Here’s a scenario you don’t see too often.
In its last financial year, industrial company enX was able to reverse its fortunes from a dire R36m loss the year before to a R377m profit — and yet there’s now a buyout offer on the table where the "buyer" clearly doesn’t want anyone to accept his bid.
It’s an odd picture, since you’d think that with enX’s share price now at R8 — far below its last stated NAV of R14.77 — any buyer would leap at the chance to snaffle the company at what seems like a huge discount.
Yet the buyer — a concert party made up of MCC Contracts and African Phoenix, which are linked to enX director Warren Chapman — has offered to buy the 63% it doesn’t own in enX at a price of just R5.60 a share. No investor in their right mind would accept that, since they’d be able to get 42% more by selling their shares on the JSE.
As one person close to enX put it: "R5.60 is the wrong price for the company — it should never trade at that level."
So what exactly is happening here?
Contacted by the FM, Chapman says: "I’m happy to discuss this, but I can only talk once a detailed circular has been sent to all shareholders." That is likely to happen within a few weeks, spelling out more details of his rationale for the lowball pitch.
It leaves a lot of questions hanging over a company of whose existence, let alone activities, few are even aware.
The background is that enX first listed on the JSE in 2007, when its sole asset was the woodworking machinery business Austro. It then bulked up, buying generator business New Way Power, oil lubricants business Centlube (which represents Mobil in the region), plastics and chemicals business West African Group and Imperial’s former vehicle leasing business, Eqstra Fleet Management.
For investors, however, the listing has been something of a disaster. Listed 15 years ago at R18.04, enX’s shares crumbled to a Covid low of R3.20 before staging a 40% recovery in the past year after its triumphant return to profit.
Still, for those down-on-their luck investors who invested at the beginning, the "buyout" offer is hardly enticing.
What’s actually going on is that Chapman’s companies had no option but to make a bid, since the Companies Act says that once you buy more than 35% of a company, you have to make an offer to buy out all shareholders at the price you last paid. And that last price, thanks to an exceedingly odd deal in January where African Phoenix bought 4% of enX from Chapman’s former colleague Sean Katz, was R5.60.
The story here is that Katz, who co-founded Peregrine but left the group in 2002, had held 4% of enX through Sunwood Investments. Then on January 28, enX said African Phoenix had bought those 7.5-million shares in an "off-market transaction" at R5.60 a share. This pushed the stake of the companies linked to Chapman — MCC and African Phoenix — to 37.8%, triggering the automatic offer.
The intriguing question is, why would Katz have sold his stake for that price, when the ruling price on the JSE was R8? In all, Katz was paid R42.3m, but those shares, according to the ruling JSE price, would have been worth R60.4m. Why would he take an R18m haircut?
Katz has lived in Australia for the past 12 years, where he has launched a new private equity firm called AltX, but was in Florida when the FM reached him.
"I’ve been trying to sell my stake for a very long time, [and] to move a stake like that in enX, with such low liquidity on that stock, is relatively impossible," he says. "If you go try sell 1-million shares at R8 a share today, you’ll knock the stock down 20%-30% in a heartbeat."
Katz says he’s been looking to get rid of his last remaining SA assets, including enX. So when he was approached by African Phoenix — which he says has strong empowerment credentials — he figured it was the best possible exit.
Sure, but at an immense 30% discount to the ruling share price, couldn’t he have found a way to sell the shares on more economic terms?
Again, Katz says that practically, you won’t get that R8 a share for a large tranche. "There’s just no volume, there’s probably only one or two real buyers out there."
Katz says other factors in his decision were the lengthy period he’s been out of the country and the difficulties enX had been experiencing.
"They had the generator business, which was well placed initially with the whole [electricity] problem. But once you’ve sold a large generator to a company, that’s a once-off thing," he says. enX’s forklift business was doing well, but Covid altered its prospects. "So while they’ve got good parts, it’s very challenging," he says.
There’s also been no end to the drama in the boardroom.
In 2020, Chapman effectively emerged as the main player at enX when he took control of MCC Contracts after its former owner, David Brouze, made a series of ill-fated margin calls on enX and lost control. Within no time, MCC asked for sweeping changes to the board: former Absa CEO Steve Booysen, Eddy Oblowitz, Allan Joffe and former ArcelorMittal CEO Paul O’Flaherty were axed. New directors were appointed, and Andrew Hannington appointed as CEO.
At the time, the FM reported that analysts were taken aback by the "aggressive changes".
It also cited concerns about the conflict of interest, given that all the new enX directors were involved with Chapman previously, either at Zarclear, African Phoenix (what remained of African Bank on the JSE) or brokerage Legae Peresec.
As one shareholder told the FM at the time: "They are clearly not independent, and it is difficult to believe that they will be acting in the best interests of enX — as required by the Companies Act — as opposed to MCC, the new 32.4% shareholder."
Despite the 40% rise in the share price in the past year, it’s clear not all investors are entirely comfortable. At the January AGM, for example, almost a third of the shareholders voted against the remuneration policy and its implementation.
Craig Butters, the former Prudential Investment Managers fund manager who flagged problems with Steinhoff before it crashed, tackled the company at the AGM about its transparency. He asked why it hadn’t disclosed the fact that enX’s directors — notably Chapman, chair Paul Baloyi and Hannington — had hiked their stake so significantly in the company.
In particular, Butters pointed to the fact that enX’s 2020 annual report says that by August 2020, the directors (including Chapman, Baloyi and Hannington) owned 12.2% of the company. A year later, the directors’ shareholding had effectively doubled, to 25.9%. Yet, there’d been no stock exchange announcements along the way, disclosing when those directors were buying shares.
However, Chapman told Butters at the AGM that this happened because of technical shareholding changes in MCC Contracts, and the company had obtained a legal opinion saying it didn’t have to disclose these changes.
This didn’t appease Butters, who pointed out that this disclosure isn’t just a JSE rule, but is also required under the Companies Act.
Contacted for this article, Butters says: "At the invitation of the chair, I sent the board a letter on January 28 with some key questions on the increase in the shareholding of Chapman and Hannington in particular." However, Butters says, he still hasn’t had a response.
Presumably, much of this — as well as the legal opinion — will be contained in the eagerly awaited circular.
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