Comair downs small supplier

One of the JSE’s most consistent performers, airline company Comair, has been accused of reneging on an agreement to buy out small family-owned business Metaco, suffocating it in the process.

On Thursday 17 October, the business served Comair with a “statement of claim”, which sets out the facts of the dispute and seeks compensation for damages.

Comair operates the British Airways brand in Southern Africa as well as the low-cost carrier kulula.com.

In 2017 and 2018, former Comair CEO Erik Venter was knee-deep in Comair’s diversification strategy. Comair spun off its IT team into a separate entity, Nocelle, that provides a variety of IT-related services; opened its network of slow lounges; invested in catering, and invested in training for pilots, ground crew and leaders in the aviation industry.

It invested about R100-million in this strategy.

To this effect, in July 2018, Comair acquired Metaco, which had been providing coaching and leadership services to Comair for two years. The intention at the time was that Metaco would drive the establishment of the Aviation Academy, and continue providing leadership services to the company while maintaining its external client base.

Comair acquired 100% of the small firm for R33.5-million with a down payment of R12.8-million and the balance of the total purchase price to be paid on an earn-out basis over six years.

Metaco’s proprietary learning methodologies were licensed to Comair, and its board was reconstituted to give Comair a controlling stake. Danny Tuckwood, one of the founding partners, was deployed to Comair to establish the new aviation academy. His position was replaced by contracting a senior executive consultant.

However, after the deal was signed things changed rapidly.

In November 2018, Comair CEO Erik Venter stepped into a group CEO role, and was replaced by Wrenelle Stander.

Venter resigned from the company in May. His successors were named as Glenn Orsmond and Stander, to jointly take over the role from 31 July 2019.

For Metaco, the changes were almost instant. By February the company raised concerns at its board meeting, chaired by Comair, that use of its services had declined by more than 80%, with no notice given.

As a result, the small firm risked posting a loss for the financial year, with significant implications for its earn-out clauses.

Meanwhile, Comair was wrestling with its own demons. While the business had been profitable for 72 years, and had survived the worst of the anti-competitive practices perfected by SAA, the trading environment was, and remains, difficult.

This is evident in Comair’s latest results. In the 12 months ended June 2019, the company reported headline earnings per share up 184% to 197.2 cents. This was largely thanks to the SAA settlement that was paid following an anti-competition judgment, which ruled that the national carrier should compensate Comair with R1.1-billion plus interest.

Profit before taxation, excluding the SAA settlement, actually declined by 82% from R471-million in the year prior to R86-million.

“We had to do something,” co-founder Barbara Walsh told Business Maverick. To help mitigate the impact, the Metaco board agreed to bring forward its plans to develop virtual reality learning platforms and focus on building Metaco’s external client base.

An internal loan of R4.05-million was confirmed by Comair and ratified by Metaco’s board to fund these developments.

Despite believing that it and Comair were on the same page, in June the new CEOs, who had not officially assumed their roles, informed the founders that as the company was insolvent (whether it was or wasn’t is now part of the dispute) they were in breach of the sale agreement.

The loan facility was withdrawn and a demand made for them to personally restore solvency, including reimbursing the R1.7-million drawn down from the loan. Furthermore, Comair required the sellers to capitalise Metaco for a further 12 months.

Two weeks later, on 15 July 2019, Orsmond demanded the sellers refund R12.8-million, being the initial purchase price, plus interest.

Orsmond would not be drawn into a discussion with Business Maverick. Instead, a spokesman released the following statement:

“Comair holds itself to the highest standards in its business operations and has done so for more than 73 years. We hold our business partners to the same high standards. Unfortunately, not all mergers and partnerships work out and that was the case with Metaco. The matter is subject to litigation and we do not intend to conduct those proceedings through the media.”

Metaco is no longer part of the Comair Group and the founders are now in the process of rebuilding a once vibrant business.

However, they are not willing to walk away entirely.

“It’s a moral principle,” says Walsh. “To be future-proof you have to ride through waves of change. If we don’t fight this, then we condone Comair’s behaviour.”

Taking a fight to a big company is not easy and for a small company, litigation can be unaffordable.

“The strongest power does not lie with the biggest bank account,” says Walsh. “It lies with your network. We have pulled that in, and in turn, they have pulled in their networks. The advice we have received is solid.” BM