Founder Turnaround Talk
On 1 June, we published an article based on a presentation by Adamantem CEO, Siviwe Dongwana, where he discussed the Basil Read business rescue and the lessons that Adamantem learned during the rescue.
A common theme became clear in Dongwana’s presentation. Basil Read was facing an uphill battle for rescue from both an industry and operational point of view. So much so that we are left with little choice but to ask whether Basil Read was always destined for distress.
From there, tough decisions need to be made. Was Basil Read a candidate for business rescue or was it a candidate for liquidation? And the starting point for this decision is always:
- is there a company worth rescuing? and
- what would the financial return to creditors be in both cases?
This means that those in charge of these evaluations must decide if they are going with the Wisdom of Solomon or the lesser of two evils to make their decision. In the end, Adamantem decided that Basil Read was a candidate for business rescue rather than liquidation. Dongwana outlines his thoughts below; you can make your own conclusions as to whether the right decision was made.
Decision time
In his presentation at a virtual event hosted by South African Institute of Chartered Accountants (SAICA), Dongwana pointed out that their decision to place the company into business rescue was mostly made following the determinations that every BRP makes.
Dongwana alluded to the fact that Adamantem felt that there was a company worth saving because only the construction part of Basil Read was in distress. This distress placed other parts of the business in distress, but it seemed to be the root cause of the issues at the time. His feeling was that if the distressed portion of the company could be turned around, the other parts of the company would be able to continue to realise the same profits that they did pre-distress.
First box ticked.
When ticking the second box, Dongwana was faced with the return-on-investment issue. What option would provide creditors with the best return on the money that was owed to them? According to an audit carried out by PricewaterhouseCoopers, Basil Read’s creditors would receive a return of 5.4 cents to every Rand that was owed to them if the company was placed into liquidation. Therefore, if Basil Read was liquidated, PwC pointed out that a creditor owed R1 million would only receive a return of R54 000. “We felt that creditors would receive a better return on their investment if the company was placed into business rescue rather than liquidation,” said Dongwana.
Media reports indicate that creditors would receive a return of between 70 and 90 cents to the Rand. If this is accurate, then (based on a return of 70 cents) if a creditor was owed R1 million they would receive R700 000.
Second box ticked.
Once this was decided, Adamantem then needed to establish whether the company should be returned to solvency or face a structured winddown. “Based on the number of contracts that were ongoing, and in the red, and the fact that there was a significant absence of cash, all signs pointed towards a very structured winddown which will likely start once the business rescue has been implemented in its entirety.
Photo By: SevenStrom via Pexels
As Dongwana pointed out in the presentation to the SAICA members, there was a lot at stake when it came to the assessment of the Basil Read position (liquidation vs business recue) and that the company was simply too big to choose the wrong option. What role (as a third factor) did this play when it came to the decision made by Adamantem?
Did this factor play a bigger role in the decision to favour business rescue over liquidation than the other two factors?
Instant vs delayed gratification
Once agreeing to the business rescue plan in the creditors meeting, the next question on the creditors mind’s will be when they will actually see the return on their investment.
The Stanford marshmallow experiment was a study on delayed gratification in 1972 led by psychologist Walter Mischel, a professor at Stanford University. Thirty-two children were put into a room and were offered a single marshmallow. They were told that if they could wait a certain period of time (15 minutes), they would receive two marshmallows. The invigilator of the experiment walked out of the room and closed the door. Recordings of the experiments showed that seven out of ten children ate their marshmallow immediately preferring instant gratification over delayed gratification. If creditors had known about the financial impacts of the Covid-19 Pandemic, would they have also opted for instant gratification?
As pointed out in the article published on 1 June, the majority of Basil read’s contracts faced long payment cycles as they were in the public sector. Dongwana pointed out that Adamantem needed to ascertain which contracts needed to be cancelled, which needed to be ceded to another construction company for completion and which contracts Basil Read would complete itself.
If the return to creditors was going to be funded from the performance guarantees and payments from completed contracts, when would this occur. There were also rumours that Basil Read would consider selling the mining portion of its business – which was not in distress – to fund the payment to creditors. If Covid-19 did not have the sweeping implications (in terms of both disruption and distress) it has, is it possible that Basil Read’s creditors would be prepared to play the waiting game?
It would be imprudent to say that the only reason why Basil Read should have been a candidate for liquidation is the Covid-19 wildcard; the financial model of the construction industry is inherently flawed. It has become clear that Basil Read’s distress, and the distress of the whole construction industry, has highlighted the problematic nature of having government as your major client and the long payment cycles associated with these contracts. Should Basil Read have been liquidated as opposed to placed into business rescue? How can construction companies distribute their eggs evenly in a number of baskets so that they avoid distress?
