Caxton vs. Novus: Hot metal flies in printing 'shootout'

Publishing company Caxton has fired a broadside at bitter rival Novus Holdings over the emergence of a secret commission agreement with Lebone Litho Printers, the Novus empowerment partner in a huge contract with the Department of Basic Education.

Both Novus and Lebone insist there is "nothing untoward" about the commission payments of 10 to 15% Novus made to Lebone.

But Caxton, a minority shareholder in Novus, has taken the extraordinary step of demanding, via its lawyers, that Novus cancel the agreement and recoup the money paid to Lebone.

The current contract for printing and distributing school workbooks is said to be worth more than R2.8 billion over three years – and has just been extended for a further two years.

Novus, the listed printing giant unbundled by Naspers, and Lebone, a smaller black-owned printing house, have dominated the DBE printing contracts together with their logistics partner, DSV Solutions.

DSV is not a party to nor implicated in the commission agreement.

The Lebone-Novus joint venture has won tenders for workbooks since the project was initiated in 2010, though its success has been dogged by controversy from the start.

At the centre of that controversy were connections that Lebone and its colourful chief executive, Keith Michael, were alleged to have at the DBE – though nothing was ever proven.

Michael has always dismissed the allegations as baseless and "made by disgruntled bidders who were not successful and ran to the media" – a response he repeated this week.

Now Caxton, which has had its own workbook bids disqualified by DBE tender committees three times, reckons it has found a smoking gun.

It comes in the form of a commission agreement between Novus and Lebone which covers the DBE workbook contract from the time the consortium bid for the new tender in 2015.

A whistle-blower provided a copy of the agreement.

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The agreement provides that an "incentive commission" is payable by Novus to Lebone for payments received by Novus from the DBE for its printing work.

After each set of printing deliveries to a central warehouse, Novus is paid directly by the DBE – after which Novus pays forward a commission to Lebone.   

The agreement differentiates this incentive fee from workshare payments that are due to Lebone for any printing it does under the contract.

The commission agreement is specifically "in addition to the terms of the Consortium Agreement", which appear to set out different procedures for internal pricing and allocation between the three consortium partners.

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Under the consortium agreement, the DBE pays Lebone directly for distribution services and Lebone is obliged to settle the logistics invoices of DSV (previously known as UTI) and may benefit from any mark-up on logistics costs.

Novus has strenuously denied that the commission payments to Lebone were unlawful.

The company declined to answer questions posed by amaBhungane, citing the ongoing exchange of legal letters between itself and Caxton, but instead issued a press release dealing with what it termed "Caxton's Frivolous Allegations".

It said: "The payments made to Lebone were no more than Lebone's share in the proceeds of the tender, in the normal course of business. These allegations are blatantly misleading, unfounded and intended to harm Novus without good cause."

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Lebone has likewise lashed out at Caxton in a detailed response to amBhungane's queries, accusing Caxton chief executive Terry Moolman of "abusing the media for his own personal vendetta against his nearest competitors".

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Lebone said the parties "just chose to call this commission" – but in fact the payments were nothing more than monies due to Lebone for the extensive work it was doing to manage the contract.

"Payments to Lebone are for work done. By no stretch of the imagination can this be seen as irregular payments for the purpose of influence peddling or corruption."

But the wording of the agreement suggests it is primarily Lebone's ability to get work and pass it on that is being rewarded.

The introduction states: "Lebone Litho does have access to, and business networks regarding, certain printing work from time to time (including the [DBE] Contract) but does not possess all the necessary operational capacity itself to print such printing work... The Parties will accordingly share income from time to time in respect of the Printing Work passed to Novus."

The inference that this "incentive" is a reward for the exercise of influence is supported by the way the commission deal is structured to reward expedited payment by the DBE.

According to the agreement, if the DBE paid Novus within 10 days of the "receipt date" of printed workbooks at the distribution depot, then the commission would be raised to 13% of the total payment.

If the department paid later than 10 days after the receipt date, then the commission was only 10%.

Caxton has alleged that this portion of the commission was later increased from 3% to 5%. Neither Novus nor Lebone has challenged this claim.

If true, this would mean that fully one third of Lebone's reward would depend on getting the DBE to pay early.

The agreement does not explain what means Lebone would use to achieve this in an environment where the national government target is to make all invoice payments within 30 days – a target it struggles to meet. The agreement obtained by amaBhungane is backdated to the formation of the Lebone-Novus-UTI consortium in November 2015.

It applies to the years 2018 and 2019, as well as any extension granted by the DBE – and appears to replace an earlier agreement.

Lebone implicitly confirmed this.

Asked whether the earlier workbook contract in 2010-11 also involved commission payments, Michael answered: "Yes, the first workbook contract also required that payments be made to Lebone. The payments were made in the ordinary course of business."

In response to follow-up questions, Novus told amaBhungane that since 2011 all the DBE payments for workbook printing were made to Novus.

"In turn, Novus compensated Lebone Litho in accordance with the contractually set formula... Lebone Litho performed its contractual obligations as quid pro quo for the compensation paid...

"The reference… to 'commission' and 'incentive commission' is simply the allocation of pricing between the Novus and Lebone Litho and constitutes Lebone Litho's compensation as its legitimate profit share and also referred to as such in this agreement in very specific terms."

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The time lag between the renewal of the consortium for the 2015 workbook tender and the signature of the commission agreement in April 2018 may be due to several factors.

First, the outcome of the 2015 tender was repeatedly challenged in court by Caxton (though the DBE implemented the contract with the Lebone consortium on an interim basis).

The 2018 signing of the commission agreement took place two months after Novus and Lebone successfully resisted a legal challenge brought by Caxton.

The DBE had in the Gauteng High Court in Pretoria delivered a strong defence of its decision to disqualify the Caxton bid, leaving the consortium as sole qualifying bidder (although the decision against Caxton was later overturned by the Supreme Court of Appeal).

In April 2018 Novus was also under financial pressure, having lost a large chunk of the Media24 printing contract to Caxton.

Novus, originally called Paarl Media, was once majority held by Naspers, via Media24, but Naspers reduced its holdings to 19% in 2017 when the majority of its Novus shares were distributed to Naspers shareholders.

Media24's decision a year later to sign with Caxton would have stung. That history partly explains the hostility between the parties and the perception from the side of Novus and Lebone that Caxton was a sore loser, beaten fair and square three times – and the suspicion, from the side of Caxton, that there was something fishy about the award of the contract and that the DBE was biased.

The legal saga around the 2015 tender involves no less than three evaluations of the same showdown between the Lebone consortium and a rival Caxton joint venture.

Each time Caxton was shot down. Each time it has got up to try again – this time armed with its allegations involving the commission agreement.

The 2015 tender was for a 36-month contract period from 1 April 2017 to 31 March 2020, subject to a possible two-year extension.

The first evaluation was a fiasco, though not of the DBE's making.

Only the Lebone consortium and the Caxton JV made it through the qualifying round to begin scoring for functionality, for which there was an 80% threshold.

Caxton did not make the 80% cut-off, leaving Lebone as the sole surviving bidder.

The process was challenged because of a new National Treasury scorecard that mandated scores of only 0, 1, 2 or 3 – where 2 was defined to mean "meets the functionality requirements". Caxton failed because scoring 2s, although functionally compliant, mathematically only equated to 66.6%.

Lebone, the incumbent, was able to score more 3s and achieved the 80% threshold. Caxton went to court. In the meantime, Treasury itself cancelled the tender.

By early 2017, it was agreed that a new adjudication process would re-evaluate the same Caxton and Lebone bids without the problematic 0-4 scorecard.

A court order set out detailed safeguards aimed at preventing any further irregularity.

Any bidder reaching the minimum qualifying score of 80% in the functionality evaluation would then be evaluated on price and empowerment.

However, the new process was again dogged by controversy.

As the Supreme Court of Appeal noted later: "From the onset, the members of the BEC [bid evaluation committee] were uncertain about how to proceed with the scoring…"

No new scorecard had been provided. An auditor in the meeting recommended the BEC simply create its own scorecard. Her proposal was rejected.

Instead, the BEC resolved to first score the bids individually, allocating "raw scores"; and then to collectively discuss their scores and have an opportunity to adjust them.

This approach appears contrary to treasury guidelines that evaluators must score independently.

On tallying the "raw scores", the Lebone consortium scored 92.6%, but the Caxton JV scored exactly 80% – meaning on the raw scores both bids should have gone through for evaluation on price and BEE.

Caxton has claimed that its price was some R700 million cheaper than the R2.8 billion reportedly bid by the Lebone consortium. This claim is contested by Lebone and Novus.

After discussion, members changed their scores. Caxton's average score dropped from 80% to 79% with the consequence that they were disqualified.

Caxton went to court again, losing in the Gauteng High Court in Pretoria in February 2018, but winning in the appeal court, which delivered judgement on 20 November 2018.

It noted: "Although there was no suggestion of corruption in the adoption of a consensus-seeking approach adopted by the BEC, it falls short of the standard required. It is not so much the separate incidents taken individually that matters but the aggregate or 'cluster' of certain facts… One is left with a residual sense of unease."

The court ordered the DBE to re-evaluate the tender for a third time.

The Lebone consortium petitioned the Constitutional Court for leave to appeal, which was denied on 4 February 2019.

For a year Caxton was kept waiting – while, in the interim, Lebone, Novus and DSV continued to deliver and be paid in terms of their tender.

By now, so much time had passed that all that was at issue was the two-year extension.

After fruitless queries to the DBE, Caxton learned (via a stock exchange announcement by Novus on 18 February 2020) that the Lebone consortium had been granted an extension for a further two years following a re-evaluation of the bids.

Caxton had again failed to meet the 80% threshold.

Now Caxton has come out guns blazing.

Correspondence that Caxton disclosed to amaBhungane shows that on 25 March Caxton wrote to the Novus board disclosing they knew about the commission agreement with Lebone.

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The letter states: "The commission is paid as ostensible compensation to Lebone for using its access and business networks… to procure printing work (including the DBE Contract); and… to obtain expedited payment from the DBE. The overall commission has since been increased to 15%."

Caxton alleged the commission agreement created at least a suspicion of corrupt activities and called on Novus to terminate the agreement and recover all commission payments made to Lebone.

The reception was chilly. Novus wrote back saying it was "concerned about these serious allegations" and would discuss the matter at the next scheduled board meeting.

On 5 April Novus wrote back again stating: "We have now shared your concerns and correspondence with the board of directors. The Board is considering the contents..."

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The first letter advised that "in the absence of a timely, full and adequate explanation and response, Caxton has instructed us to institute an application under section 162 of the Companies Act… to declare the directors of Novus delinquent on the basis of a breach of their fiduciary duties".

The letter set a deadline for response by 14 April, since extended to 27 April.

A second letter issued a demand in terms of Section 165(2) of the Companies Act that Novus institute legal proceedings to rescind the commission agreement and recover payments flowing from it to Lebone.

On 14 April, lawyers for Novus wrote back condemning what they called "the spurious, vexatious and defamatory allegations on which the demands are founded".

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Given the lockdown, Novus would respond substantively only by 27 April, but its lawyers charged that the "unwarranted inferences" drawn by Caxton were manufactured to "cause damage to a competitor and the value of its shares, with the intent to derive an unlawful commercial benefit".

"A blatant attempt to prejudice a direct competitor by an abuse of process and infringing on bona fide contractual rights and obligations as a direct competitor of Novus under the guise of being a shareholder will not be countenanced."

Clearly this is a gun fight.

Whether Caxton is in possession of a blunt knife or a Colt six-shooter remains to be seen.

The amaBhungane Centre for Investigative Journalism, an independent non-profit, produced this story. Like it?  Be an amaB  Supporter to help us do more. Sign up for our newsletter to get more.

an amaBhungane investigation