THE DEVIL MADE ME DO IT By: Marc Hasenfuss THE CHIPS HAVE hit the fan at black-controlled casino investor Grand Parade Investments (GPI)* around a further empowerment initiative, only months before a much anticipated listing on the JSE. Aside from inferences of "white infiltration" at GPI, there are also allegations of board incompetence, suggestions of imprudent valuations and conflicts of interest as well as pending legal action and questions around corporate governance. GPI - now one of the most coveted unlisted shares in SA holds a 19,12% stake in SunWest, the parent company of the money-spinning GrandWest casino in Cape Town. The group also owns a significant minority in limited payout machine operator, Grand Slots (aka Thuo Gaming), and is likely to secure a stake in the new Worcester casino. The current value of GPI ranges between R400m and R1bn, making the company a nice addition to the JSE's small cap index or a weighty addition to the AltX. One might also assume - with access to such an array of gaming assets - that shareholders, many of whom acquired shares several years ago at 70c/share, would be a contented bunch. Hardly? A special meeting of shareholders last Sunday revealed serious tensions at board and shareholder level during the lead-up to a vote on proposals to issue 12m new shares to enhance the group's BEE credentials. No surprise that three directors - Ragi Moonsamy, Crispin Sonn and Solly Tshiki - were booted off the GPI board a day after the shareholders' meeting. All three had either questioned or objected to GPI's empowerment share issue. Moonsamy and Sonn - both directors of major shareholder Sancino Projects - had addressed the shareholders' meeting in an attempt to sway the more than 1 000 assembled shareholders to vote against the share-issue proposals. Tshiki is a director of GPI shareholder Origin Investments. The issue at stake at GPI - the way Finweek sees it - really revolves around whether existing shareholder value is being diluted if the board pursues a share issue to enhance the group's BEE credentials. The very valuation of GPI also comes into question. The debate also questions the current leadership at GPI, implying that the group isn't being run in the interest of shareholders. Indeed, there's every indication that the controversy over the empowerment share issue has exposed the start of a power struggle at GPI. For the record, about 70% of GPI's shareholders voted in favour of resolutions to issue the 12m new shares. But the matter isn't this cut and dried. A few days before the special shareholders' meeting, Sancino (an anagram for 'casino') - a 13% shareholder in GPI - petitioned the Cape High Court for an interdict to stop the vote on the empowerment share issue. Sancino was supported by another significant majority shareholder, Blue Bay Partners, a Cape-based investment company. The matter was postponed, with Sancino and Blue Bay agreeing to let the meeting proceed on condition that no resolutions are enforced until court proceedings run their course. A new court date - aimed at overturning the establishment of the BBBEE (broad-based black economic empowerment) trust - has been set for mid-September. Perhaps at this point it's useful to outline the main thrust of the empowerment share issue. Basically, 12,6m shares (almost 20% of GPI's share capital) will be issued at an average price of 500c to raise R63m. Proceeds will be used to acquire further shares in SunWest as part of a stated goal of securing 30% of the gaming company. The shares will be issued as follows: 2,5m to a GPI special purpose vehicle comprising new black corporate investors at 650c/share; 3,2m to new non-black corporate investors at 650c/share and 6,9m to a GPI broad-based black economic empowerment Trust (which will include existing black shareholders in GPI) at a discounted 400c/share with a year lock-in clause until 2012. The circular sent to GPI shareholders did not disclose the identities of the new corporate investors - but a question at the shareholders' meeting from well-known Cape Town businessman Kevin Roman saw JSE-listed Trematon Capital Investments and Alpha Capital named as the nonblack corporate investors and Bulelani Ncguka, Circle Capital and Cape Empowerment Trust (CET) as the black corporate investors. Adams stressed that none of the investing entities had any relationship with GPI directors. The bolstering of empowerment credentials at GPI should not really be a contentious issue. For SunWest to retain the exclusivity of its gaming licence in the Western Cape, it stands to reason that suitable empowerment partners are safely in place. One only has to look at the situation at Real Africa Holdings - a major investor in Sun International's casinos to see how empowerment credentials can be eroded. Interestingly, RAH is suing Sun International for over R300m in a dispute over the allotment of additional shares in SunWest (see our recent Cover Story: "Gray Skies over Paradise"). It's a well-known fact that white investors have in the last 12 to 18 months infiltrated GPI. The most significant "raiders" are Charisma Holdings and Blue Bay, which each hold about 2,9% of GPI. The major issue, though, in terms of so-called white infiltration is the emergence of Sanlam as a major indirect shareholder in GPI. Sanlam featured prominently on the pages of www.fin24.co.za and Finweek late last year when it snatched control (59%) of Sancino (by converting preference shares into equity) from CET. Sanlam effectively holds 6,5% of GPI. Sancino - by virtue of Sanlam's majority shareholding - can no longer be deemed a BBBEE company. That means Sancino - one of the original investors in GPI - may not be in line for its allotment of shares offered to original consortia shareholders, the BBBEE trust. By inference one would assume Sancino's opposition to GPI's empowerment share issue is based on its possible exclusion from the exercise. Sancino director Ragi Moonsamy emphatically denies this. He argues that Sancino's opposition to GPI's share issue proposals is based on concerns about the dilution of existing shareholders. He intimates that the Sanlam factor at Sancino is a red herring because the institution has already agreed to sell a 15% stake to directors in a bid to push black ownership back closer to the 50% mark. "Our big issue is why GPI insists on issuing shares to protect BEE credentials. This is a black-owned company. Was it asked to do the share issue by the local gaming board or SunWest?" Moonsamy argues that if there's a need to protect BEE as regards the GrandWest licence, then the matter should be dealt with by SunWest. "The gaming licence lies with SunWest? it's SunWest's responsibility to protect BEE, not GPI's." This sentiment is shared by Blue Bay. Blue Bay director Uys Meyer, earlier told Die Burger that his company isn't against a mechanism to safeguard the long-term empowerment credentials of GPI, but then the shares must be issued in an even-handed way, based on transparent pricing by an independent merchant bank. On a valuation basis Moonsamy argues that GPI is not being prudent in issuing shares between 400c and 650c in the empowerment share offer in lieu of the value that could be accorded the GPI shares on listing. Meyer reckons GPI's directors need to get an independent merchant bank to value GPI's shares for purposes of the new issue. Moonsamy asks: "Why is GPI giving away shares at this price when we know at listing the price could be substantially higher? We ran an independent valuation model that put a value of 1500c/share on GPI." GPI's share issue price carries a "fair and reasonable" statement from Paul Leaf-Wright (the former BoE executive) from Leaf Capital. Moonsamy reckons the proposed share issue is fundamentally flawed - describing the exercise as a "memorial service" to empowerment at the recent shareholders' meeting. "New shares should be issued to existing shareholders in the correct proportion." Of course, there's a potential hitch in a pro rata share issue to existing shareholders in that many may not be able to take up their rights. Who would be the underwriter in such a case? GPI chairman Hassen Adams is adamant the share issue is absolutely necessary for GPI. At last week's shareholders' meeting Adams dismissed Sancino's legal challenge to GPI's share issue as spurious. "If anything happens, it'll be an indictment to empowerment. I would have thought we explored the matter ad nauseam in our board meetings." He told shareholders that Moonsamy - who received rapturous applause from shareholders - "excites people with the wrong information". Adams pointed out that allowing corporate investors to buy in at a premium-priced 650c/share meant existing shareholders could subscribe for new shares at 400c/share. "We have not sold BEE away. The corporate shareholders are holding shares on your behalf with the same lock-up clause." On the issue of diluting existing shareholders, Adams shot back with a hard-hitting response to shareholders at the meeting: "We are not diluting you, we are diluting Blue Bay. You can shoot me down for this, but I will never allow a white man to steal from us again." Adams was clearly miffed with Blue Bay - whose two representatives were present at the meeting. He said Blue Bay used State employees from the police and prisons services - allegedly purporting to represent GPI - to convince shareholders to sell their shares. The fact of the matter is that Blue Bay was (and is) perfectly entitled to buy GPI shares. As such Blue Bay was offering the only mechanism whereby GPI investors could trade their shares as there has never been a formal or informal over-the-counter platform available to investors. Blue Bay consultant Andrew Ball says the company had unsuccessfully initiated talks with GPI early last year with a view to a reverse listing via the old Moribo shell (now housing IFA Hotels). Ball says that when Blue Bay started buying GPI shares, nine months later, the shares were still being bought and sold at R1,10 through GPI's office. Ball says that 65,2% of the total shares purchased by Blue Bay, have been in blocks of 5 000 shares or more - the largest block being 600 000 shares. Clearly GPI's remaining directors must be concerned about the "hostile" presence of Sancino and Blue Bay. The combined entities, with support from other larger shareholders (as witnessed in the shareholders' meeting vote) may be able to garner sufficient support to become a major nuisance to GPI directors. Presumably first prize for the rebel shareholders would be to preclude GPI passing any special resolutions. That could affect future deal flow and stymie future fundraising efforts. With a listing imminent, it's probably incumbent on GPI's board to find a quick solution to the tense impasse - if only to put thousands of unsophisticated shareholders at ease. A possible solution could be to make peace with Sanlam. With three directors ousted from the GPI board last week, there may be an opportunity to appoint someone from the Bellville-based institution to GPI's board. Whether including Sancino in a proportional empowerment share offer - ie only the parts of Sancino deemed genuinely BEE - would smooth matters over, remains to be seen. Gut feeling is that such a gesture could ease tensions markedly. But Blue Bay's Ball notes: "Peace lies in the board of directors understanding the value of the assets owned by GPI." The inference is that by issuing shares at 650c/share to new investors, the board is giving away a valuable chunk of the company. Blue Bay reckons a fairer issue price for shares to new participating investors may be closer to 1200c/share, based on the underlying value of the SunWest shares. Ball says: "Basically we think that if a share offer is to be made, then it must be made to all shareholders. Why outsiders like Trematon, Bulelani Ngcuka or Alpha?" Both Sancino and Blue Bay have raised concerns about the levels of corporate governance at GPI, citing a conflict of interest with the chairman's position on the boards of related companies. Adams serves on the boards of SunWest, Sun International and the Worcester casino as well as on the boards of Tattersalls, Slot Solutions and Thuo Gaming. Ball argues: "Hassen has a good vision, but we can't console ourselves that GPI is guaranteed the best outcome in negotiations when the man sits on practically all the boards of related companies." It seems the rebel shareholders will be punting for Adams to stand down as chairman (although retaining his board seat) with an experienced, independent corporate figure (someone like Jakes Gerwel springs to mind) taking the helm in the run-up to listing. Moonsamy has raised the question of the appointment of Felicia Roman as the trustee for the GPI SPV and BBBEE trust, where she can vote the 12,6m shares. Roman was recently appointed GM of the soon-to-be-opened Worcester casino, in which GPI is likely to secure a meaningful shareholding. Adams holds a major investment in the Worcester casino, a stake that's rumoured to be earmarked for injection into GPI shortly. The first signs of resistance to the Worcester casino's incorporation into GPI were evident at the recent shareholders' meeting where some parties questioned the "real" rationale for such a transaction. There's a growing belief that Sun International acted on Worcester (which was initially part of London Clubs' fizzled SA plans) as a safety measure. Lack of development at Worcester could have seen the licence transferred to the Cape Metropole (ending GrandWest's exclusivity in Cape Town), as Gaming Board regulations have previously allowed the transfer of licences within provinces. Other shareholders canvassed by Finweek are content for Adams to take the company forward to listing. One noted: "Sure issues have been raised about Hassen, but he has injected much-needed vigour at GPI since taking over the chairmanship from Peter Swartz. What have his critics done for GPI?" Adams - at the shareholders' meeting and afterwards in conversation with Finweek - reiterated that he had gone out of his way to secure the best deals for GPI shareholders. "These shareholders are my congregation?we've always had strong community support. We've promised the world and now it's time to deliver." Adams told shareholders ahead of the crucial vote last week: "We have done the most incredible transaction with Sun International. I'm too scared to even tell my board about it?" Shareholders had their say last Sunday - now GPI's welllaid empowerment plans rest in the hands of the courts. * The writer holds shares in GPI.