The story of small-cap property developer Pinnacle Point’s billion-rand problems with Absa and Nedcor is a story of fabulous beach-front houses, dubious characters, exotic financial instruments, market manipulation, greed and now, inevitably, legal disputes. In other words, an ordinary day in South African business. Okay, politics too.
Yet the details of the dispute also illustrate some of the peculiarities of our current state, including the adage that the way to make money in South Africa is not by making stuff, but by manipulating stuff.
More often than not, this process ends not only in tears for someone, and mostly not the people actually responsible, but it also ends in court. And teasing out who are the good guys and who are the bad guys is, as ever, an exercise in exasperation, which does not mean it’s not worth trying.
Pinnacle Point revealed on Tuesday that Absa had sold its stake in the company, valued at one stage at R931-million for R150-million to boutique finance house, Tri-Linear, chaired by Sam Buthelezi. Tri-Linear will get close of a majority stake, but will have to do some fancy footwork to get around the regulatory issues first.
That’s a fairly eye-opening transaction in itself; it looks as if Absa is paying quite a lot to walk away. However, Absa’s sale of its stake in the company (which has golf estates in places like George and is planning a big expansion in Nigeria) is on a separate track to a much more fraught R1,3bn dispute between other shareholders in the company and Nedcor.
That dispute burst into the open last week when Nedbank, apparently after press enquiries on the topic by Business Times columnist Stuart Theobald, suddenly revealed it was being sued by a group of shareholders for the fairly whacking sum of R1,3 billion.
By doing so, Nedbank pre-empted Theobald’s story, which appeared at the weekend, but not before the Stock Exchange News Service notification was picked up by others in the financial press.
What happened is, to put it mildly, on the complex side. Essentially, the argument of the Pinnacle Point shareholders is that when the company merged with Acc-Ross in late 2008, it was not aware Nedbank owned practically all of the stock.
It’s all a bit inverted, because Acc-Ross issued a large chunk of shares at the time as part of a reverse-takeover of Pinnacle Point, which at the same time changed its name to that of the company it was buying.
The point is that the old Pinnacle Point shareholders are now complaining that the share price of Acc-Ross was, shall we say, supported by Nedbank by virtue of a complex arrangement involving controversial businessman Jac de Beer working through broker Cortex Securities.
Nedbank denies it participated in such a scheme, but if you look at the way the share price just tanked after the merger, you have to have some sympathy for the Pinnacle Point shareholders, who it seems got sold a pup. The share price dropped from R1 to about 10c and its currently worth even less than that.
But sympathy is not the same as legal responsibility.
How did this all happen? With the help of complex financial instruments, natch. Cortex was apparently peddling a system whereby investors could free-up the value of their stock exchange investments without losing control of the shares by using single stock futures.
Single stock futures are an undertaking to buy a share at a future time normally at a fixed price. Since single stock futures are a leveraged bet, the system allowed shareholders to realise cash, invest part of that cash back into the stock and pocket the rest.
Theobald reports in Business Times that De Beer, through various companies, some of which included minority shareholders such as former director of public prosecutions Bulelani Ngcuka, was a major shareholder in Acc-Ross.
De Beer used the SSF mechanism to raise cash, selling his shares to Nedbank, and then buying SSFs through Cortex. “He only needed to put down 10% of the value of the shares as a margin deposit with Cortex. He then used cash raised from selling the shares to buy additional futures, so leveraging his exposure,” Theobald writes.
The leverage meant that he, and other investors, would still effectively control as much stock as they did originally, but with a smaller cash outlay. Neat. Only one problem. Nedcor ended up being on the other side of the bet, because it was market maker in single stock futures. So every time someone buys an SSF, Nedcor and other market makers would buy ordinary shares to cover the bet.
Hence, whenever shareholders embarked on this kind of scheme, Nedbank would buy the underlying shares in the company, inadvertently providing some tradability and liquidity for the share, obviously very important point in the case of small companies.
And Acc-Ross shareholders were clearly doing this a lot, because by the time of the merger, Nedbank owned, it is alleged, 89% of the stock.
At this point, there is a bit of arguing this way and that. The Pinnacle Point shareholders led by Ivor Stratford, Mervyn Key and Dave Mostert claim in the court papers that “the apparently solid demand for Pinnacle Point shares on Alt-X, which an outsider would perceive … existed principally as a result of (Nedbank) continuously acquiring such shares in the context of SSF contracts”.
To this Nedbank will be within its rights to claim, effectively, caveat emptor. The due diligence ought to have demonstrated this state of affairs, and if it didn’t, that’s the buyer’s responsibility, not theirs. Anyway, the decline of the value of the company could have as much to do with the state of the property market as the extent of the controlling shareholders holding.
There is one problem, though. The securities regulation panel code requires a company to make an offer for outstanding shares at the point it gains control of more than 35% in a company, and this Nedbank transparently failed to do. The bank’s explanation in its Sens announcement is that any shares in Acc-Ross were being held “non-beneficially purely for the purposes of meeting obligations and commitments in terms of these SSF contracts entered into with various parties”.
But can you ever be the “non-beneficial” holder of 89% of a company’s stock?
The issue is now in court and before the SRP. But even before it gets there, the extent of the wheeler-dealing and the whizz-kid machinations and market manipulation are clearly worthy of, well, Wall Street.
By Tim Cohen