PE & Fundraising

Japaul pulls plug on $350m Milost deal as stock slumps 8%

by LOLADE AKINMURELE

May 11, 2018 | 2:04 pm
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It’s been two months since BusinessDay first published an article raising a red flag over the announced investments in some Nigerian companies by a purported US-based private equity firm, Milost Global Inc, and the dust hasn’t settled.
A number of those announced deals have gradually collapsed since then, with oil and maritime services firm, Japaul, being the latest to back off on a planned $350 million (N126 billion at N360 per US dollar) deal, citing “numerous red flags associated with the proposed equity injection,” in a statement filed at the Nigerian Stock Exchange (NSE) on May 9, 2018.
“The board of the company, at its meeting held on Thursday, March 29, 2018, deliberated on the proposed equity injection by Milost… and management resolved that it should in consultation with the company’s retained counsel, take prompt steps to pull out of the transaction in a non-prejudicial manner,” a statement signed by Akin Oladapo, Japaul’s acting managing director said.
Two phone calls and an email to Japaul, seeking comments on whether the deal termination will attract a cost, went unanswered.
Unity Bank, a tier-two commercial lender, and mortgage bank- Aso Savings and Loans- have since distanced themselves from deals with Milost, with the former pulling the plug on a $1 billion financing agreement, while the latter (Aso Savings) insists a deal was never in place.
All eyes have now turned to the companies that are following through on their deals with Milost.
According to the public announcements that were made by Milost and the affected companies at the time an agreement was reached, real estate firms- Femab properties and Prime Waterview holdings- are the only two companies that remain on course with their dealings with Milost.
Although it was reported April 10 on Milost’s website that one Williamsville Sears Management Inc. signed a Letter of Intent for the acquisition of PrimewaterView from Milost in an all-stock transaction subject to the approval by both companies.
Termination costs are typically associated with financing deals that go burst last minute. They serve as compensation fees.
Oladapo only said “Further development regarding this transaction will be communicated in due course.”
Palewater Advisory Group Inc in New York and Banklink Africa Limited in Nigeria were reported to have arranged and negotiated the Japaul deal, but two phone calls to a number found on their website was not answered.
A private equity lawyer with peripheral knowledge of the transaction said the settlement fees could be as high as N10 billion.
That works out to 7.9 percent of the total deal reportedly worth N126 billion.
Several phone calls to a New-York number on Milost’s website, to confirm if it will press for break-up fees from Japaul, went unanswered.
Japaul’s share price plunged 8.3 percent to 44 kobo, Wednesday, according to Bloomberg data.
“Other companies that have struck similar deals with Milost are likely to follow suit,” a source with knowledge of the matter said on condition of anonymity.
“The matter is an indictment on the regulators, SEC and NSE and the Nigerian companies involved, who should have read the handwriting on the wall.
“The economics of the deals made no sense, as I was convinced after I read your report,” the source added, referring to a BuisnessDay report “The Math does not add up with Milost” that chronicled the ingenuity of Milost’s purported investments in Nigeria.
Four companies, who did not want their name in print, also claimed to have pulled the plug on informal talks with Milost for a mix of debt and equity financing, after reading the BusinessDay report published March 12, 2018.
The article titled “The Math doesn’t add up with Milost” picked holes in Milost’s announced $1.1 billion in real estate firm- Prime Waterview, $350 million in oil and maritime services firm, Japaul and $250 million in mortgage bank, Resort Savings and Loans.
Our calculations showed that Milost was offering to buy the shares of publicly listed Japaul and Resort at a premium and questioned the rationale behind a premium investment in a technically insolvent Japaul and a Resort Savings yet to release a financial statement since 2015.
In a bid to get Milost to clear the air, our reporter at New York tried to book an appointment to visit Milost’s New York office, but the lady who received the call said she would connect him to the appropriate person to speak to but the call was disconnected and subsequent calls ignored.
Japaul announced in February that Milost will invest $250 million in equity and add another $100 million in convertible loans, causing its share price to rally to multi-year highs.
Given that its share price was 35 kobo and it had 6.2 billion outstanding shares, at the time of announcement, February 20, a $250 million (N90 billion) equity investment would imply paying N14 per share, a huge premium by any standard.
The firm went on a 177 percent share price rally after the deal was announced, trading at N0.97 Friday March 09, according to Bloomberg data.
The oil and gas services company closed as the highest gainer on the stock exchange for a second straight week, jumping 53.9 percent in the week ended March 9.

It all came crumbling down afterwards, as the shares collapsed to as low as 30 kobo, costing retail investors- who are the heavy traders of penny stocks- millions of naira.
As of Wednesday, May 9, Japaul’s share price plunge which started since the BusinessDay article hit the market, had wiped over a billion naira off its market capitalisation.
Japaul’s first quarter 2018 results show a 50 percent decline in revenues to N108.76 million from N221 million in Q1 2017.
Its loss before tax hit N3.2 billion in the period under review from N519.7 million in Q1 2017.
Japaul has been technically insolvent since 2016 with reported losses every year since 2014.
In its 2017 full year report, the auditors of the company questioned the going concern status of Japaul reporting that “a matter of uncertainty exist which may cast significant doubt on the Group’s ability to continue as a going concern.”
Japaul reported losses totalling N13.08 billion for the full year 2017 period, lower than the N21.3 billion loss recorded in 2016, according to the company’s financial statement.
Revenues declined 38 percent to N1.9 billion in 2017 from N3.07 billion in 2016.
For Resort savings and Loans, which announced a planned investment to the tune of N90 billion ($250 million) by Milost, the numbers also sound improbable.
The mortgage provider, which has a market capitalisation of N5.6 billion, said the Milost financing comprises $100 million (N36 billion) equity and $150 million (N54 billion) debt.
Given that Resort’s share price is only 50 kobo (having been suspended since 2015) and it has 11 billion outstanding shares, Milost’s N36 billion equity injection implies paying six times more for each share (N3 per share).
The motivation to incur this premium was particularly questionable, especially since Resort Savings and Loans has not released a financial statement since the 3rd quarter of 2015 when it reported net profits of N34.2 million on revenues of N1 billion and shareholder funds of N2.92 billion.
Total assets for the mortgage provider for the period came in at N10.1 billion.
Both firms reacted to the article with harsh words for Business Day reporters.
According to Paul Jegede, the chairman of Japaul “We don’t really know where the dailies got their variables that do not add up mathematically about Milost math. They should have watched and see what happens about the issue of performance.”
Resort’s chairman Sunday Fajinmi also had a thing or two to say about the article.
“It is sad to realise that a few grumbling, half educated individuals are against the recovery of the Nigerian economy through resuscitation of dying businesses,” Fajinmi, said.
According to Fajinmi, Milost “has been verified to be a very credible investor in developing economies like Nigeria. Their track record which speaks for itself, attest only to their credibility. Their understanding of the peculiarity of developing economies in Private Equity financing is amazing when compared to others who are the paymasters of the journalist, the author of the fake news.”
If these companies really did think Milost had a track record free of any blemish, then our second article probably triggered a change of heart.
BusinessDay’s second article titled “Milost sued in New York for fraud, violating US securities exchange law,” was published March 24.
The article gave an account of a pending court case between Milost and one Alex MacGregor who sued the former in September 2017 for alleged fraud, according to a document filed at the New York Southern District Court and obtained by BusinessDay.
In the Case No. 1:17-cv-06691 filed on September 1, 2017, MacGregor through his counsel {Law Offices of Nolan Klein} sued Milost for damages bothering on wire fraud, common law fraud, conversion, breach of contract and civil conspiracy.
The allegations also include violation of the US securities exchange law by making material misstatements of fact related to a filing with the Securities and Exchange Commission.
MacGregor, the President and CEO of Canada-based KGIC Inc., (a publicly traded company on the Toronto Venture Exchange), seeks the refund of some $560,000 (N201 million) paid to Milost under a financing deal worth $25 million.
The Plaintiff is also seeking punitive damages against Milost, and all reasonable attorney’s fees, litigation expenses, and costs.
Two phone calls to a number on Milost’s website and an email seeking comment went unreplied.
According to the court documents MacGregor’s company, KGIC, had been experiencing significant liquidity problems and needed to raise funds to recapitalize its operations.
After a plan to raise some USD$20.2 million from Canadian lenders in August 2016 failed, the company got commitment from Milost, which contacted MacGregor with a proposal to provide funding through a friendly take-over bid worth $25 million.
Milost proposed a buy-out using a U.S. OTC publicly traded company called PHI Global.
To execute the transaction, an agreement, called “Milost Equity and Subscription Agreement” (“MESA”) was entered into between both parties on October 30 2016.
After execution of the MESA, Milost requested that MacGregor form a special purpose private company to acquire the assets as well as to purchase an existing U.S. OTC shell Company identified by Milost as KMRB II Acquisition Corp, owned by one Florida-based Brian Kistler.
In this regard, Milost requested that MacGregor pay a retainer of $80,000 for its services in locating KMRB and facilitating the transactions.
MacGregor alleges that it paid Milost the retainer of $80,000 and says he would go on to pay a total $250,000 in two separate payments for the acquisition of KMRB.
The suit also alleges that he also coughed up $70,000 as payment to complete the financial audit of the company (KMRB) as directed by Milost. The total amount received by Milost from MacGregor, excluding any sums received pursuant to the earlier KGIC–Milost agreements, was $560,000, the court document showed.
MacGregor has since requested a full refund of all monies paid to Milost and the case remains in court.

 

LOLADE AKINMURELE

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by LOLADE AKINMURELE

May 11, 2018 | 2:04 pm
  |     |     |   Start Conversation

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