Confidential email correspondence between Babereki Investments and their transaction advisor and lead arranger, obtained by The Patriot on Sunday, paint a sorry state of affairs at the 'union of choice' that has led to loss of millions in poor investments.
Africa Wild Safaris
In late 2015, Don Gaetsaloe successfully concluded an investment in a growing tourism business on behalf of Babereki. This was achieved through an equity investment of BWPP3m for 30% of the issued ordinary shares of Africa Wild (formerly Stoffberg)) and venture debt (Preference shares) of circa BWP17m at a coupon that was agreed by both parties – 15%. At the time, Africa Wild operated two camps: Kadizora, in the Okavango Delta that had been in operation for 12 months and Elephant Valley in Chobe Forest Reserve that had been in operation for 6 years. At the time of this acquisition, the target company had received significant offers for half of one camp (Kadizora) that far exceeded the offer from Babereki for the acquisition of 30% of the Group. Furthermore, the incoming investor was to buy-out existing shareholders to achieve his target shareholding, and the existing shareholders would effectively cash-out proportionately and still remain active shareholders.
On the other hand, the deal with Babereki was structured such that the entire BWP20m was invested into Africa Wild, with a dilution by the existing shareholders. The valuation was therefore based on this concept – all cash invested in the business - and none of the existing shareholders were paid out. Therefore, although the company had a NAV of circa BWP1m at acquisition, this was irrelevant as BWP20m was re-invested entirely in the Company and the new company valuation determined on this basis. The model itself assumed no further depreciation of the Pula against the USD and no increases in occupancies beyond 40% for ten years, making the enterprise value significantly lower than what it would have been if the occupancies and currency depreciation was “reasonably” factored in. That is, developed market growth rates of at least 3% per annum and depreciation of Pula against dollar of 5% per annum as well as growth in occupancies of 5% per annum, tapering off at 75% by year 5. The value was in the leases that were to be acquired that underpin the lucrative and exclusive wilderness experience in Botswana. So, tendering for leases is competitive and partnering with an experienced operator even harder to find. This investment ticked all the boxes.
What did this mean for Babereki? It is undeniable that the business was cheap. The ultimate test was the third party offers for 50% of Kadizora of BWP16m, that far surpassed the price paid by Babereki for 30% of the enterprise with three solid leases in arguably the best wilderness destinations in this miraculous plant. When Bakang Seretse of Basis Points Capital critiqued this valuation, Gaetsaloe challenged him to rather prepare his own and for the client to agree a price to pay. He remind the former Chairman Andrew Motsamai that third party offers were also under consideration. "You will no doubt agree that the ultimate test of the valuation is willing seller and willing buyer concept and therefore the argument by Basis Points was just academic. It is noteworthy, however, that Babereki have made Basis Points’ comments a valid reason to argue that Babereki overpaid for this business. If you had all the facts, workings, comments and if interviews had been done you would have been aware of this, and I would not have to deal with commercial hindrances associated with dealing with Babereki," wrote Gaetsaloe.
What I am saying is that Africa Wild bent over backwards to accommodate Babereki – representing thousands of ordinary people – when they could have accepted a more lucrative offer from a third party who brought significantly more value than Babereki. The potential investor had more marketing reach, more cash and was willing to not only pay significantly more for a lower shareholding, but had committed to double rack rates (to be achieved by upgrading the Camp from 5 star to 6 star). "Put differently, if I were acting for the Seller, a much higher price could have been obtained for the same shareholding sold to Babereki," reads part of the correspondence. The former Chairman on the other hand, made a decision to invest in Africa Wild, and his Board supported this action.
Documents seen by The Patriot on Sunday include Babereki Directors' resolution to invest P20 million in Africa Wild dated 25 August 2015; Babereki’s offer to Africa Wild dated 31 August 2015; Africa Wild’s Board resolution of 8 September 2015 accepting the offer; and Africa Wild’s acceptance of Babereki’s offer dated 9 September 2015.
Clearly, therefore, the decision to invest and finance this company was made within the company acts’ provisions and was done with approval of the Babereki Board, argues Gaetsaloe. Moreover, he says, the Babereki Board has an independent director in Otto Itumeleng who is also a practicing attorney who could have advised on the legal structure.
Furthermore, the entire P20m did reach Africa Wild and Ernst and Young could verify this is a minute, he said. "I cannot understand how it is possible that Babereki could even assume that this money somehow reached me, or that I benefitted from part of the proceeds. The concern though is that it is feedback that reaches me and I now need to deal with it squarely. My fees, on the other hand, were motivated in a detailed proposal and accepted by Babereki, represented by the former Chairman and were fully justifiable. Industry fees are typically 2.5% - 3.5% of debt and 5% of equity, with equity well defined.," reads Gaetsaloe's letter.
Further he said: "Of even greater concern is that Ernst and Young argued that the investment in Africa Wild must be impaired. I do not know what informed this decision and unfortunately I have failed to have a meeting to ascertain this. What I do know is that Africa Wild is cash flow positive and has recently re-financed expensive USD debt from a leading commercial bank. I would assume a credit assessment has been done by the bank and this validates the viability of the business".
Importantly, however, at my meeting with Masego Mogwera and some Directors of Babereki on 4 July 2018, Gaetsaloe said he repeatedlyasked if they would rather sell their entire shareholding in Africa Wild. They eventually answered NEVER. Why would they continue to support a business managed and run by Partners they did not trust and never bothered to engage and support in respect of the accounting and audit functions, he asked rhetorically. Ernst and Young could have asked for an internal audit of Africa Wild if they suspected any breakdown in internal controls. If Babereki believe in this business and its management and have undertaken to support it financially and otherwise, the impairment would not be necessary. Ernst and Young could have done more to gather whatever missing information they required, he said.
Babereki Board, led by the former Chairman, commenced active involvement in Africa Wild and the newly constituted Board identified that aircrafts were a critical tool for the attainment and sustaining of current occupancies and the increase to levels achieved by competitors such as Wilderness Safaris, for several reasons: As the lodges get busier demand for an air charter service will increase. The ability to comfortably sell accommodation, coupled with an outsourced air charter, becomes increasingly difficult because third party- operators would honour bookings with lodges whom they have contracts with first; With the completion of a third camp, Saguni, in Moremi the demand for air charters would increase significantly and similarly for any new developments
It has always been regarded as a point of vulnerability in the strategic plan of Africa Wild that a key requirement is operating its own aircraft; the marketing of these lodges is significantly intertwined with the ability to ensure an in-house charter and not to rely on third party charter companies. Published Audited Financial Statements show that Wilderness Holdings and Chobe Holdings each have subsidiaries operating charters.
This led to the decision to invest up to P10m in FMS - subject to a Due Dilligence and valuation for a locally registered charter and maintenance company.
Flying Mission Services
FMS approached Babereki with a unique investment opportunity to acquire both an Air Operator Certificate (“AOC”) and an Approved Maintenance Organisation Certificate (“AMOC”). These licences are for charter and maintenance services respectively. We can only assume that this was done because of the good perceptions the market had about Babereki as they had other suitors.
In light of the foregoing strategy in the background to charters above, I was engaged to undertake a due diligence, the outcome of which confirmed that the business was technically insolvent. The DD report was issued in February 2017.
However, considering the strategic importance of the charter business to the growth of the lodges and the usually lengthy and very expensive licencing requirements (due to the risks and sensitiveness of the aviation industry) a strategy for turnaround was developed, with the captive market of the lodges and the very high rates per seat that prevail in the Delta assuring the aviation company of significant revenues from day one, and also guaranteeing Babereki new revenue streams in the future. Underpinning this was the identification of a competent aviation company to provide expertise, financial resources and management capability for both charters and aircraft maintenance - and a specialist independent advisor to examine the fleet and advise on the air worthiness of the entire fleet with a view to recommending optimisation of routes, types of aircraft to sell or keep and repair (and at what cost / price) and how and when to refleet as well as determining pricing.
Furthermore, over 200 aircraft are registered at Maun and the majority are serviced in Lanseria, Johannesburg, including Allistair MacFarlane’s own aircraft. As one of the few registered maintenance companies, a business case for growing a reputable and profitable AMOC company existed. A further 100 aircraft are registered outside Maun, further increasing potential customers. At the time of this deal, the BDF had issued a contract for maintenance that was cancelled.
Meanwhile, Babereki had paid circa BWP 1m for the two licences and had taken deeds of hypothecation over two aircraft. A non-binding expression of interest was issued to FMS by the Babereki Board for an investment of up-to BWP10m, pending the determination of a competent valuation and DD. The expression of interest from Babereki signed by Executive Chairman Andrew Motsamai had been accepted and signed by FMS Managing Director Fred Mabonga on 25 October 2016.
Around April 2017, Africa Wild paid circa ZAR200 000 for the directors of Babereki to travel to Durban for the tourism Indaba. The names can be availed to you for the record. The trip was to acquaint the directors with the tourism and travel industry and also to meet SA AirLink, a company that had expressed an interest in acquiring controlling shareholding in FMS in order to leverage of the strategic location of Maun in SA, the captive market of guests at Africa Wild that were now circa 2 500 at USD 300 - 450 a seat and the valuable charter and maintenance licences of FMS. SA AirLink was to provide the resources alluded to in the paragraph above.
Unfortunately this meeting never took place and the discussions slowly died a natural death. Private Investors need to move quickly and fatigue slowly set in and they called off the deal. Babereki can speak for themselves as to why this opportunity was not followed through.
Between February 2017 and August 2017, many meetings were held between FMS and Babereki, but the aircraft were never flown and the grounded aircraft were not sold as it was proposed. Even after signing the shareholder and loan agreements, Babereki did not perform and eventually the Chairman separated with Babereki acrimoniously and the company could not be saved.
"I had proposed the following: Babereki to pay up-to Paid P1m for both licences (as invoiced by CAAB) and immediately started AOC services with the 2 Cessna’s (after repairs); The above would be paid subject to security to protect the licence – which was done".
Undertaken a valuation considering:Injection of P10m; Appointment of a capable CEO to lead charter business; Appointment of CEO to lead maintenance business; Sale of aircraft based on professional advice including the repayment of existing debt with banks; Rational of the business including relocation to Maun and separation of the charter and maintenance businesses; Development of hangar in Maun; Commencement of internal charters with Africa Wild; Followed by the commencement of third party charters; and Commencement of maintenance operations
"Unfortunately, it was becoming very clear to me that the lack of harmony amongst the BOPEU leadership – political interference in business - was hampering progress and decision making. Despite the fact that I did not receive any additional compensation, I was taking on increasing workload which, as it turns out, was not worth the effort and the RISK and not commensurate with the compensation approved. However, I did feel an obligation to assist. The emails speak for themselves.
What is clear is that Babereki had a new potential revenue stream from a captive market at its Lodges. With the breakdown in the FMS transaction, caused by Babereki’s new leadership, Africa Wild has had to go cap-in-hand to third party carriers / charters – who were aware that negotiations were advanced for the company to acquire its own aircraft through its shareholder, Babereki - and its Guests have had to pay much more for transfers from Maun to the Kadizora and back. This presents a real strategic risk to the business as outlined above.
We had already strated to prepare a valuation with a maximum investment of P10m and a complete restructuring of the business and the fleet as was to be undertaken by InterJet, but again, this was never completed as the Politics now seemed to be derailing the Project.
"I did mention to Masego Mogwera at my meeting of 4 July 2018 that FMS was now in its present position because nothing was done by Babereki failed to perform".
Babereki cash loans
Gaetsaloe's involvement in capital raising for the capitalisation of the Babereki micro finance loan book has also been discussed extensively. "It is relevant here because it demonstrates that the very same leadership that I am being accused of colluding with and or acting in concert with to defraud Babereki recognized the need to raise funding to meet requirements for consumer finance loans and social infrastructure loans in its micro finance business. To this end, I was engaged to prepare a detailed information memorandum to be issued to investors. I discussed the challenges of fund raising with the former Chairman and he agreed to my proposal to Restructure the Group and create a new holding company, Babereki Group; Restructure the company such that Babereki Investments would be a stand-alone company with an exclusive focus on micro finance; All other subsidiaries to be unbundled out of Babereki Investments and set-up as stand-alone subsidiaries (property companies etc; and Shares in associate companies to be held by Babereki Group".
"I further submitted that Babereki would be unable to raise Grade A security for debt financing and therefore this was more the reason for the Company to consider an equity investor who could also bring debt financing. Micro finance monthly collections are presently circa BWP350million a month and loan disbursements stand at circa BWP 120m a month – approx.. This is a very important sector in the economy.
The restructuring proceeded and Ernst and Young submitted a proposal for the tax implications and requisite dispensations to be obtained from BURS (as I had proposed). Lawyers were to be engaged to handle legal aspects of the restructure. Paradoxically, the law firm that was in discussions with and a front runner to be awarded the legal work is the same Firm that is now engaged against the former chairman."
"I performed this entire assignment – carried out over approximately 6 months – at risk and the contract was signed between my Firm, Babereki and co-advisors in SA with fees approved by the investor, the PIC, based at Pretoria, SA. Fees were to be paid upon successfully conclusion of the deal, with Babereki refusing to pay a retainer to cover direct and reimbursable costs. My time on this assignment, together with travel to and from Johannesburg and Pretoria to meet with co-advisors and investors and financiers was never recovered.
The IM was presented to the PIC at Pretoria and after a review by credit analysts, a meeting for a presentation was called by the Investment Committee, which was to be followed by a Due Diligence, if the deal was approved – and all facts pointed to a tacit approval. Unfortunately Babereki could not attend and I could not establish why. With hindsight, I can now guess why. Politics seems to have gotten in the way, denying the company significant new credit lines.
"I have still received enquiries about this Deal from Head of Infrastructure at PIC, but I cannot proceed with it for obvious risks associated with dealing with this client. Babereki did ask me for a copy of the IM and the detailed valuation – which was submitted to the PIC – and I refused to do so on the basis that my costs would have to be met and, until they paid for the work, they did not own the document. I will send a separate summary valuation of the company at the time.
"I did not get paid for this work and it is now clear that the business has suffered from lack of capitalisation as micro finance is capital intensive".
Babereki was due to receive between BWP60m and BWP90m for 25% of the shares and BWP500m loan financing. The summary capitalisation proposal I prepared at the instance of the former Chairman is a matter of record. Effectively, this transaction would have taken the company to another level far surpassing many companies in Botswana. When I called Masego Mogwera to enquire why they would not sell equity to raise capital and also attract a strong financier, she informed me that the Congress had resolved never to sell shares in Babereki.
From a personal perspective I was left wondering why she and the Board did not see it fit to revisit this and make a motivation for the passing of a resolution at Congress to raise equity and debt funding as the playing field had changed significantly and the company had grown too big to fund loan book growth internally. This is a matter of record.
"Again, at my meeting of July with Masego Mogwera and some Board members, I did make an overview of my engagement in this regard and asked them to clarify if there was anything wrong with my engagement and or the transaction. The answer was clear that I did nothing wrong, " said Gaetsaloe.