Lottery operator says it is being bullied, while gaming and leisure group contends that Ithuba breached loan agreement

The settlement of the long-running battle between Ithuba and JSE-listed investment group Hosken Consolidated Investments (HCI) over the running of the lottery is being stalled by the Covid-19 pandemic.

Ithuba, which won a contract to run the national lottery through its management company, Zamani, from June 2015 to May 2023, has been locked in a legal battle with HCI over claims of unpaid management fees.

HCI’s urgent court application seeking access to Ithuba’s financial statements was dismissed in November. The matter was taken for arbitration, but both parties refused to comply with the decision and sought a review.

HCI later took the matter to the competition authorities by applying for an approval for a merger with Ithuba. The hearing, which was set for June, has been cancelled.

HCI executive Yunis Shaik said the Covid-19 pandemic was preventing his company from concluding its legal fight with Ithuba.

The Competition Tribunal at the end of June delayed hearings around approving the Competition Commission’s recommendation that HCI be allowed to get oversight rights over Ithuba through a “merger for negative for equity”.

Shaik said he was waiting for the tribunal to give more reasons for the delay, after a request for a postponement by Ithuba, but it had said that there could not be hearings for a “large merger” as defined by the Competition Act, while the pandemic raged.

HCI lent Ithuba R325m in 2015, which included R166m of principal, to bid for the lucrative national lottery licence, which would allow it to manage the gambling operation until 2023.

Shaik said these funds were used to establish the lottery and were provided not on the basis of loans but as an equity funder. HCI sought an equity interest and an equity return.

“It was a condition precedent that any funding by HCI was dependent on, firstly, the right to hold preference shares equal to the value of a loan to be made and, secondly, the right to exercise oversight in the event of breach of financial covenants,” he said.

It was on this basis that HCI released the sum of R325m to Ithuba on or about April 27 2015, he said.

But Shaik said that Ithuba hadn’t created the preference shares for HCI and it had also breached financial covenants.

Shortly after the lottery commenced its operations, a dispute arose which was referred for arbitration, he said.

The agreement was that Ithuba would pay 2.5% of the lottery’s R7bn annual turnover as a management fee. But the arbitrators confirmed that Ithuba effectively paid a 4.67% management fee.

“Zamani was overcharging for the services it renders to Ithuba in breach of the financial model which was entered as its bid for the national lottery licence. Ithuba and Zamani are directed to afford HCI Invest the right of oversight over the manner in which Zamani renders service to Ithuba,” Shaik said.

HCI estimated that the total fees that would be paid to Zamani over the full term of the licence would be R819m.

Shaik said the overreaching by Zamani was made possible because the controlling and beneficial shareholders of Ithuba and Zamani “are one and the same people: Mr and Mrs Mabuza”.

Ithuba founder and MD Charmaine Mabuza is married to advocate Eric Mabuza.

Shaik said Ithuba and Zamani refused to comply with the arbitration award and asked for a review. Judgment was to be handed down shortly.

He said once the merger was approved, HCI could get Zamani to pay back the overspent funds so that they would be spent fairly and give HCI its preference share in Ithuba.

Shaik said if HCI can exercise the oversight rights it was originally promised when it lent money to Ithuba, it can prevent the lottery operator from mismanaging those funds.

But Charmaine Mabuza said HCI was trying to wrestle control of the licence. She said Ithuba fairly won rights to the national lottery from June 2015 to May 2023, and that HCI was a “bully” that believed it could take away her business because she is a black female entrepreneur.

Mabuza said that she didn’t understand why HCI was pursuing legal action against Ithuba when Ithuba had paid back the more than R300m it borrowed from HCI so it could launch the lottery.

Mabuza said HCI was using its clout and “generational wealth” to bully her company.

“Working with an organisation that traces its roots to the progressive trade union movement, we were lulled into a false sense of comfort in the belief that we were working with like-minded funders that shared our ethos about driving the empowerment of black business and, in particular, women,” she said.

“The sheen quickly dissipated and the viper started showing its fangs when HCI started filing legal papers seeking control of Ithuba,” Mabuza said.

Shaik said HCI denied claims that it wanted to take over Ithuba so that it could get access to the lottery through the backdoor.

“HCI does not seek to take control of Ithuba and has no intention to do so. All HCI requires is that Ithuba complies with the agreements it has concluded,” he said.

Source: Business Day – Alistair Anderson