Storm over ‘stinky’ meat shares

Storm over ‘stinky’ meat shares

….Ministry touts public to buy shares in dodgy company…..

MASERU – THE Ministry of Small Business could find itself in a legal fix after touting the public to buy shares in a private company whose details are opaque.
On April 4, the ministry crowed on a Facebook page about what it thought was a lucrative investment opportunity in a company called Basotho Meat Enterprise.
It said the company, incorporated in November last year, was looking for an M8 million-investment in exchange for a 30 percent stake.

The company was offering 10 percent to the Association of Butcheries.
And as if to sweeten the deal, the ministry said the association will pay for the shares from dividends earned in the new company. The other 20 percent is offered to the “general indigenous Basotho public” for M80 000 a share.
“If that is not development, then we don’t know (sic),” the ministry declared after inviting those interested to register with the principal secretary and director of small business.
Leading the company is Mosito Khethisa, the former PS of the Ministry of Finance who is now chief executive of Meraka Lesotho.
Meraka Lesotho is the country’s only licensed abattoir that the government also controversially granted a monopoly to import beef.

Basotho Meat Enterprise seems intricately linked to Meraka Lesotho because of the nature of its business, leadership and shareholding. Its core business will be the manufacturing of sausages, viennas and cold meats.
Apart from leading Meraka Lesotho, Khethisa also owns 400 shares in Basotho Meat Enterprise. Xiaoyi Yao, a Chinese woman who has 690 shares in Meraka Lesotho, owns 250 shares in Basotho Meat Enterprise. A certain Stefan Engelbrecht owns 350 shares.
On the surface, it looks like the ministry is advertising a golden business opportunity to the public.
At this point, the ethical concerns about a government ministry advertising shares of a private company might not be too noxious.
After all it is the ministry’s mandate to promote small businesses.

But a closer look reveals a transaction that could be gravely faulty both legally and mathematically. The Basotho Meat Enterprise doesn’t seem to meet the regulatory prerequisites to offer shares to the public.
Worse, the mathematics behind the share offer looks so defective that some experts suspect it borders on fraud.
First, the legal issues. According to the Companies Act 2011 the Basotho Meat Enterprise is not allowed to offer shares to the public because it is a private company.
The law “prohibits any invitation to the public to subscribe for any shares or debentures of the (private) company”. A private company, the law says, should not have more than 50 shareholders.

To offer shares to the public, Basotho Meat Enterprise should change its registration status from a private to public company. The company, doesn’t seem to have done that, according to the registration documents.
Yet even if it were to transform into a public company the process of offering shares to the public doesn’t seem to be as easy as the Ministry of Small Businesses makes it out to be.
Section 115 of the Companies Act says a public company’s public share offer should be accompanied by a detailed prospectus. It says a company should advertise in a “newspaper or elsewhere” clearly indicating where the prospectus can be found.

Basotho Meat Enterprise doesn’t seem to have a prospectus nor is there any indication that it has advertised the shares in its own capacity. What the public has so far is a post the ministry made on a Facebook page that has a disclaimer that it is not official.
“The Page is NOT an Official Page, but it is managed from within the Ministry as a Pilot Page to Test The Usefulness of…” the ministry says on the page.
A prospectus is the most important document when a company is going through an Initial Public Offering because it reveals the number of shares, the prices, the financial status, management structure, nature of business and company profile.
Most importantly, it shows the value of the company and explains how the share valuation is reached.

The prospectus will also reveal the due diligence analysis by accountants and auditors. The names of the accountants, auditors, attorneys and bankers of the company are supposed to be in the prospectus.
Those experts have to give their consent to have their names being mentioned in the prospectus because it is their credibility at stake if things go wrong.
The idea is to protect the public from being fleeced by fly-by-night companies. Without a prospectus there is a huge risk that the public might buy shares in shell companies that have no assets or sustainable business model. Nothing stops unscrupulous people from selling shares in a dubious company and making away with the loot.
So far there is no prospectus showing Basotho Meat Enterprise’s shareholding structure, financial status, management and share valuation. No one knows if it has started operating because there is no prospectus showing its official address.

Ideally, a prospectus is supposed to explain why the company is looking for additional capital and how it will use it.
Incorporated in November last year, the company doesn’t seem to have sold even a single product. Its production, turnover and profit projections are still unknown yet it is calling on the public to invest M8 million. To make matters worse, no one knows who will be leading the company and what assets it has.
This is in addition to the fact that as a private company, it has no right to sell shares to the public.
But it is the defective mathematics involved in the share valuation of Basotho Meat Enterprise that should spook potential investors and force the Small Business Ministry to rethink its association with the company.
Records show that the company’s share capital is one million shares. Now remember that it is selling each share for M80 000. To get the size of the company you multiply the number of shares by the share price. So according to its share capital and share price Basotho Meat Enterprise is worth a staggering M80 billion.

To put it into perspective, Lesotho’s Gross Domestic Product (GDP) is about M40 billion and its budget is about M16 billion. GDP is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period. It is a broad measurement of a nation’s overall economic activity.
In this case, the owners of Basotho Meat Enterprise are saying a company started in November last year is two times bigger than the value of finished goods and services Lesotho produced last year.
In other words, a company that is barely six months old and has not sold a single product is two times bigger than the total wealth of the whole country. The bizarre mathematics doesn’t end there because according to this valuation, the company is five times bigger than the budget of Lesotho. Yet this supposedly M80 billion company is looking for a mere M8 million on the open market.

The story gets murkier as you interrogate the numbers. In an interview with thepost Khethisa sounded unsure about the numbers. He said the share capital of one million was a mistake made by the Ministry of Trade when the company was registered.
“I don’t know why it was not rectified,” Khethisa said.
But the Ministry of Trade doesn’t amend registration forms because it solely relies on details provided by those registering the company. If this is a mistake, then it most probably came from the company’s directors.
Khethisa said the three shareholders made an initial investment of M8 million to start the company.
That money was used to rent premises and buy equipment, he said.

But the numbers tell an entirely different story. Khethisa and his three partners own 1 ooo shares of Basotho Meat Enterprise. If each share is worth M80 000 it means Khethisa and his partners did not invest M8 million as he says.
Khethisa however insists that they invested M8 million. If we assume that the correct figure is M8 million it boggles the mind how they arrived at the M80 000 as the price for each share.
The trio owns a total 1 000 shares in the company. If their 1 000 shares are worth M8 million it means each share they hold is worth M8 000 (eight thousand Maloti). To get the value of each share you divide their investment by the number of shares they hold.
The question then is: at what point did a share that initial investors bought for M8 000 jump to M80 000 in just six months?

The company has not even started selling products but its share price has gone up ten times.
This is a company whose financial status is largely unknown.
No one knows what’s in its bank accounts and how much are its assets, if there are any.
To raise M8 million, the company only has to sell 100 shares to the public. So Khethisa and his partners bought 1000 shares for M8 million but they are asking the public to shell out M8 million for just 100 shares.
Still that is not the most curious part of this share offer. Remember the company has a share capital of one million shares. With only 1 000 shares of the share capital of one million, it means Khethisa and his partners own 0.1 percent of the company.

Using the same logic, the public’s 100 shares will amount to a miserly 0.01 percent of the company.
Khethisa doesn’t see it that way. He said the public will own 30 percent of the company even if they are buying 100 shares in a company that has one million shares. He told thepost that the motive of the share offer is to “distribute wealth to Basotho”.
It is however unclear how it’s possible to distribute wealth by selling a share for M80 000.
By some estimates, the average net salary in Lesotho is M76 000 per year, slightly more that the price of one share in Basotho Meat Enterprise.

Khethisa said the Ministry of Small Business also had reservations about the share price. “They said perhaps we could have made it M2 000 per share but we could not change because we had already registered,” he said.
“We were looking at business people when we offered the share. We were not considering the very poor,” he added.
Chalane Phori, the Minister of Small Business, said the ministry’s only role was to alert the public to an investment opportunity.
He said the ministry was trying to do what the Lesotho National Development Corporation (LNDC) has failed to do.
He didn’t seem bothered by the legal issues involved in the transaction.
“The role that we play as the Ministry of Small Business is to enhance the development of small businesses,’’ Phori said.

Basotho Meat Enterprise’s shares seem extremely overpriced even if we assume everything else about the transaction is in order.
The shares of Apple, which has a market capitalization of US$1 trillion (M15 trillion) were hovering at US$200 (M3 000) this week.
Amazon’s stock is trading at around US$2 000 at a time when the company has a market capitalization of US$1 trillion (M15 trillion).
Yet Basotho Meat Enterprise, a company that has not sold a single sausage and claims to be worth M8 million is selling each share for M80 000 (US$5333).

Advocate Letuka Molati told thepost that he was shocked by the proposed transaction.
“It is wrong at all for a private company to offer shares to the public. Even with the little information we have, it is clear that there is something wrong about the proposal,” Advocate Molati said.
He was stinging in his Facebook post about the proposal, describing it as “one big joke that makes us a laughingstock of other nations” and “another lowly thought of monopolistic tendencies and practices meant to sugarcoat corrupt and backward business practices that swim against the tide of a free market economy”

Shakeman Mugari & Refiloe Mpobole

 

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