The African Lakes sale – questions begin to pile up

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The sale of African Lakes (the owner of pan-African ISP Africa Online) has had more twists and turns than a Grand Prix race-track. Everyone involved – those selling the company and the two potential buyers – probably only agree on one thing: the sale ought to have been done by now. Russell Southwood looks at the lengthening number of questions emerging from this deal not yet done.

On 28 January 2007 in issue 340 we announced erroneously that African Telecoms Company (ATC) had secured 52.66% of African Lakes and increased its offer to £18.50 a share, giving the deal a total value of GBP5.04 million.

So in one corner you have African Telecoms Company, a grouping that includes Richard Bell, Kenyan ISP Wananchi, several local Kenyan investors and the US Schneider Media and Holding Group.

And in the other corner is South African incumbent telco Telkom that is trying to put together a regional acquisitions strategy that will equip it to face a competitive future. True to form, it refused to say what it was doing: “The reports linking Telkom SA as a bidder for Africa Online are speculative and Telkom will not comment on media speculation”. Telkom had made no public offer at this point despite having been in discussion since an earlier point in 2006. The African Lakes Board did not recommended the ATC offer on the basis that it could obtain more money for shareholders from another bidder, the as-yet-unnamed Telkom.

In the third corner is African Lakes that is chaired by David Montgomery, whose main claim to fame has been cutting the cost base of the UK’s Mirror Newspapers after the death of Robert Maxwell.

ATC thought it had secured victory because it had acquired an “irrevocable” on the shares of one of the key shareholders, RAB Capital (18.9% of the total shareholding at that point). On 8 February ATC formally issued notice of its increased offer. The offer expires on 23 February.

This triggered two things: a frantic scramble by ATC and African Lakes to sign up shareholders to their cause and the need for the somewhat indecisive Telkom to issue a public bid.

In its 12 February press release announcing the Telkom bid African Lakes said it had “received strong support for it from shareholders holding more than 60% of the voting rights of the Company. Unfortunately the Panel ruled on Friday that of this number shareholders holding 18.9% of the voting rights cannot have their support counted in favour of the Telkom disposal as their voting rights have passed to ATC as a consequence of them accepting the ATC Offer prior to the Board concluding its negotiations for the Telkom Disposal. Furthermore, attempts by these shareholders to have their acceptances withdrawn were also deemed invalid under the conditions of the ATC Offer”.

The Telkom offer was for what was claimed would be £25 per share, valuing the deal at £9.72m. But it emerged on 15 February that as it would only be buying what must be the controlling Africa Online Company – Africa Online (Mauritius) - it would not be dealing with the historic liabilities of African Lakes as a company.

These would be dealt with using the cash from the deal and shareholders would be paid on liquidation of the African Lakes Company. Shareholders were assured that the offer figure of £25 a share had been based on a company audit of liabilities. On the same day it issued a correction saying an audit of liabilities had not been completed. Indeed a review of liabilities had only been started.

The fight to gain shareholder acceptances was clearly getting tight as on 14 February African Lakes issued a notice saying that it had exercised various share options and issued more share to T Hoare Nominees, Lesley Davey and Paul West: the latter two are both senior Managers of African Lakes and Board members. Furthermore it issued shares to African Lakes employee, George Ezzat. On being rung by a member of the ATC consortium, it is alleged that Ezzat was unaware that the shares had been issued to him.

This has been a dense and often complicated struggle for the company and in the interests of comprehension we have sought to summarise events above. But the number of questions that need answering just keeps getting longer:

- If there is no audit of African Lakes’ liabilities, how can the company say with any confidence what the final outcome price of the Telkom offer will be to its shareholders?

- What were the circumstances in which shares were issued to George Ezzat? Why (as alleged) did Ezzat know nothing about this share option issue when asked about it by an ATC shareholder? Why were additional share options granted during what was clearly an offer period when at least two offers were being publicly discussed?

- It is not clear what number of subscribers Africa Online has but it is certain that it has fewer than the figures named in the last publicly available documents. What is the number and what is the Average Revenue Per User? It is one thing for a group of private investors to take a risk of this magnitude but how does a publicly quoted company like Telkom think that it will make a return on the purchase price?

What expertise does Telkom have to run a pan-African retail ISP in competitive environments? What has been the success of its existing pan-African connectivity sales operations?

Africa Online has the potential to become a pan-African player in the new competitive landscape that includes both voice and data. But it will need determined and experienced management capable of investing more than the purchase price to take it from where it is now to a successful future. Faced with these two potential buyers, who would you choose to carry out this task?