HCI wants to sell Gallagher Estate and other properties to SACTWU, but it’s far from a vanilla deal (JSE: HCI)

Selling the properties is good in theory, but these terms are quite something

When I last wrote about HCI and its group companies in Ghost Bites, I pointed out a fundamental problem: the group’s most important cash cow is its gaming assets, and with the shift to online betting, casinos are producing less milk. To add to the pressure, HCI is investing in speculative plays like energy, which tend to be capital intensive with uncertain outcomes. This isn’t a great combination.

An obvious way to improve the balance sheet would be to sell off certain properties in the group that are sucking up capital and producing poor returns. For some reason, even in HCI subsidiary companies, there’s a love of holding unnecessary property assets. So, in theory, seeing a sale of assets like Gallagher Estate is positive. The bad news is that this disposal does absolutely nothing to improve HCI’s cash flow. In fact, it leads to a cash outflow.

How can that be? My read of it is that HCI has decided to solve the problems of the Southern African Clothing and Textile Workers’ Union (SACTWU) at the expense of other shareholders. Now, HCI’s history is firmly entrenched in the unions, so this shouldn’t come as a huge shock.

SACTWU currently holds 23.8% of HCI’s shares in issue. They aren’t managing to meet their financial obligations, so they keep selling HCI shares in the market, a situation that isn’t sustainable. There’s an argument to be made that this is an overhang on the HCI share price. I think it’s a weak rationale for a deal though, especially on these terms. Average daily value traded in HCI shares is below R10 million, so it would be difficult, but not impossible, for SACTWU to unlock that kind of value through on-market disposals.

Here’s part one of the deal: HCI (acting through an unlisted subsidiary called Squirewood Investments) will repurchase 1.1 million shares from SACTWU for R144.1 million at a price of R131 per HCI share. At the start of trade on the day of the announcement, the market price was R130.50 per share, so this is approximately the market price.

Yes, HCI with its balance sheet under pressure and with dicey core exposures will be parting with R144.1 million to buy its shares back at the market price, giving SACTWU a sweetheart deal of note to exit part of their position. Hmmm.

But what about the property disposals? Do those make up for it?

HCI will sell its shares and claims in Gallagher Estate, HCI Rand Daily Mail and HCI Solly Sachs House for SACTWU for R550 million. There will then be an agreement for Squirewood to purchase shares worth the same amount from SACTWU (once again at R131 per share). A cession agreement will essentially offset these amounts.

In other words, the R550 million doesn’t actually flow. HCI is repurchasing a ton of shares here and is offloading the properties. When all is said and done, SACTWU will hold 18.4% in HCI rather than the current 23.8%. Whether or not HCI would then look to dispose of the shares in the market or hold them as treasury shares is unclear.

Does this actually solve anything for SACTWU on a sustainable basis? The total value of the net assets is R510 million on the HCI balance sheet. As one of them is loss-making, they achieve net attributable income of just R5.5 million, which is an astonishingly bad return. It’s difficult to imagine that this makes such a difference to SACTWU.

Did you notice the price? It looks like SACTWU is paying a premium to the current net asset value on the properties, although this could just be because of an outdated valuation. Based on attributable net income though, the properties are either terribly mismanaged or just terrible, full stop.

Shareholders will have to approve this, with a special resolution required. SACTWU isn’t allowed to vote on the deal. I don’t personally like this deal and can’t see why HCI shareholders would rush to approve it, unless HCI has managed to sell the properties at an inflated price, with the balancing point being that HCI then needs to drip shares into the market to raise cash instead of SACTWU having to do that.

If shareholders believe that HCI’s shares are currently undervalued, then they will see this as a clever transaction that gives HCI flexibility down the line. Those with a more bearish take will be worried about the cash outflow at a time of weakness in the gaming industry, potentially creating further pressure for HCI down the line.

I can’t wait to read the independent expert report!

MAS makes the summary of the all-important joint venture agreement with PK available (JSE: MAS)

The “summary” is 17 pages long – and it delivers an important lesson

Webber Wentzel was appointed by MAS to summarise the joint venture agreement that is at the centre of a negotiation between MAS and Prime Kapital (PK). This is because the terms have come as a surprise to investors in terms of the difficulty that MAS is having in getting access to the cash in the joint venture. The summary is 17 pages long and is available here.

The joint venture was set up for development of property in Central and Eastern Europe, with PK appointed as the general partner of the joint venture. Importantly, there are reserved matters that require unanimous approval of the B ordinary shareholders (i.e. MAS and PK). When you see unanimous approval, be afraid. Be very afraid.

After all, joint control is just a different way of saying no control.

Ironically, MAS is actually better off for the unanimous approval requirement, as they only own 40% of the B ordinary shares despite having put in all the capital for the A preference shares. In other words, MAS signed up to put in far more capital than PK in the form of non-voting shares, while having very little in the way of ability to drive the direction of the joint venture due to a non-controlling stake in voting shares. From PK’s perspective, they have a controlling share of the voting shares, but this doesn’t amount to much due to the agreement.

My view on commercial agreements is that the risk capital should drive control. MAS should’ve had a controlling stake in the ordinary shares and there should’ve been some basic protections in place for PK, rather than the ability to veto dividends.

Let this be a lesson to anyone negotiating a deal where there’s an imbalance. I’ll reference that old wisdom: they who have the gold, make the rules. If you have the gold and you give someone else the power to stop you getting it, then you’re going to have a bad time.

Nibbles:

• Director dealings:
  • A number of Dis-Chem (JSE: DCP) directors, including members of the founding family, sold shares worth R11.8 million in relation to various share awards. There’s one small sale that is referenced as being the taxable portion, so I assume that the rest is not just the taxable amount.
  • Sean Riskowitz bought shares in Finbond (JSE: FGL) worth R570k.
  • A director of a subsidiary of PBT Group (JSE: PBG) bought shares worth R36k.

• As a reminder of how different the listing rules are in Australia vs. the JSE, Orion Minerals (JSE: ORN) has a halt in place on the Australian Stock Exchange (ASX) ahead of capital raising activities, but there’s no such halt in place on the JSE. The halt on the ASX will be lifted when Orion announces the results of the capital raise.

• Vodacom (JSE: VOD) and Remgro (JSE: REM) have agreed to extend the longstop date for the fibre transaction to 18 July. With the Competition Appeal Court heading dates reserved for 22 to 24 July, that date will need to be extended again for the deal to stay alive. As we recently saw in the Sun International (JSE: SUI) – Peermont transaction, it’s not a foregone conclusion that parties will extend the date.

• Burstone (JSE: BTN) announced that Jenna Sprenger will step down as CFO at the end of August 2025, after 12 years with the company. Myles Kritzinger, ex-CEO and CFO at Transcend Residential Property Fund, will take the CFO role at Burstone with effect from 1 September 2025.

• After getting rid of their designated advisor, Mantengu Mining (JSE: MTU) has now appointed AcaciaCap Advisors to that role. In case anyone is keeping score, the share price is down 24% year-to-date and we still haven’t seen any concrete evidence of illegal behaviour in the market.

• If you’re keeping an eye on the few remaining preference shares listed on the JSE, then be aware that Absa (JSE: ABG) is about to repurchase and delist its preference shares this month.