Iqbal Survé's mythical beast
The full extent of the destruction at Independent Media since the Public Investment Corporation placed the company at the disposal of Iqbal Survé has been laid bare – ironically via Survé‘s outrageous attempt to use other peoples money to plug the R2,3-billion hole in his media balance sheet.
Last week, on 28 March, a company 73% owned by Survé‘s family trust issued a remarkable “Pre-listing Statement” inviting selected investors to subscribe for a “private placement” of shares ahead of a planned listing on the Johannesburg Stock Exchange.
The company’s name is Sagarmatha Technologies (a grandiose reference to the Nepali name for mount Everest) and the pre-listing statement represents a desperate bid to portray it as a high-tech start-up in the mould of an African Google or Amazon.
In reality, it looks like a desperate attempt to save Independent, which will be incorporated into Sagarmatha if the private placement attracts enough money.
Survé is seeking to raise a minimum of R3-billion via this private placement despite the fact that the company he’s selling is technically insolvent and labouring under the burden of some R2,3-billion in debt.
The situation is dire because Survé needs to find R863-million by August this year to repay a 50% portion of loans from a Chinese state consortium and the Government Employees Pension Fund (GEPF) that funded his acquisition and development of Independent Media.
Sekunjalo Independent Media (SIM), controlled by Survé, owns 55% of Independent Media.
Independent is the successor to the venerable but battered Argus newspaper group that was offered up in politically directed sales, first to the Irish Independent group in 1994, and then to Survé‘s consortium in 2013 in a R2-billion mainly debt-funded deal.
The funds from the GEPF were controversially extended to Survé‘s consortium via the Public Investment Corporation (PIC), which drew criticism for making an investment driven by political considerations rather than returns for government employee pensions.
The PIC itself took 25% of Independent, as well as funding Survé. The other 20% of Independent was picked up by a consortium consisting of the China Africa Development Fund and China International Television Corporation.
The deal was veiled in secrecy – as were the subsequent fortunes of the group, though plunging circulations, staff retrenchments, resignations and allegations of asset-stripping suggested managing the purchase debt was always going to be a challenge.
Suspicions are now rife that the private placement has been engineered largely to allow the PIC to come to the rescue with more government pensioners’ cash.
The institution refused to confirm or deny whether is was taking up any portion of the private placement.
Just what a mess Survé made of Independent is now laid out in brutal detail in his pre-listing statement.
The interim financial information disclosed by SIM reveals that, as of 30 June 2017, SIM had accumulated losses of R752-million and that the company’s total liabilities exceed its assets by R547-million.
The figures include and reflect the financial state of Independent because SIM exercises control over via its 55% holding.
The pre-listing statement discloses that SIM suffered significant losses every year of operation since Survé took over.
It says the group’s revenue was “negatively affected” by declining advertising sales and reduced margins on advertising.
The group is losing cash, mainly due to interest payments, though it has been making only limited interest payments on its major loans, whose repayment deadlines are looming.
The interest bearing debt of some R2,3-billion includes just under R1-billion owed to the Chinese, half of which must be paid by 15 August and R770-million owed to the GEPF, half of which also falls due in August.
Another debt to GEPF is currently sitting at R490-million, but is due for final calculation and payment only in 2020.
Given that the company is technically bankrupt, the auditor’s report notes: “The ability of the company to continue as a going concern is dependent on a number of factors. The most significant of these is that the directors continue to procure funding for the ongoing operations for the company.”
In other words, Survé needs cash and, given the August debt deadlines, he needs a lot and he needs it fast.
What to do?
The issue about Sagarmatha – and the listing as a whole – is the disconcerting way in which benefits appear to flow to Survé and his family interests. To understand this, we need to follow closely how the initial Sagarmatha package was put together.
Step 1 – establish a company at R1 per share
Sagarmatha Technologies started corporate life in 2013 as the rather more lowly Independent Media Corporate Services Proprietary Limited, of which 120 shares were issued to a company which is effectively wholly-owned by Survé‘s family trust. The shares were a nominal R1 each.
Step 2 – get another company you control to buy shares for real cash
On 31 December 2014 – Independent, controlled by Survé, injected R10.3-million into Sagarmatha Technologies in exchange for 31 new shares.
There were now 151 shares. Independent held 20,5% of the company for which it had paid R10.3-million. Survé‘s family trust now held 79,5% of the company, for which it had paid just R120.
Step 3 – inject assets
Several new and some existing assets were injected into Sagarmatha Technologies.
In March 2015 Survé launched the African News Agency (ANA). It was held 79% by Sagarmatha Technologies and 21% by another vehicle of the Survé family trust.
ANA was established to replace the old SA Press Association, which closed its doors at the end of March 2015.
ANA is tiny. The pre-listing statement says it currently has a staff of 26 and its low cost strategy is “crafted around strategic media partnerships” that enable ANA “to package and on-sell authentic African content to news and media organisations across Europe, North America and the BRICS countries”.
ANA’s sales for 2015 were R8,3-million (with an operating loss of R22,5-million) but Survé somehow managed to persuade the China Africa Fund to buy 5% of the company for R357 million.
This ridiculous sum valued ANA alone as being worth R7,14-billion.
What were the Chinese actually buying? That remains to be seen. (Note, this share expansion diluted the Survé trust holding in ANA slightly to 20%. That 20% will be relevant later.)
Also in March 2015 Sagarmatha Technologies acquired a 75% shareholding in Loot Online, an internet shopping site.
The purchase was funded mainly via R420-million rands worth of free advertising, which would have come mainly from Independent’s print titles – not from Sagarmatha’s resources.
It is not clear from the pre-listing document how this gift to Sagarmatha was accounted for in Independent’s books.
Loot Online actually brings in a bit of cash, earning R150-million in 2016, though at a R3-million operating loss.
Independent also transferred its online offering to Sagarmatha – Independent Online, which leverages its value off Independent’s titles, for a price of R19-million – as well as the IOL Property Joint Venture, for R7,7-million.
Step 4 – repeat Step 2
On 31 December 2016 Independent was again persuaded to buy more shares in Sagarmatha: this time 10 shares for just under R137-million, or R13,7-million per share.
Step 5 – sell yourself shares at a discount
On exactly the same date, 31 December 2016, the Survé family vehicle bought 839 shares for R553-million.
This is R659,222 per share, compared to the R13,7-million per share that Independent paid on the same date.
To recap: Independent contributed a total of R147-million – for 41 shares, giving it 4.1% of Sagarmatha Technologies, while the Survé trust contributed R553-million for 959 (839 + 120) shares, giving it 95.9% Sagarmatha Technologies.
Still, R553-million was a lot of money – or was it?
In fact, the pre-listing statement discloses that no money changed hands at all.
Instead Sagarmatha Technologies (controlled by the Survé family trust) issued 839 new shares, effectively to the Survé family trust, in exchange for the 20% of the African News Agency owned by the Survé family trust.
This “R553-million” transaction valued ANA at a still ridiculous R2,7-billion.
So Survé effectively got 95.9% percent of Sagarmatha in exchange for 20% of ANA.
The pre-listing document deals rather coyly with this transaction, noting: “The share issues to Independent Media and [the company owned by the Survé family trust] on 31 December 2016 were part of an internal group restructuring in order to obtain the optimal Listing structure. All entities were under common control at the time of issue and therefore the issue price of the shares was not the determining factor.”
You don’t say.
So now Survé had a little company selling stuff online (at a loss) but with a stated value of R392-million, mainly due to the ridiculous valuation of ANA.
It is this vehicle, Sagarmatha Technologies, into which he now wants to inject SIM – with its 55% of Independent and its massive debt. Then he wants to list this elaborate confection on the Johannesburg Stock Exchange.
But he can’t.
Even with Sagarmatha Technologies extravagant R392-million valuation, the pre-listing documents show that SIM’s debt still drowns the combined entity, leaving it with a negative valuation (minus R303-million) or minus 30 cents per share for each of the 1 billion shares in issue.
Who would buy those shares?
Enter “the African Unicorn”.
Survé‘s newspaper titles have carried a blizzard of material punting Sagarmatha in recent days, from four page wrap-around advertorial, to breathless puff pieces from his chief cheerleader, Adri Senekal de Wet, the editor of Business Report.
She has hyped Sagarmatha as an “African Unicorn”, employing American terminology where a technology start-up valued at more than a billion dollars is termed a unicorn.
The pre-listing statement describes the company to be listed as creating “an integrated multi-sided platform ecosystem in Africa that knits technology platforms; content creation and distribution and e-commerce into a consolidated value proposition aimed at attracting prime customers for monetisation”.
What does this mean?
Senekal de Wet quotes two of the VIP passengers Survé has gathered on the Sagamartha departure platform, Ambassador Harold Doley Junior, 71, and Jim Rogers, 75, both Americans, both involved in investment advisory services and both serving on Sagarmatha’s informal “International Advisory Board”.
“Sagarmatha is the next emerging markets technology platform growth and success story, with e-commerce, syndicated news and business content, digital media, and technology ventures in one African-owned and managed integrated group,” she quotes Doley as saying.
“Sagarmatha’s e-commerce offerings are Africa’s own Amazon, Tencent and Alibaba. In syndicated news content it is Africa’s answer to Reuters and to Bloomberg for business content. In digital news it is an African alternative to Quartz, Daily Beast, and NYT Digital.” she quotes Rogers as saying.
(It might irrelevant that Rogers has recently predicted that the next stock market crash would be more severe than in 2008. “When we have a bear market again, and we are going to have a bear market again, it will be the worst in our lifetime,” Rogers told Bloomberg on February 18 this year.)
Despite all this hype, the JSE will not list an insolvent company – hence the requirement to raise a minium of R3-billion from private placement investors before the listing of Sagarmatha can go ahead.
Injecting R3-billion in cash would raise the value of the company to a positive R2,58-billion, or R2,43 per share. Notwithstanding this modest improvement, the company has set the price for the private placement at R39.62 per share.
This means that if an investor commits to the minimum investment of R1-million and if the private placement is successful his R1-million will immediately be worth only R61,332 – unless public investors on the JSE are willing to price the shares higher in the hope of investing in an African Unicorn.
The extraordinary price set for the shares is based on an “independent valuation” of Sagarmatha (assuming the merger with SIM) carried out by a California company called Redwood Valuation Partners.
The pre-listing statement makes it clear that this valuation is entirely dependent on forecasts of Sagarmatha’s fabulous success going forward, since its current assessed value is negative.
Redwood says that information relied on included “management’s budget for the group for the year ending 31 December 2018 and the forecast for the financial years ending 31 December 2018 to 2026; the group’s listing investor presentation; and other financial and non-financial information and assumptions made by management”.
The pre-listing statement outlines an ambitious but unidentified buying spree across the continent, should Sagarmatha’s multi-billion rand war-chest materialise from the private placement.
To sweeten this unlikely proposition, the pre-listing statement identifies five investors who have delivered “irrevocable undertakings” to purchase between R50-million and R100-million worth of shares at the private placement price of R39.62 per share.
One is Nadia Kamies, known to some as Iqbal Survé‘s wife, who has promised to spend at least R50-million.
Conveniently, if the private placement is successful a company of which the Survé family trust is an 85% shareholder will earn a fee of up to R52,5-million.
Even more conveniently, if the private placement is successful, the Survé family trust will end up owning between 60% and 65% of the joined-up Sagarmtha-SIM conconction, worth at least R1,7-billion in real cash.
Another person in for R50-million is Leonardo Nicolo Altini. That is not surprising as his family trust is already exposed to Sagarmatha via a 9% shareholder. The same is true for Selwyn Lewis, who already holds 7.5%.
The two gentlemen in for at least R100-million each are the Americans, Doley and Rogers.
For them, the amounts may be small change, but it is not clear how they get past the restriction on page two of the pre-listing statement, which notes “the private placement will not be made to or be capable of acceptance by investors outside of South Africa”.
If less than R3-billion is raised with the private placement, then there is no JSE listing and the whole scheme falls apart.
In truth, if the PIC does not come to the private placement party, there will be no party at all.
But if the PIC does invest it would be a travesty, given the bloodline of this unicorn – and a betrayal of government employees.
Sagarmatha – the mountain – is known as a treacherous place.
You have been warned.