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AYO Technology: How do you stop a company from being st...

Business Maverick

BUSINESS MAVERICK OP-ED

AYO Technology: How do you stop a company from being stupid?

Iqbal Survé’s Sekunjalo owns 62% of African Equity Empowerment Investments, which owns 49% of ICT firm AYO Technology. (Photo: Gallo Images / Phill Magakoe)
By Tim Cohen
06 Jun 2021 8

Can you stop a company from being stupid? It’s a less frivolous question than it might appear. It’s actually difficult to prevent companies from acting outside of the interests of their own shareholders.

The obvious recent case in point is AYO Technology, which suffered a 36% revenue decline in the half-year to February, plunging the company into a loss-making situation. But it then went ahead and calmly declared a dividend 86% higher than its previous dividend, which will cost the company around R200-million. 

To me, the first question here is whether this constitutes reckless trading as defined by section 22(1) of the Companies Act. The section says: “A company must not carry on its business recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose.” If it does, directors become personally liable. 

But what is “reckless”? Normally, it constitutes a situation where a company that is already in debt, goes out and raises more debt despite knowing that it’s unlikely it will be able to repay its creditors. Because you are looking into the mind of directors, proving reckless trading is tricky; directors are often more confident about their company’s prospects than they should be, as we know all too well. 

In AYO’s case, this is absolutely not the case, because the company is full to the brim with cash. The reason is that government employees decided to back the company via their pension fund through the investing wisdom of the Public Investment Commission (PIC). As is well known, the PIC pumped R4.3-billion into the company in the run-up to AYO’s IPO in 2017 for a mere 30% stake. To say this was a poor decision would be an understatement of gargantuan proportions, since the company now has a market capitalisation of around R1-billion, so pensioners have lost around R4-billion so far. 

There is of course a story behind why the company plunged into a loss-making situation. In its interim statement, the company said it had lost a contract with an important client, which it declined to name. (It was Sasol.) Then only last week, the UK-based telecoms company BT said that it was unwinding its joint venture with the Sekunjalo group, the holding company of African Equity Empowerment Investments (AEEI), which is, in turn, the holding company of AYO. 

I should acknowledge a journalistic error here: I originally wrote that the departure of BT was probably the reason why AYO fell into a loss-making situation. But the company subsequently and indignantly claimed there is in fact no relationship between AYO and BTSA. So apologies for that; my bad.

In my defence, this was not that difficult a mistake to make because in its listing documents prior to its IPO, AYO claimed it intended buying this fabulous 30% stake in BTSA owned by its holding company AEEI. Subsequently, company directors claimed the deal was on the verge of taking place.

Much later both AYO and AEEI announced in a 10-line Sens statement the deal had lapsed but that “the parties are engaging with each other to have the agreement reinstated”. So it appeared they were still talking but in fact, they weren’t. This is material because the fact that AYO had lined up this stake was a substantial reason, it argued in its discussions with the PIC, for the high valuation of AYO. 

So why did the deal never happen? AYO intended buying the 30% stake in BTSA from its parent AEEI for around R990-million. It now turns out that the deal never took place because BTSA thought the valuation was substantially inflated. BTSA however chose not to say anything formally at the time, and the status quo remained for years. 

Now suddenly however BT has taken umbrage and is dissolving the partnership. 

According to BTSA, the trigger was a presentation by directors of the Sekunjalo group to the Parliamentary Finance Committee earlier this year. In a very carefully worded statement, BT said “We were not aware, nor in agreement with, the assumptions made in the prelisting statement conditions of AYO Technologies that referred to BT South Africa”. What on earth does that mean? 

BT refused to say anything more, citing “legal reasons”, without saying what those legal reasons are, nor, more importantly, what “assumptions” are being referred to. Of course, this is total subterfuge. The company is effectively saying it was breaking up its partnership because of something that happened four years ago that was incorrectly framed by Seckunjalo execs before the parliamentary committee this month that it knew nothing about. Is that really believable? Fortunately, an AYO company insider told me what happened on condition of anonymity: and it’s the obvious. BT would not sign off on the deal because it felt the valuation placed on the stake was ridiculously rich.

AYO would have had a huge incentive to claim this stake was worth R1-billion because at the time it was trying to convince the PIC to invest four times that in the company, which it managed with amazing ease. But since the deal never took place, doesn’t the PIC have the right to be a bit pissed off? Apparently not. Notionally there is a legal case to get the money back but it’s taking forever, which is the way of legal action in SA. But in the meantime, the PIC have just casually written off this huge loss. You really can’t make this stuff up.

The other outstanding question is what particularly BT disliked about Sekunjalo’s presentation? They are not saying, but these presentations are now all on YouTube, so it’s possible to see what the Sekunjalo execs told the committee, and to speculate from there. The presentation by AYO board chair Wallace Mgoqi says the deal didn’t go ahead because of “toxic media reports”. 

Mgoqi also responded to a section of the Mpati Commission report on the PIC which said: “Key to valuation of AYO was the BTSA financial statements which the PIC did not have in its possession, nor was it included in the draft or the final PLS (Profit and Loss Statement).” Mgoqi said it was true that BTSA financials were not provided, but false as regards the allegation that BTSA did not agree with the assumption made in the AYO PLS”. He went on to blame BTSA for not giving its consent for its financial information to be made public – despite the fact that BTSA had never been asked to make its financial information public but instead present them privately to a potential investor.  

So there you have it. The Mpati Commission found or implied that BTSA did not agree with AYO’s valuation. AYO says this is not true. BTSA says something that AYO said is false but won’t say what. Presumably, this is it: the valuation was nuts, and when BTSA subsequently learnt what was presented, they voted against the sale which might otherwise have made them liable to creditors and shareholders. But they continued to do business with AEEI for years, which is curious.  

And now, just to rub salt in the wound, AYO has issued Section 189 notices to staff, the section of the Labour Relations Act designed to allow companies to retrench in certain circumstances. It goes without saying that staff are really angry that the company is both retrenching and also paying out a fat dividend. 

In response, a spokesperson for AYO said the company recently announced a restructuring of its business in line with a seven-point plan, moving from an operational entity to a core investment company. “This necessitates a re-evaluation of staff skill sets. S189 notices that have been issued, in line with this.

“Due to AYO’s strong balance sheet and assets worth more than R4-billion and cash balance of almost R3-billion, therefore the decision to pay a dividend to shareholders.”

But the real question is this: where are the regulators? The answer, as we all know, is that they are hiding behind the couch. BM/DM

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All Comments 8

  • In reply to John Townsend: Well, presumably the good doctor is not keeping the stacks and stacks of PIC loot under his mattress?

    • You beat me to it John. Absolutely, as reported on DM recently, Iqbal and his family / trust stand to gain the most from this generous dividend payment. They always find a new way to siphon money from the poor.

  • With R3 billion in cash and banks closing their accounts left right and centre where do you keep so much money? Perhaps their actions not as illogical as one would think on first glance? (I am not a fan of Surve). They are though in a tight spot. How long before they implode?

    On the face of it seems it is a massively viable venture with R7 billion in assets. How much of it is Steinhoff like creative accounting?

  • I have no problem with the article generally but I do take issue with the sloppy comment: “government employees decided to back the company via their pension fund through the investing wisdom of the Public Investment Commission (PIC).”
    This is nonsense.
    The PIC is quite devoid of wisdom.
    More seriously, in practice Government employees (and the pensioners relying on the Government Employees Pension Fund, GEPF, to survive) have no say whatsoever in how their funds are invested. The GEPF’s trustees do not appear to have taken any visible or effective stand to protect our interests. The sorry saga is well documented in the bulletins and reports issued by AMAGP (the Association for Monitoring and Advocacy of Government Pensions) which is a volunteer group of pensioners concerned about the viability of the GEPF and the lack of accountability surrounding it, available at their website.
    Government employees and pensioners may not be the most popular constituency in the eyes of Business Maverick, but we are are a significant group of consumers, and failure of the GEPF will have an impact across the economy.
    Maybe a topic for an investigative reporter with time on his/her hands?

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