Adapt IT shareholders missing out on R300 million – Huge Group CEO

Adapt IT and its shareholders lost out on around R300 million by signing a long-term lease agreement for its Johannesburg head office instead of buying the building.

Six years ago, Adapt IT initiated a project to develop a new Johannesburg campus and merge its eight legacy offices into one.

Construction on the building started in November 2016 and the company signed a 13-year lease agreement with its new landlord, Inyosi Ross on 19 December 2016.

Adapt IT moved into the first phase of their new Johannesburg campus in February 2018 and occupied the second phase in August 2018.

Mshengu Property Holdings, whose sole director is Adapt IT CEO Sbu Shabalala, acquired Adapt IT’s Johannesburg campus from Inyosi Ross on 1 March 2019.

This long-term lease agreement signed by Adapt IT in 2016 was automatically ceded from Inyosi Ross to Mshengu Property Holdings.

Over the last financial year Adapt IT paid Mshengu Property Holdings, and indirectly its own CEO, R34.62 million to rent the property.

Questions have been raised about the 13-year lease and about a potential conflict of interest related to Shabalala’s links to the deal, but Adapt IT dismissed these concerns.

Adapt IT said there is nothing untoward regarding the deal and that the sale of the property was strictly between Mshengu Property Holdings and Inyosi Ross.

“Shabalala fully disclosed and completed the notice of directors’ personal financial interest along with recusing himself from all of the company’s decisions pertaining to the lease since Mshengu Property Holdings effectively became the landlord,” Adapt IT said.

“At the time of entering into the lease agreement, the board of the company was comfortable with the term of the lease which is in line with the company’s facilities strategy.”

Sbu Shabalala
Sbu Shabalala

Following the publication of an article related to the deal, MyBroadband received feedback from Adapt IT stakeholders who said they are not entirely comfortable with the property deal.

One of the concerns raised by a stakeholder, who asked to remain anonymous, was that Shabalala may have negotiated the long-term lease in 2016 with plans to acquire the property later.

Should this be the case, the stakeholder said, Shabalala may have acted in his own interest instead of the interest of shareholders.

As the property was developed specifically for Adapt IT, it seems reasonable that the company should have considered acquiring it instead of leasing it from its own CEO, the stakeholder said.

MyBroadband asked Adapt IT whether Shabalala was involved in the negotiations which resulted in the 13-year lease, but the company would not answer this question.

Another stakeholder, Huge Group CEO James Herbst is also not convinced the long-term lease is in the best interest of Adapt IT shareholders.

Huge Group, which has made an offer to acquire Adapt IT, is well positioned to comment on this issue because of their knowledge of the company’s finances.

Responding to questions from MyBroadband, Herbst said a 13-year lease is a form of financing through which Adapt IT could have bought the building.

“If Adapt IT had acquired the building, at the end of 13 years Adapt IT would own a property and Adapt IT shareholders would be the ultimate beneficiaries,” he said.

Huge Group CEO James Herbst
Huge Group CEO James Herbst

While the cost to develop the property and the purchase price is not publicly available, the rental contract gives an idea of the value of such a deal.

If one looks at the lease rental of R34.62 million per year, and a 6% annual escalation over 13 years it is assumed, the total lease payments would amount to around R571 million.

“If we discount these total lease payments back to their present value using an interest rate of 9%, then Adapt IT’s benefit, excluding an increase in the market value of the property, would probably be about R300 million,” said Herbst.

Commenting on the deal, Adapt IT said the change in ownership to Mshengu Property Holdings resulted in Adapt IT gaining BEE procurement recognition benefits as a result of having a black-empowered landlord.

Herbst said while there is a black empowerment benefit, the BEE points might still have been achieved if Adapt IT’s interest in the property was 70% and Mshengu Property Holdings was 30%.

“In our minds this would have been more equitable,” said Herbst.

MyBroadband asked Adapt IT why it did not opt to purchase the building rather than sign a long-term lease agreement, but the company would not answer this question.

Adapt IT would also not comment on whether its shareholders would have benefitted if they had purchased the building.

Instead, Adapt IT said it has close and direct relations with all shareholders who “are advised to contact our investor relations team should they have any questions regarding the property”.

“The details of the deal have been fully disclosed previously to investors in the Integrated Report and discussed publicly at investor presentations.”

Now read: Adapt IT CEO Sbu Shabalala’s property deal raises questions

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Adapt IT shareholders missing out on R300 million – Huge Group CEO