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After the Bell: Going through the AYO of a needle

After the Bell: Going through the AYO of a needle
Tim Cohen
By Tim Cohen
27 Mar 2023
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Why does the PIC think that the very people who screwed them are now suddenly going to become great IT innovators, something they didn’t manage when they had billions in the bank?

The Public Investment Corporation (PIC) and technology company AYO announced an out-of-court settlement of their public dispute on Friday, which has been made an order of court. The details of the arrangement have yet to be announced, but Business Maverick has seen some documents which explain the essence of the agreement. For public servants, the news is bad; for AYO, the agreement is a triumph.

The dispute arose, as we have written many times over the years, after the PIC made an absolutely extraordinary investment in 2017 in AYO — so extraordinary that it was obvious from the start something was fundamentally flawed.

The PIC bought 29% of AYO’s shares during its initial public offering in December 2017 on behalf of the Government Employees Pension Fund (GEPF) for R4.3-billion. The company at the time, it emerged later, had a turnover of R478.7-million, and its after-tax profit was R27-million. The company’s listing documents, however, suggested that in the year after the listing, the company would be making around R760-million. I mean, you have to laugh.

The PIC’s mandate essentially is to invest the pensions of government employees sensibly. Its assets under management (AUM) are gobsmackingly huge: in March last year, they were just under R2.6-trillion. The PIC invests most of its AUM in SA’s listed companies, which, on average, produce a market return of about 8% a year. While the numbers are large, honestly, this is not brain surgery; if you gave the funds to any number of SA’s fabulous asset management companies, they could easily achieve similar returns, if not better.

But the PIC also has the mandate to develop the country, so investing in building and growing young companies is really where it can and should make a difference. If it can’t do that, then it has no intrinsic function. So although the investment in AYO was trivial in monetary terms, by its standards, it’s an important indication of its utility. Fail here, and the entire raison d’être of the PIC falls away.

And wow, did they fail. Almost immediately after the company was listed, the share price started to implode. Coming to the market at R43, the share price is now around R4.50, valuing the company at no more than what remains of its cash.

The reason its cash is so diminished is that the company, despite being loss-making almost every year since listing, has been dishing out huge dividends and has been loaning money to companies in the group hand over fist. So the R4.3-billion is now almost gone.

This of course places the PIC in a difficult position. As a minority shareholder, it can object but not prevent the company from paying dividends. But the act is so cynical, so inherently corrupt, you are just left speechless.

Bulldozer Matjila


The PIC launched a legal action to get its money back, claiming that AYO had misled it into making the investment. Finally, five years later, the court action began a week or so ago, and the first witness, PIC assistant portfolio manager Victor Seanie, testified essentially in favour of the PIC’s claim. But he also asserted that the PIC’s procedures had been violated, generally making the organisation look like a bunch of Keystone Cops. Everything was rushed through at the last minute, aided by the organisation’s then CEO Dan Matjila, who aggressively headed the bulldozing.

In an explanation of the settlement to the PIC’s board, the PIC’s lawyers revealed that the chance of victory in the case was around 50%. My own impression is that they were well on the way to demonstrating fraud. 

Presumably, the PIC felt their chances were so slight because AYO could and probably would have made the point that it wasn’t their fault that the PIC had not followed its own procedures. And neither was it their fault that the PIC pumped vast amounts of money into a medium-sized company with modest prospects. The PIC would obviously challenge these claims, but you can see how this could easily end up being a close-run thing.

Dished-out dividends


It appears that mediation negotiations with the PIC and AYO have been on the go behind the scenes for years. The PIC initially demanded all its money back, and presumably, this encouraged AYO to accelerate dishing out the cash in dividends to its shareholders.

Ultimately, what the parties agreed is that AYO will, loosely speaking, give the PIC back around R600-million through a share sale which will reduce the Government Employees Pension Fund’s holding by just under 5%, and the company will keep the rest of the cash. The PIC may divest more in a few years’ time and will get a few seats on the board, including chairmanship, in the meantime.

Is this a fair mediation? That depends on how you look at it. If you say, well, the money paid out in dividends is gone, so the maximum the PIC could get is what the company has left, which is about double that. So at least it’s getting something back. It also leaves the company standing, which makes it possible that it could get more in the future, and AYO’s employees will still have their jobs.

And, importantly, it means the PIC can sweep its own governance problems, of which there are obviously many, under the carpet. The witnesses who were about to testify would presumably have contradicted Seanie, making the PIC look even more like rank amateurs.

That’s the plus side.

Broken trust


But on the negative side, the deal allows AYO to get away with all the absurd dividend payments it’s been making over the years, which in total amount to more than R2-billion.     

The other problem is that the PIC is left in partnership with precisely the organisation it claims defrauded it. And not only in partnership but in the position of junior partner. And not only a junior partner but an even more junior partner than it was before. Why does the PIC think that the very people who screwed them are now suddenly going to become great IT innovators, something they didn’t manage when they had billions in the bank? 

Obviously, there is a temptation to believe that companies can be turned around, and the PIC can still save face in the long run if ever the company becomes a grand money-spinner. But AYO is an IT solutions business, and this is a competitive field in which delivery is absolutely key. It depends on clients trusting you will get the job done around about the time you say you will get it done.

Can you trust an organisation that, without batting an eyelid, screws government pensioners out of billions? I might be wrong, but I don’t think so. DM/BM

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