The company’s share price shot up by 21% today following the announcement.
RYK VAN NIEKERK: Clothing and apparel group Seardel’s share price shot up by 21% today following an announcement that the company has settled litigation with former directors. On the line from Cape Town is fund manager Chris Logan of Opportune Investments. Chris, this seems to be a very big deal for Seardel?

CHRIS LOGAN: Yes, definitely. It was quite significant and obviously resulted in the share price moving up strongly. The fact that there were these claims was flagged quite some time ago in the 2009 annual report, so it’s not totally unexpected.

RYK VAN NIEKERK: As you say, the litigation started more than two years ago, and it was shortly after HCI took control of the company. What was it all about?

CHRIS LOGAN: Well, details are sketchy, but the first thing that came to light was in the 2009 annual report, and that basically the chairman trying to cope with it at the time said the board had commissioned an extensive forensic audit of past accounts in the company. In consequence the group launched an action consisting of various substantial claims for relief, the total of value of which was some R300m, against former directors of the company and its subsidiaries, primarily related to personal property transactions, the opportunity for which the company believed ought to have been passed to the Seardel Group.
There aren’t very many more details because the litigation was held by way of arbitration and not open to the public. So it essentially looks to me as if it’s related to properties which used to belong to the company, but were developed for the benefit of the directors or transferred to the directors and then developed by them. And they enjoyed substantial rewards to that which the current board of Seardel believes should have stayed with the company.

RYK VAN NIEKERK: So it is a case of the previous majority shareholders using assets for their own use, or…?

CHRIS LOGAN: Or the previous directors obviously, when HCI came in and rescued Seardel in 2008, changed the board considerably and the previous directors – it’s no secret that the founder of the company was one of the defendants in that litigation in itself. So it looks as if the chairman and the CEO, being Aaron Searll, and certain other directors did property transactions the benefits of which should have really accrued to Seardel.

RYK VAN NIEKERK: The settlement will, according to the directors, add 20% to the company’s earnings and it also removes a lot of uncertainty about the group.

CHRIS LOGAN: Without doubt. It boosts the net asset value of the company quite considerably from R1.77 to R2.16. It obviously removes R100m of debt which used to belong to one of he former directors, because that was ceded back to the company. It results in three properties being transferred back to the company at their original purchase price, which seems to indicate the original price at which the directors bought those properties from the company.

So it’s a big win from a strictly analytical point of view. It enhances the intrinsic value of Seardel quite considerably.

Source: Moneyweb