Sale of Joe Modise's offset company raises eyebrows

A company in which former Defence Minister Joe Modise had interests and which won a contact as part of SA's controversial R43bn arms deal, was last year sold for a huge, though questionable, profit.

In May 2000, Conlog, the main operating subsidiary of Conlog Holdings, of which Modise was chairman after he left government, was sold for a premium despite the fact that it was struggling at the time. This raises questions about the timing of the sale and how the price was arrived at.

Modise has long since severed ties with Conlog, an IT and electronics group, but he was Defence Minister at the time the arms deal and its offset investments were negotiated. Conlog, which manufactures hardware and software for prepaid water and electricity meters, is to form a joint venture (JV) company with ABB SA, which is part of global electronics group ABB. The JV company will be responsible for producing pre-payment electricity meters and solar power technology for the domestic and export markets.

The FM's research shows that Conlog Holdings, the company Modise chaired and had equity in soon after retiring from government, became a cash shell in May 2000 after the disposal of its operating subsidiaries.

The cash shell's name has now been changed from Conlog Holdings to Dynamic Cables and is listed on the development capital board of the JSE. This was after Conlog Holdings used its cash to acquire Dynamic from investment holding company Cape Empowerment Trust (CET).

According to its prospectus, Dynamic, which is chaired by Modise and whose board includes a number of former Conlog directors, is a "wholesale distributor of telecommunications infrastructure and cabling".

The relisting of the cash shell came after Conlog was sold for R88m to a subsidiary of French electronics giant Schneider.

According to the initial sale agreement, Conlog was valued as having an expected net tangible asset value of R33m. This meant that R55m of the purchase price was for "intangibles", which includes goodwill - a measure of a company's worth based on the popularity or demand for its products. The fact that Conlog had stood to gain financially from the arms deal could have influenced this figure.

The "intangibles" figure, which makes up over 60% of the purchase price, also looks suspect considering the company's financial performance at the time. It was choking under debt and needed to be recapitalised by about R30m-R50m.

For the six months to June 2000, shortly after the decision to sell its operating subsidiaries, the group reported an operating loss before interest of R20,5m from the previous six months' profit of R8m. Interest payments (reflecting the company's high interest-bearing debt) more than doubled from R1m to R2,5m.

Such was the company's financial state that in December last year, when the deal to sell it to Schneider was finally put to bed, Conlog's net asset value had to be revised downwards from the initial R33m to less than R20m. Strangely, however, the "intangibles" figure was not revised.

Also intriguing is that the finalisation of the sale and relisting of the Conlog cash shell became a stormy affair.

Conlog's board, with Modise in the chair, survived a shareholders' motion to oust them after minorities reportedly charged that the company's funds were "being raped". The minorities also demanded a cash dividend from the proceeds of the sale of subsidiaries. Modise and his board survived the mutiny and the sale was approved. But not without concessions to minorities in the form of a special dividend of 15c/share and that two new directors be appointed "to represent the interests of minorities".

Minorities' anger was also fuelled by the fact that while negotiations to sell Conlog were still underway, CET emerged somewhat mysteriously as a strategic shareholder in Conlog Holdings and, though owning less that 35% of the company, had powers to appoint some of its directors, notably CET CE Shaun Rai, to the Conlog board. This prompted accusations that CET intended to take Conlog's profits, an allegation CET denied. The hurried conclusion of the sale appears to coincide with the start of the growing public outcry over the arms deal.

As part of the revised sale agreement, Schneider had to "accelerate" payment of the outstanding purchase price. This was contrary to the initial agreement, which stipulated that the buyer had up to 20 months to settle the amount. Could this be a case of wanting to get out - and getting out fast?

With acknowledgement to Percy Mthimkhulu and the Financial Mail.