Erbacon in R200m plus recapitalisation plan

AltX-listed construction company Erbacon Investment Holdings Limited (ERB) on Tuesday announced a debt restructuring plan in excess of R200m to recapitalize the business ahead of implementing its strategic growth plans for 2012 and beyond.

In terms of the transaction, several of the company's existing major shareholders have agreed to inject a further R25m into the business and this, together with existing loans amounting to R63m (plus accrued interest) owed to them by Erbacon, will be converted into ordinary Erbacon shares at an issue price of 40 cents per Erbacon share.

In addition, the 67.5m Erbacon preference shares held by empowerment partner Medu Capital, will be converted into 283 million ordinary shares at a similar issue price. The effect of this conversion means that Erbacon will become one of the most black empowered listed construction companies in the country.

Another interesting feature of the SENS announcement is that the management team will also commit funds as part of the capital raising exercise.

As part of the steps being taken to focus on the core business of heavy civil construction and industrial and commercial building, and to improve its liquidity position, last month Erbacon announced that its small plant hire business had been sold for an enterprise value of R30 million. This business had accounted for a material portion of the losses reported in the Group's half year results to end August last year.

Erbacon's CEO, Sean Flanagan, says the debt restructuring plan is necessary to recapitalize the business after the Board had taken the decision to dispose of non-core businesses. It will also help the company recover from the effects of several years of difficult trading conditions in the construction industry. The debt restructuring, he says, will allow the Group to grow its core offering, and to build capacity.

According to Flanagan, the authorized share capital of Erbacon will also be increased to enable the Group to raise further funds from investors and make acquisitions that can leverage the Group's construction capability.

In a simultaneous trading update, Erbacon advised that the Board had established with reasonable certainty that the Group will report a basic loss per share for the year ended 29 February 2012, which is expected to increase by more than 100% than that of the prior corresponding period. The headline loss per share will be less than the basic loss per share primarily due to the exclusion of losses arising from the small plant hire disposal transaction. The Company said it would revert to shareholders with a further trading update once more certainty existed with regards to the financial results for the year ended 29 February 2012.

However, Flanagan says anticipated losses on the company's troublesome contracts have been fully factored into the group's financial results to 29th February 2012 and all of these contracts will be completed by end June this year. Barring any unforeseen circumstances, no further contract losses are expected to be incurred. In addition, it is hoped that the satisfactory resolution of several significant commercial claims owing to the Group will reverse certain contract losses in the 2013 financial year.

Flanagan observes that trading conditions in the local construction industry are beginning to improve and there is a discernible increase in the flow of new tenders onto the market.

In addition, the Group is making steady progress with its "Best-in-Class" medium term strategy and has been hiring highly skilled construction executives, management and site staff to ensure that the Group has sufficient capacity to meet its growth objectives.

Says Flanagan: "The Group has a confirmed forward order book of R1.15 billion, of which 90% is expected to be executed in the year to end February 2013. In tandem with the recovering market conditions, the Board has also focused its efforts on ensuring that the Group has the capacity to close out existing contracts to our clients' satisfaction and to successfully deliver on our newly-awarded tenders.

"The Board has placed its confidence in the large pool of new talent recently recruited into the Group, and is satisfied that the 'Best-in-Class' strategy will deliver value to all stakeholders into the future."