Wednesday, January 26

Fund manager calls on Balwin shareholders to vote against proposed deal with BEE

A fund manager and shareholder at Balwin Properties has called on all shareholders of the JSE-listed residential property developer to vote against a proposed Black Economic Empowerment (BEE) transaction at next month’s general meeting. .

Read: Balwin Properties Announces Agreement with BEE

Rudi van Niekerk, founder and manager of Desert Lion Capital, opposes the proposed transaction because he believes it is destructive value for current shareholders “with the likelihood of destructive deals of similar value in the future if this transaction is approved.”


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In an open letter to Balwin shareholders, Van Niekerk said: “I am writing this letter as a long-time concerned Balwin shareholder.

“After numerous interactions with several other shareholders, it became apparent that they share similar concerns and opposition to the proposed transaction.

“Three of the resolutions to be voted on require at least 75% shareholder support to pass.

“At the 2020 AGM, shareholders expressed their opposition and voted against the ‘General Authority to Issue Shares for Cash’ with 21.3%.

“It is very likely that an opposition vote of> 25% can be achieved and this proposed transaction can be blocked,” he said.

Balwin’s answer

Balwin CEO Steve Brookes said Wednesday that Balwin is aware of Van Niekerk’s open letter and has previously engaged with him about his concerns.

“To our knowledge, no other shareholder has expressed opposition to the transaction.

“The board has believed and continues to believe that transformation is an important imperative,” he said.

Brookes was cautious when commenting on the percentage of Balwin shareholders that the company believes will back the proposed transaction.

“We cannot comment on the respective vote of each shareholder, and we trust that shareholders will support this empowerment initiative,” he said.

Commenting on Balwin’s action plan if the proposed transaction is rejected by its shareholders, Brookes said, “We are always open to compromise to find a pragmatic solution to ensure the company achieves its empowerment goals.”

The deal

If the transaction is approved by Balwin shareholders at the September 6 general meeting, black shareholders will take up to 10% of the company’s issued share capital and increase Balwin’s empowerment credentials.

The proposed deal involves businessman Aobakwe Reginald Koketso Kukama, who will own 51% of a new special purpose vehicle (SPV) BEE that may own up to one-tenth of Balwin.

The remainder of the 10% stake is expected to be taken over by a broader base of black shareholders, representing women and youth.

Kukama is the founder of Yaetsho Investments & Projects, a real estate asset management and project management group that is also involved in renewable energy.

He is behind the development of the Vaal River City in Gauteng and has worked with the Mia family, the owners of the Waterfall mega-development area, among other business interests.

Read: Meet the man behind Vaal’s rejuvenation

Balwin said when announcing the proposed transaction on May 26 that it will involve the creation of the BEE SPV, which will be able to subscribe 10% of the group’s issued share capital at a discounted subscription price of 20%.

The discount will be applied to the 30-day volume-weighted average price of Balwin’s shares on the JSE.

A representative from the SPV will also be on Balwin’s board.

Van Niekerk’s concerns

In the open letter, Van Niekerk said that the subscription consideration will be provider-financed by Balwin, with a small nominal amount of R20 million contributed by the subscriber.

“Current shareholders are essentially vendors financing 10% for a new shareholder at a 20% discount,” he said.

Van Niekerk added that the BEE SPV will be locked for 10 years, and Balwin will retain the assignment on the newly issued shares as collateral for the repayment of the supplier’s loan for the 10-year period.

“If the BEE SPV does not meet its obligations, Balwin will have to roll back the scheme at the expense of current shareholders,” said Van Niekerk.

Van Niekerk further stated that the proposed transaction will have a limited positive impact, if any, on Balwin’s widespread Black Economic Empowerment (B-BBEE) rating because ownership, in terms of the B-BBEE scorecard, is measured against a target of 25% economic interest and voting rights that will be in the hands of black people and the proposed transaction will only result in approximately 10% ownership.

“The dilution of existing shareholder value is real and immediate. Effective immediately after implementation, and forever into the future, approximately 10% of dividends will go from current shareholders to new shareholder, in exchange for virtually zero compensation to existing shareholders, as newly issued shares They are financed by the provider.

“The redirection of future cash flows will have a significant negative impact on the net present value of current shareholder ownership in the company,” he added.

Share price and valuation

Van Niekerk also believes that the current price of Balwin’s shares and the price at which the new shares are proposed to seriously undervalue Balwin.

“Issuing shares at the proposed price would constitute a capital allocation decision destructive of value by the company,” he said.

Van Niekerk further noted that the market reaction to the proposed deal is evident from the stock price movement after the May 26 announcement.

Source: Open letter from Rudi van Niekerk

If shareholders succeed in opposing the transaction, the market may assess the company more positively and the share price may rebound, he said.

Balwin shares rose 2.67% on Wednesday to close at R3.85. Balwin’s stock closed at R4.42 on May 25, the day before the empowerment transaction was announced.

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