Koseff moves into Protea

But this was far from the real story. Pertinently, Protea failed to reveal that the reason a consortium of empowerment investors, Investec and management, had bought Protea from Australian owner Stella was to alleviate a crippling debt burden on the SA hotel group. And, the truth is, Protea was coming home with its tail between its legs.

In July 2007, hospitality company Stella paid R1,48bn to buy Protea. At the time, Protea's spin machine gushed that this was a step forward in Protea's “global expansion”. Protea chairman Otto Stehlik said the deal “secures Protea's future outside Africa as part of an established, global leader in the tourism and hospitality industry”.

However, its new Australian owners almost immediately fell on hard times.

By February 2008, Stella's then-holding company, MFS, was forced to sell 65% of Stella to Asian private equity firm CVC for an effective A1,3bn to pay a looming A155m bill.

Last week, Stella sold Protea to the consortium for an “undisclosed sum” that was sharply lower than the R1,48bn it paid last year. Sources say the consortium paid less than R1bn — a 33% discount to the original price.

It looks a good deal for the buyers, including Investec Private Equity which will hold 33% of Protea Hotels.

But Investec had a lot to lose: it was the main bank behind Stella's R1,48bn purchase in 2007, providing finance of R700m that sat on Protea's balance sheet as a debt.

But in December, Stella's holding company, Global Voyager, produced financials for the six months to June which confirmed Protea had breached the terms of the deal with Investec.

Global Voyager's accounts stated that Protea “received notification from its lender [Investec] on December 17 2008 that it had committed a breach of the terms of its lending facility, having failed to lodge its financial statements within the period provided”. It was given until December 29 to lodge the financials, which it then did.

Protea MD Arthur Gillis confirmed to the FM that his company had received this notice of breach, but plays it down. “As part of our debt agreement, our audited financials had to be filed within 85 days of our year-end. These financials were ready within 60 days, but we had to wait for certain details from Australia,” he says.

So why did Investec not reveal to its shareholders that Protea was in breach of this large loan as long ago as December?

Ursula Nobrega, head of Investec's investor relations, says this was only a “technical breach”. “At no point have Protea Hotels stopped paying us. They breached a technical aspect of the deal, not the payment terms,” she says.

Whether Investec shareholders buy this or not, they will be more concerned with another red light raised in Global Voyager's accounts.

By June last year, the accounts say, Protea owed A85m (R550m) in debt, yet it had only A31m (R200m) in net assets.

As Global Voyager reported, if Investec had used the breach to demand full repayment, Protea “would not be able to immediately repay the amounts due”, and Investec could have taken it over entirely. In this case, Stella would have to record “asset impairments of $231m”.

So is Investec buying a lemon, with hefty debts and little cash flow?

Though Gillis says that part of the R700m owed to Investec has been converted into equity, the hospitality company won't reveal much about its financial health.

Gillis refused to release Protea's financials to the FM, as it is a “private company and we've never released that information”.

But, he says, after the “restructuring”, the debt levels will be “significantly lower” than previously. “The new purchasing group is putting in a significant amount of cash. The only reason we had all that debt on our balance sheet was because this is the way Stella chose to structure the deal. I was never that comfortable running a company with such large levels of debt anyway.”

While he won't reveal the size of Protea's debt right now, Gillis says that if Investec CEO Steven Koseff was at all worried, “he wouldn't have acquired a major stake in Protea and neither would we, as the management team who were the founders of this business”.

Quite why there is such secrecy over the purchase price is also concerning. Gillis says there is a strict confidentiality clause regarding this price, and Nobrega is equally coy, saying: “It's never been our policy to go into detail on client transactions.”

Though Nobrega confirmed that Investec hasn't lost any money on the Protea loan or investment, with such little disclosure it is difficult to say whether Investec shareholders are getting a raw deal.

For Investec, this probably won't be the last company struggling to pay its debts right now in which the bank will end up with an equity stake. And while some of Investec's local investments, such as Corobrick, are doing well, some of its other overseas investments are less prosperous.

When Investec's full-year results are released on May 21, Koseff says it may have to take a goodwill impairment for its 68% holding in biofuel company Global Ethanol.

At a briefing to investors earlier this month, Koseff said his bank was “reviewing the Global Ethanol investment where a goodwill impairment may be required”. But he told the FM that this impairment would be tiny in the context of the bigger group.

Another of Investec's investments which is struggling is IdaTech, the London-listed fuel cell company of which Investec owns 73%. According to its financials, IdaTech's loss for 2008 deepened to US21,9m from US16,3m, which it attributed to “planned investment in operations, research and development, and sales”.

Nobrega says Global Ethanol and IdaTech are two investments where “the market turned against us”, but both companies were still operating. “Investec will continue to make investments in companies with strong cash flows. With Protea, we always wanted to take an equity stake, but it wasn't opportune to do so until now,” she says.

With the deal covered in cloud, it's impossible to say whether Investec's foray into the hotel business will be as good for its shareholders as it is for Protea.

Source: Financial Mail

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