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I see Tom Winifrith has published an expose on African Potash regarding its December 2015 agreement with Beryl Holdings regarding the acquisition of African Fertilisers (Mauritus) Limited.
I have a lot of respect for Tom, he is one of the few people who has the balls to highlight some of the questionable practices that take place at the bottom end of the AIM market. I have already covered African Potash in detail in an existing article, the article raised a lot of questions on African Potash here, so I thought I’d look into the latest questionable deal on a list which is lengthening.
The Original Contract per RNS
Let’s start with what was originally published in the December 1st RNS. According to this RNS the deal was structured as a £1 up front consideration, with a deferred element based on the success of the new Mauritian subsidiary. Beryl has the existing knowledge, logistics, contacts of trading fertiliser and African Potash are paying to get access to this ‘know how’. The Deferred element is subject to meeting a minimum EBITDA of $4m in either the 1st or 2nd year, this would result in consideration of £8m ($10.4m) for the seller, Beryl Holdings.
This RNS is not particularly well written (standard African Potash), but the substance of the deal is that it represents a payment of 2.5x Earnings (todays fx) from African Potash to acquire a fertiliser trading operation, subject to a minimum hurdle of $4m earnings of the NEWCO. So at first glance, a very good and also low risk deal. Feels almost too good to be true? Yes, my only side note would be that there appears to be no ‘non-compete’ clauses included, so as far as I can see there nothing to stop Beryl continuing to trade fertiliser during the 2 years (less likely) or after the deferred consideration is triggered (more likely).
The RNS does then become murkier, what does this mean?
Does this mean that consideration will be payable based on the formula ‘EBITDA/EBITDA Minimum ($4m) x £8m’? But earlier in the RNS it was stated there is a minimum EBITDA, which surely implies no consideration is payable until EBITDA>EBITDAMinimum?
So then why further down the RNS does it say that consideration will not be made only if no EBITDA? I thought no consideration at all should be paid if EBITDA is <$4m? At best this is badly defined, at worst this RNS is misleading. Which one is it African Potash?
What has come to light on this agreement since the original 1st December RNS?
Tom Winifrith has published the legally binding heads of terms of the Beryl agreement on his website and it includes the following clause, which is not referenced above in the original RNS:
‘Beryl has a number of associated and subsidiary companies involved in agriculture, commodities and mining in Africa and will select with AFPO’s agreement another one of its associated or related companies suitable for a London Stock Exchange IPO, RTO or similar transaction or pre IPO Investment and AFPO will either introduce third party funding or invest itself GBP£600,000 for equity or quasi equity to enable this transaction or other necessary costs to be met’
To me there is a liability here, it appears that African Potash must itself or find a third party to inject £600,000 of funding into a Beryl Holdings related company. The clause is sufficiently vague to be any company that Beryl choses. The only caveat is that African Potash must agree, but what does that mean and what are the consequences of not agreeing? Tom has only received the heads of terms, they state that a long form agreement will be put into place subsequently to these terms being agreed. So is this clarified in the Long Form Agreement?
Having now read the full heads of terms myself I can see a few other inconsistencies between the Heads of Terms and the RNS, but in summary it looks like the deal might not be so good as implied. One could argue that this is in fact consideration for the acquisition, it is also clearly material, so why was it not included in the 1st December RNS?
What is the status of the contact today? Has the £600,000 been invested?
This is not clear. Assuming African Potash has released RNSs in compliance with AIM rules then no shares have been issued to Beryl Holdings as consideration. This is not unexpected as African Potash does not appear to have generated any material revenues on any of its deals so far.
In fact I can’t even see any evidence of the company African Fertlisers (Mauritus) Limited ever being incorporated on the Mauritian Companies Register. A bit concerning? Or is the Mauritian register out of date? Perhaps….
Regarding Tom’s revelation, the £600,000 requirement from the contract would be a material investment and would require an RNS when the investment was made even if it was omitted from the original agreement RNS with Beryl. So far African Potash nor any counterparties to an investment have disclosed any investment on the LSE other than the Blenheim Natural Resources investment. Regarding this investment, having looked through the current shareholders and the TR1s disclosed I can’t see any evidence of ownership or other relations between Blenheim Natural Resources and Beryl Holdings so I think we can rule that one out. By the way, I still think the Blenheim Natural Resources investment stinks as covered here, but for different reasons.
But perhaps it has paid the £600,000 and not disclosed it as an RNS? On review of the unaudited interim cashflow African Potash has spent around £720,000 in the 6 months to the end of December 2015 and the balance sheet at that point shows no investments and $509,000 (£391k) of cash. African Potash raised a further £825,000 in a placing on 12 January 2016 and another £190,000 through warrant exercises with Bergen. So Total Cash would have been around £1.4m, and with the interest charges, PLC costs, trading costs and upcoming loan repayment to the FD’s wife then I think African Potash would have had to increase its funding to get a £600k ‘investment’ away.
So on balance I think it is unlikely that this £600,000 has been spent (‘INVESTED’) so far, but we will only know for sure or whether a liability has been included once the auditor gets its hands on the books and the final results for 30th June 2016 are published, past form dictates this will probably on 30th December 2016, i.e. right at the deadline when no one is watching. I’ll set a reminder though don’t worry Chris Cleverly!
So as a shareholder should I be worried about Tom’s revelation? Is it Fraud?
Should I be worried? Absolutely, I have already summarised the stinky smells that surround African Potash. This just adds to a long list of questionable deals that for me make this uninvestable at any price.
Is it Fraud? Potentially. I disagree with Tom that this a ‘Slam dunk’ case but it does raise a lot of questions. I think it hinges on the ‘with African Potash agreement’ clause. However, the best thing is for the company to put out an immediate statement clarifying the facts around this case.
It goes without saying this company in my view is an outstanding SELL.