Last minute deal could hurt Sharemax shareholders

Gareth Stokes, FAnews Online Editor

Like the analyst put it last night: 'Still a million questions outstanding'". This was the response FAnews Online received from Manie Booysens, chief executive of the Financial Intermediaries Association (FIA), when we asked him what was going on at Sharemax. For those intermediaries who haven't heard of the company, Sharemax has for many years been offering investments in retail property developments, offering investors market beating interest returns and paying lucrative broker commissions. The company has come under scrutiny from numerous financial journalists in recent years - the latest being Finweek's Vic de Klerk - who has questioned just about everything about the group.

In July this year stories surfaced that the Reserve Bank alleged that Sharemax acted as a bank by taking "deposits" in excess of R5 billion from an estimated 40 000 investors over a period of six years. Sharemax offers its investors interest rates in excess of prevailing bank deposit rates with the promise of capital growth to boot. The company's directors subsequently assured investors their money was safe and that they were working with the Reserve Bank to resolve the issues. Nevertheless, investors are concerned about their capital (usually invested in blocks of R100 000), while financial advisors are concerned about possible claims at the FAIS Ombud.

But Sharemax has an FSP number…

Yes - Sharemax Investments (Pty) Limited is licensed with the FSB as a financial services provider (FSP 6153), but as Ian Middleton, managing director of broker organisation Masthead points out, the individual financial products (or property investments) aren't. The broker recommending an investment of R100 000 a time into any of Sharemax's property ventures would definitely have had to conduct a due diligence study for that opportunity. Such a due dilligence would have included a careful study of the prospectus, approved and registered by the Registrar of Companies, through which Sharemax markets its unlisted property investments and which includes and investigation of the projections by an independent auditor.

De Klerk has been doing a due dilligence at the group's giant The Villa development in Pretoria East. When we chatted to him yesterday he told us he'd made at least 50 trips to the giant shopping development (still under construction). You'll have to read his Finweek articles for his conclusion, which earned him the threat of legal action from Sharemax.

A bombed out property share offers R5 billion for Sharemax

Imagine our surprise when we saw a press release earlier this week which read: "Sharemax Investments confirms that it has received a formal offer from Bonatla Property Holdings to acquire 100% of all the property assets originated and promoted by Sharemax Investments." Sounds like a "saved by the bell" transaction!

The transaction is still subject to various regulatory approvals… In the interim we'll have to look at Bonatla's SENS announcement to get a feel for the deal. The property minnow (with a market capitalisation of around R10 million at the time of the offer) said it would pay Sharemax R4,985,162,808 "by means of an issue of Bonatla Property Holdings Limited ordinary shares (which are currently listed) and various other securities, to be listed." Readers might be interested to learn that Bonatla only recently emerged from a three-year suspension on the JSE, due to accounting irregularities.

Now we're clearly not in the same "spin doctoring" league as the bankers structuring this deal. The way we see it - at the 9c/share Bonatla currently changes hands - the company isn't going to be able to raise the purchase price. According to the JSE the company only has 500 million authorised shares, all of which are already issued. This means the company will have to either pass a resolution to authorise more shares or make use of the "various other securities" mentioned in its SENS announcement. We wonder if these "securities" might perhaps include a loan from Sharemax?

The impact on the small guy

A stockbroker we approached for comment said this "transaction" could resolve Sharemax's problems in one hit. It solves the "acting as a bank" accusation from the Reserve Bank and addresses the "fair value of assets" questions raised by the financial press. He says a solution could be for Bonatla to authorise 5 billion shares of R1 each and to issue 4.9 billion of these shares to Sharemax to cover the acquisition costs. Sharemax would then distribute these shares to the property investors according to the initial investments made. The risk passes to the shareholders who will then engage in a free market tussle as the JSE determines the fair market value of Sharemax's property portfolio… QED as my grade 10 math teacher used to say.

Small investors in the group's ventures could suffer as a consequence. Our first observation is that early Sharemax investors might suffer more than those who invested in the later developments. Sharemax is effectively "borrowing" from investors in the profitable smaller developments to subsidise the massive The Villa- development, for example. Shareholders could also take a hit if the value attached to the Sharemax property transaction is discounted too heavily.

Editor's thoughts: Could this be the end of the long-running battle between Sharemax and financial journalists? We'll have to wait and see. Sharemax has issued a "no change" statement to financial advisors in the mean time - urging them to continue marketing the scheme as usual. Are you still selling investments in Sharemax? E-mail your comment to gareth@fanews.co.za