The deal’s off
11 May 2011
SIMON BORCHARDT, in a special report for SA Rugby magazine, finds out how the SWD Eagles’ deal with Bunker Capital went sour.
One of the more remarkable aspects of the 2010 South African rugby season was the SWD Eagles’ ability to perform on the field, while chaos reigned off it. As administrators and businessmen battled each other in the boardroom, the Eagles went about topping the Currie Cup First Division log, before narrowly missing out on promotion to the Premier Division.
But what really happened at the George-based union in 2009 and 2010 when a deal involving a company called Bunker Capital went sour? Various allegations have been made by those involved (see ‘War of Words’) but SA Rugby magazine will stick to the undisputed facts.
It all began in mid-2007, when a deal was negotiated between the South Western Districts Rugby Football Union (SWDRFU) – represented at that time by its president Stag Cronjé – and Bunker Capital (Pty) Ltd.
They were the primary contracting parties in this deal and were both going to be 50% shareholders in Eagles Rugby (Pty) Ltd – the professional arm of the SWDRFU. Bunker Capital was originally going to buy the 50% shares and the R2.5 million loan account claim against Eagles Rugby held by the South African Rugby Union (Saru) for R1.5 million. But as the shares were effectively worthless Saru opted to give them to Bunker Capital for a nominal amount as it believed the company was bringing value to Eagles Rugby.
That value was an annual payment of R6.5 million for an initial period of four years (total of R26 million). On an annual basis, R3 million would go to the SWDRFU and R2 million to Eagles Rugby, with the Eagles Academy receiving R1.5 million.
Certain monies were paid over to Eagles Rugby for distribution as per the agreement. However, the SWDRFU and Saru claim that, based on the signed shareholders’ agreement, there was an underpayment of the money in the first year amounting to R3.4 million, while Bunker Capital insists its financial obligations to Eagles Rugby were met.
The next complication in the deal came when Cronjé, the president of the SWDRFU (one of the shareholders in Eagles Rugby), was nominated by Bunker Capital (one of the other shareholders) to be the managing director of Eagles Rugby and the clubs approved his appointment. This was an obvious conflict of interest.
It then turned out that Bunker Capital had transferred its shares in Eagles Rugby to an entirely separate and distinct third party called Market Demand Trading 464 (Pty) Ltd, which was in the process of changing its name to Bunker Capital Investments (Pty) Ltd (it has still not done so). The SWDRFU was not aware of this entity and never contracted with it. At the time that the shareholders’ agreement was concluded, Saru and the SWDRFU were not aware of the fact that the funding obligations of Bunker Capital were to be met through complex private equity fund arrangements, in terms of which Eagles Rugby was required to subscribe for preference shares in that fund.
Underpinning the entirety of this deal was a single and certain monthly income flow: the guaranteed sum of R430 000, being the broadcasting money that Saru paid to the SWDRFU for the union’s funding requirements and operational costs (all South African provinces receive funds as part of the broadcasting deal).
That income flow would be utilised by Bunker Capital (alternatively Market Demand Trading 464) in Eagles Rugby in order to raise funding to meet its obligations in terms of the shareholders agreement. As the diagram below shows, the Living Eagles Development Fund (LEDF), which was created to manage the funds, would receive the monthly R430 000 broadcasting money from Eagles Rugby. The LEDF would then give Eagles Rugby a monthly fee of R970 000 (the R430 000 plus an additional R540 000).
Eagles Rugby would use that money to run the professional side of the game, and would pay the SWDRFU a monthly fee of R250 000 to cover its operational expenses.
Bunker Capital planned to use this guaranteed income flow of R430 000 to invest elsewhere, so without the private equity funding there was no deal. Bunker Capital traded this future income stream in parcels, at present value rates, and hoped to raise instalments of capital to meet its contractual obligations, which it did or didn’t, depending on who you speak to.
What transpired, and not necessarily in this order, is that the conflict of interest created by Cronjé’s dual roles as president of the SWDRFU and MD of Eagles Rugby became untenable and certain suspicions arose around the execution of his functions (with or without substance). The SWDRFU became uncomfortable with how Bunker Capital was doing its business and/or the legitimacy of the manner in which it was doing it. There was also a trust fallout between the two main shareholders – the SWDRFU and Bunker Capital – and certain individuals representing those entities.
It was clear, according to the agreement signed by all parties, that the monies paid to Eagles Rugby would be in the form of an interest free loan that would only have to be repaid if the company made a profit (an unlikely scenario).
Then a whole lot of things happened.
On 21 November 2009, a vote of no-confidence was taken against Cronjé as president of the SWDRFU and he was replaced by Hennie Baartman. Cronjé responded by filing a court interdict, which forced the union to hold another special general meeting a week later. Baartman, though, could not be nominated for president again because of the court interdict, so Faried Stemmet was elected as interim president.
Cronjé walked out during this meeting and took the SWDRFU to court. On 12 April 2010, the Western Cape High Court ruled that the meetings and resolutions adopted at the special general meeting on 21 November by the SWDRFU were in accordance with the law, in accordance with its constitution, and that the newly-elected office bearers validly held office. Baartman was therefore restored to his role as president. Cronjé appealed the court’s decision, which was denied, before being granted leave to appeal. This decision is pending, although it is academic as Cronjé’s term as president has already expired.
Preceding this court decision, the SWDRFU had decided to withhold the R430 000 broadcasting money from Eagles Rugby, which brought the whole house down. Eagles Rugby could not pass on the R430 000 to the LEDF, so the LEDF would not give Eagles Rugby the R970 000 that the latter needed to pay its operational costs (including player salaries).
In June 2010, Cronjé applied for provisional liquidation of Eagles Rugby and later that month, the SWDRFU, having been prompted by Saru, met with Bunker Capital to try to restore the deal. From the SWDRFU’s perspective, a prerequisite to any restoration of the relationship was that it be given the opportunity to conduct an integrity vetting process on the structure of the whole commercial arrangement (the union asked for certain assurances, explanations and documentary evidence). The meeting did not achieve that end from the SWDRFU’s point of view and the issues have still not been resolved. The relationship remains fractured and for all intents and purposes is over.
However, the LEDF (the first-tier beneficiary under Eagles Rugby) has launched court proceedings against the other parties, including Saru. The hearing of the matter and the judgement is anticipated to be in 2013.
WAR OF WORDS
What the main role players told SA Rugby magazine
DERRICK DE NECKER (CEO OF BUNKER CAPITAL): ‘Bunker Capital and its associates set in place a unique structured finance transaction not seen anywhere in South African rugby. It paved the way for rugby to be totally revolutionised in the way it viewed the financing of its operations. SWD became one of the first provinces to become totally self-reliant and not dependent on sponsors at all. After political interference for most of 2010, rugby in SWD has experienced a setback like never before. Not only did rugby in SWD suffer, but South African rugby as a whole.’
DAVE HEGGIE (SWDRFU ADVOCATE): ‘The question the SWDRFU wanted answered was: “Where is the [Bunker Capital] money coming from?” Bunker Capital/LEDF’s strategy was to sell off the future income stream [broadcasting money from Saru]. The total anticipated future income stream until December 2015 was R40.6 million. The LEDF has already “sold” off the future income stream until January 2013 – worth a total of R20.5 million – for R12 million, of which R7 million went to Eagles Rugby. The other R5 million is unaccounted for. If the contract had been enforced by the courts, Eagles Rugby would have had no rights to the income of R40.6 million and would only have had a claim against the LEDF for the “contracted” funding. Therefore, if the LEDF went “belly-up”, all the income would be gone and only a claim against an insolvent entity would be left. Despite numerous requests there is still no evidence that Bunker Capital or the LEDF had any other assets or source of income other than the sale of future income.’
SAM DU PREEZ (LEDF ADVOCATE): ‘The LEDF was established as a funding mechanism to raise capital for investment in Eagles Rugby and its projects. Neither the SWDRFU nor Eagles Rugby is in breach of contract with the LEDF. The LEDF issued preference shares to Eagles Rugby in exchange for media rights [R430 000 per month] and commercial rights [to Eagles Rugby] with the approval of the SWDRFU. That contract of subscription has been perfected and all parties duly performed in terms of the contract, thus no breach of contract. Thereafter the SWDRFU perpetrated the theft and fraud against the LEDF in that it “stole” an asset of the LEDF. Eagles Rugby subscribed for preference shares of the LEDF in exchange for all its media rights and commercial rights valued for the period till December 2015 to be in excess of R70 million. This subscription rendered Eagles Rugby solvent. This is vital to note as the first challenge of Bunker Capital was to do a turnaround of the company, which it successfully did.’
STAG CRONJÉ (FORMER SWDRFU PRESIDENT AND EX-MANAGING DIRECTOR OF EAGLES RUGBY): ‘As part of its shareholders’ agreement, Bunker Capital could choose the managing director of Eagles Rugby and I was asked if I wanted the job. I said the SWD clubs would have to decide if I could be president of the union and MD of the company. The motion was passed by the majority of the clubs at the 2008 AGM, but I assured them I would not run for president again when my term expired in 2010. The SWDRFU then began to withhold the R430 000 broadcasting money from Eagles Rugby in February 2010, which meant the company could not pay the LEDF. In June 2010, Eagles Rugby was placed under provisional liquidation. Faried Stemmet [then interim president of the SWDRFU] and Willem Small [then CEO of the SWDRFU] broke the agreement with the LEDF by not transferring the broadcasting money to Eagles Rugby. They did that because they wanted to kill off the company and get rid of me and Bunker Capital. They wanted me out because I’m white and had laid disciplinary charges against Small [in September 2009]. Stemmet and Small misled the clubs by spreading lies about me, Bunker Capital and the LEDF.’
JOHN BRUINDERS (FORMER SENIOR VICE-PRESIDENT OF THE SWDRFU): ‘Small was charged for a number of things, including his decision to give R110 000 of Saru development money to the rugby academy of PW Botha Kollege – a school his son attended. That money was supposed to be used to develop promising players in the region, but he never consulted with the executive committee before spending the money, which was a breach of protocol. When Cronjé charged Small with misconduct, I was the secretary of the SWD coastal region and Small instigated a political campaign against Cronjé because he knew he was going to lose his job, although I wasn’t aware of it at the time. Later on, I was in a caucus meeting when Small and others said that they couldn’t have a white man in charge of SWD rugby anymore and that they had to get rid of him.’
WILLEM SMALL (FORMER CEO OF THE SWDRFU): ‘We set up a rugby academy at PW Botha before my son attended the school, so giving them that money wasn’t a conflict of interest. I was just doing my job and it wasn’t a dismissible offence [the charges against Small were later dropped, but he chose to leave the SWDRFU to join the Department of Health]. I would also like to distance myself from any racial remarks Cronjé has made.’
CRONJÉ: ‘The SWDRFU said Bunker hadn’t brought any money into the union and that the LEDF was a pyramid scheme. For the first time in the union’s history, the clubs were getting money from the union and this was because of the deal with Bunker Capital. The fact is the union took the company’s money and it broke the deal between the union and the company. Bunker Capital did not break its contract with Eagles Rugby – it paid R3.8 million in the first six months of the deal, which is R559 000 more than it had to.’
HENNIE BAARTMAN (CURRENT PRESIDENT OF THE SWDRFU): ‘The union paid the R430 000 broadcasting money to the company in January but didn’t get any money back, so we stopped paying it in February. This had nothing to do with race. Ask anyone who knows me and they will tell you that I appeal to all races – black, white and pink.’
CRONJÉ: ‘The union paid the broadcasting money to the company in December 2009 but then broke the contract. Baartman initially refused to pay the money in January so we took out a court interdict against them. The union then relented but still didn’t pay all of the money from Saru that it should have. The SWDRFU’s and Eagles Rugby’s 2009 financial statements show that Bunker Capital never missed a payment. These statements should have been presented at the 2010 AGM, but weren’t. Baartman said it was because of the company’s insolvency, which is rubbish. He just didn’t want the clubs to see the truth.’
SMALL: ‘Cronjé says he was forced out because he is white, but the fact is that he tried to be clever by getting Eagles Rugby to apply for provisional liquidation and ended up costing himself his job [as MD]. He blames the union for the company’s demise but why would we make a transaction in an illegal operation? When Cronjé left the company it was R18 million in debt and had just R1 million in assets, yet he tells people he turned the union around.’
CRONJÉ: ‘The company was R16.8 million in debt and that’s because the money from Bunker Capital was not taken into account. If it had been, the company would have been solvent. Small says that the union refused to honour its agreement with the company because there was illegal activity involving the company and the LEDF but then why did the union try to arrange a new deal with the LEDF where the full executive committee of the union, Saru [represented by Oregan Hoskins, Dawie Groenewald and Jan Marais] and the delegates of the LEDF were present? A letter from Small to Saru confirms that this meeting took place and that they were close to finalising a new deal between the union and the LEDF. This is dirty play!’
SMALL: ‘I had my suspicions about the Bunker deal from day one, and in February 2010 we suspected that it was a pyramid scheme. But we didn’t have any proof, so we couldn’t do anything. Saru met with Bunker in May and then asked us [the SWDRFU] to meet with them to try to restore the deal, which we did in June. It was only after that meeting that all the dirty stuff came out about the deal and we decided to stop paying the broadcasting money to Eagles Rugby.’
CRONJÉ: ‘Small talks about illegal transactions involving Bunker Capital, but where is the proof? This was all about race. Why else did the three black employees of Eagles Rugby continue to be paid by the union [after the company went into provisional liquidation] while the white employees were not? Small said the black employees worked for the company and the union which is why they were paid, but that is not true, they only worked for the company. If that is his argument then why did they not pay the financial manager, Dirk Goosen, because although he was a company employee he also did the financials of the union and development fund for a number of years.’
SMALL: ‘Those three staff members of Eagles Rugby were paid because they worked for the union and the company. It was just a coincidence that they were black. We appointed our own financial manager because we felt that Goosen couldn’t be trusted.’
– This article first appeared in the May issue of SA Rugby magazine. The June issue will be on sale from Wednesday, 18 May.
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