Trustco, the Namibian investment company, appears to be courting controversy again, this time with a curious share repurchase arrangement.
Trustco made headlines in the Financial Mail last year when it proposed an acquisition of little-known diamond mining and exploration assets for a hefty R3.6bn from CEO and company founder Quinton van Rooyen in a paper-funded deal.
The latest development could be every bit as controversial, with Trustco proposing a specific buyback of its shares from minority shareholder Buckley Capital Partners, a Miami-based investment firm.
The agreement proposes the repurchase of 41.8m Trustco shares, which is equivalent to 5.4% of the company’s issued shares. While a specific share repurchase is fairly common on the JSE, the twist in this instance is that Trustco will pay a huge premium of 480c/share for Buckley’s holding on January 1 2018.
This is a premium of more than 40% of Trustco’s average share price over the 30 days before the repurchase was announced. The share price was 335c at midday on Tuesday — well off the 540c high recorded in November last year.
Trustco FD Ryan McDougall says the buyback is an opportunity to acquire a very underpriced asset "which when correctly priced will present a range of further opportunities". He says more details will be shared in a circular to shareholders, which should make the reasoning behind the deal clearer. He adds that Trustco still continues to buyshares via its treasury programme, over and above the Buckley repurchase.
In essence, Buckley is offered a premium-priced exit from Trustco in 14 months. It would then seem Buckley is banking on a short-term Trustco share price that is less than 480c and Trustco is banking on a considerably higher share price.
One Trustco shareholder, who asked not to be named, said he was not uncomfortable with the proposals. "The share is cheap ... it’s trading on a low single-digit multiple despite making profits and paying dividends, and having a significant value underpin in its properties."
In the year to end-March Trustco — which spans insurance, banking, private education and property — posted earnings of about 55c/share and paid a dividend of 8.4c/share. The controversial diamond mining assets have not yet made a contribution to the company’s earnings.
Social media, nevertheless, is morbidly fascinated by developments, with pundits questioning why Trustco did not simply accumulate its own shares, which traded as low as 276c earlier this month, on the open market.
Another issue is the potential prejudicing of other Trustco minority shareholders, who do not have the opportunity to sell out of their holdings at a premium price at a later date. The question is whether the attractive specific buyback terms should rather have been offered to all shareholders by way of a general share repurchase scheme.
The Buckley share repurchase will cost Trustco about R200m — which could, in theory, buy back close to 8% of the company’s issued shares at the 335c/share level.
Another point to mull is whether Trustco is paying a premium price to preclude Buckley, which appears to be a determined seller, from offloading its shares in the market at a time when investment sentiment is brittle.