After lowball bid for KWV art, properties – HCI is close to a new deal
Minority shareholders in investment entity Niveus have to decide on Thursday whether to accept Hosken Consolidated Investments’ (HCI) bid to buy them out.
It looks like a done deal – but leading up to the offer, HCI has been involved some eyebrow-raising corporate action concerning properties and artworks once owned by wine and spirits company KWV.
HCI, a JSE-listed black empowerment investment holding company which owns hotel, gaming and entertainment group Tsogo Sun, and has an indirect stake in eTV, among other holdings, sold KWV’s drinks brands in 2016. But it kept KWV's properties in Paarl, including its imposing head office, Laborie wine farm and a large art collection - which contains works by Pierneef, Gregoire Boonzaier, Maggie Laubser and the largest Irma Stern work in the world, called Harvest.
The properties and the artwork are housed in a company called La Concorde, which is majority owned by Niveus. Niveus is listed on the JSE and HCI owns more than half of it.
Last year, the fair value of some of these properties and the artwork were dramatically lowered after an independent re-valuation. According to La Concorde, these new valuations were more realistic given the current market and state of the properties.
Shortly after their values were slashed on La Concorde's books, HCI made a lowball offer to buy some of La Concorde's assets. For example, the fair value of La Concorde's Picardie farm in Paarl was cut from R35m to R9m as part of the revaluation, with HCI offering only R6m.
A higher counter bid was made by another investor for the properties – but then suddenly the La Concorde board didn’t think it was a great idea to sell the properties, and scrapped the deal.
Now, however, HCI is back and wants to buy out the minority shareholders of Niveus, which will see it get an even stronger grip on La Concorde. (Niveus owns only two other assets: a radar tracking business, which it recently sold to HCI, and a sports betting company, which it is in talks to sell.) HCI currently owns less than a third of La Concorde indirectly – the new deal will give it a direct 58% stake. It has also made a direct offer to La Concorde investors to buy them out.
HCI contends that it is buying out Niveus shareholders because the company should be delisted, as it is too small to carry the "unnecessary" expense of remaining on the JSE.
The deal is in the final stretch, and shareholders will vote on it at a general meeting on December 4. But questions remain whether they are getting a fair shake.
HCI CEO Johnny Copelyn, the former trade unionist and ANC MP, believes it's a good deal for Niveus shareholders. "Niveus shareholders did particularly well out of the share, quintupling their money over five years if they held the share from the time it was offered to HCI shareholders to the time of that distribution," he told Fin24 in an emailed response to questions.
But while HCI's cash offer of R2.40 per Niveus share is 24% higher than the average price over the month before the offer at the end-September – it's 21% below the company's net asset value (304c per share), as stated in its interim results released in November. Its cash reserves alone stand at R215m, and total assets are valued at R574.6m, even after the revaluation of La Concorde assets in 2018, which included KWV's impressive art collection.
La Concorde owns some 60 art works, which is valued at R40.4m on Niveus' books, according to CEO Lael Bethlehem.
Bethlehem said while some of it is valuable, most of art has "little commercial value but are important in reflecting the history of the company".
But while disgraced Steinhoff CEO Markus Jooste's recent firesale of South African art has depressed local prices, one person with knowledge of the collection estimates that it is worth between R50m and R100m - and contends that HCI will get the collection for less than its worth.
The person believes that the main piece in the collection, the massive Harvest painting by Stern, could fetch more than R40m on auction. Previously, a Stern piece called Arab Priest achieved the highest price ever for a South African artwork – more than R52m. The KWV collection also includes works by Pierneef (whose work in the past has sold above R10m per piece), Marjorie Wallace, David Botha, Gregoire Boonzaier, Carl Buchner, Frans Claerhout and Erik Laubscher.
But Copelyn believes the valuation of the art is market related. He added that HCI has "no desire to sell heritage assets".
In reaction to questions about why HCI made such a low offer on La Concorde's assets earlier this year, Copelyn said: "We put up an offer for those properties that seemed fair to us. The offer was designed essentially as a standby offer that allowed others to bid. As we anticipated there were no expressions of interest, never mind bids, vaguely close to the previous unrealistically high values placed on the properties concerned."
Bethlehem confirmed that there was a "slightly" higher bid - but says it came with some conditions and in a format which had shortcomings, and did not comply with request for proposals. The board had decided it was better to hold onto the properties for longer term value, and refused the offer, she said.
HCI's current bid for Niveus, was endorsed by an independent board that the company established to consider the offer. But not a single person on the independent board – which includes Moretlo Lynette Molefi, a former HCI director; Rachel Doreen Watson, a current HCI director, Jabulani Geffrey Ngcobo, a current HCI director, and Mohamed Haroun Ahmed, a director of HCI-owned Deneb – does not have a strong HCI connection.
Bethlehem told Fin24 that the board complied with the provisions with the Companies Act.
"In addition, there has been an external expert 'fair and reasonable' opinion on the value offered - per the provisions of the Companies Act," she told Fin24 via email. "Individuals who currently or previously served as independent directors of HCI, and/or other of its subsidiaries, qualify as independent when serving on the board of Niveus," Copelyn said. "Nevertheless, we did not seek to rely simply on their good judgement but instead took a number of steps to establish external valuations of assets to ensure related party offers were sensibly priced."
Offer to La Concorde shareholders
At the same time of the Niveus offer, La Concorde has made an odd-lot offer to repurchase shares from its shareholders who hold less than 9 500 shares, at a price of R3.25 per share. The offer closes on December 18.
HCI, in turn, has offered to purchase the shares of holders who have more than 9 500 shares, at the same price as the odd-lot offer.
The offer of R3.25 is more than 3% below La Concorde's net asset value per share of R3.36.
A minority shareholder who asked not to be named contends that shareholders are not getting the full value of what the company is worth. The shareholder also pointed out that the market value of the art is not reflected on the balance sheet, but rather its carrying value and therefore not appropriately reflected in the NAV.
According to the shareholder, it is unlikely that HCI will get any pushback because it would require a lot of resources from shareholders to launch a legal battle.
There are estimated to be some 2 700 small shareholders – mostly previous investors in KWV, including wine farmers – in La Concorde.
According to Copelyn most of them own less than 10 000 shares in La Concorde and seem "entirely inactive".