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RELATIVE ISSUES

FEW will doubt that Hosken Consolidated Investments (HCI) has a frighteningly difficult task in picking up the profit thread to run through clothing and textile conglomerate, Seardel Investment Corporation.

HCI controls just over 70% of Seardel after underwriting the clothing and textile group’s recent R300m “rescue” rights offer. In the half-year to end-December, Seardel posted some ominous operational losses as the key textile and clothing divisions slumped into the red.

What HCI does not need in its endeavours to turn around an ailing Seardel is lingering legacy issues – especially those of the related party variety.

To date HCI’s no-nonsense approach has seen Seardel’s head office in Constantia closed down, and a serious shake-up of the board (where only textile boss Walter Simeoni – who is due for retirement later in 2009 – and non-executive deputy chairperson Neil Lazarus retained their seats in the boardroom).

When the next Seardel annual report is published, probably in late September or early October, I will be flipping to the notes on the annual financial statements to see whether a number of related party transactions have been cancelled.

These related party transactions mainly involve former CEO Aaron Searll, who is the founder of Seardel and remains a significant minority shareholder in the group.

A finger in many pies

For instance, Seardel subsidiaries entered into property lease transactions with Searll (or companies controlled by him). These were worth R7.5m in 2008 and R8m in 2007.

In the last financial year Seardel paid nearly R400 000 to use the services of Searay BD100 Charters, a partnership in which Searll holds a 5% stake. The company also paid R30 000 to use Owenair, a company in which Searll and former financial director Arthur Jacobsohn held a 51% and 49% stake respectively.

Seardel paid R800 000 for services provided by Crystal River Consultants, an entity owned by a Searll family member, and almost R600 000 to Lining and Textile Distributors, a firm in which the Searll family has a 20% interest.

These may not sound like massive issues for a company that turns over almost R4bn a year. But little things add up, especially when trading margins in the core businesses are under constant siege from cheap imports.

I would be surprised if any of these related party transactions are extended under the HCI regime.

But the one related party transaction that fascinates me much more than the others is Seardel’s R100m loan owed to Grawood Investments. Searll is the sole shareholder of Grawood Investments, which was the corporate vehicle used by Searll to follow his rights in the recent rights offer.

R100m loan conundrum

The Searll loan bears interest at prime less 1%, and – according to the last annual report – had grown from R87.6m as at end June 2007 to R98m in financial 2008.

Seardel’s interim results, released last week, now suggest the loan is closer to R100m.

The interest earned by Searll in the 2008 financial year (when interest rates crept up quickly) was a rather chunky R12.4m. Why I make reference to this loan is because Seardel’s interim results reiterated that “lenders to the group” – Absa Bank, Standard Bank, Nedbank, Investec and the State Bank of India – had undertaken to maintain their existing facilities until at least the end of June 2010. This agreement was undertaken on the basis that Seardel’s assets are secured in favour of the lenders “in various ways”.

But the R100m loan from Grawood Investments is not part of the secured arrangement that Seardel has with the five banks.

Seardel directors noted: “Despite ongoing discussions with the representatives of Grawood, the group has not yet succeeded in reaching any agreement as to the basis on which Grawood may be afforded security for its loan account, nor has any of the terms of such security been finalised.” How the Grawood loan will be settled will be interesting, as Seardel certainly does not have the cash flow to repay it out of operational resources. Perhaps if non-core assets are sold off, sufficient cash can be raised to settle the account – but one has to remember that the main lenders have secured certain of Seardel’s assets.

If Seardel’s financial position, particularly its operational cash flow, improves it might not be unreasonable to assume that a fresh loan (perhaps struck on better terms) could be raised to cover the Searll loan.

Still, one wonders why the loan was simply not converted into equity when the R300m rights offer was under way – especially since Grawood subscribed for new shares in that fund-raising exercise anyway.

Perhaps Seardel was not keen to see Searll bolster his already large stake (and influence) in the company. Or perhaps Searll prefers the cash flow stemming from the monthly interest payments on the R100m loan.

In any event, it will be interesting to see if this related party loan has longevity…

Source: Fin24 – Marc Hassenfus