Faritec Holdings has concluded a transaction with Shoden Data Systems whereby Shoden will advance a loan of R29-million to fund Faritec's working capital shortfall. The loan will convert to equity that will result in Shoden acquiring a controlling interest in Faritec.
This follows a 6 April cautionary announcement stating that JSE-listed Faritec was in the process of securing an urgent working capital facility.
The board of directors of Faritec has also resolved to amend the terms of the rights offer announced on 10 March 2009 to ensure consistency between the original rights issue transaction and the new transaction which entails an issue of shares for cash.
In addition, Jay & Jayendra , one of the underwriters of the rights offer, has agreed to advance a R5-million bridging loan to Faritec, increasing the immediate capital injection into Faritec this month to R34-million.
Faritec CEO Simon Tomlinson says that, following the company's loss for the six months ended 31 December 2008, immediate steps were taken to implement a turn-around strategy to address the company's performance, including rationalising costs to improve management of working capital and raising additional working capital through the rights offer.
"As part of this strategy, Faritec raised a R15-million bridging loan in the context of the rights offer, to fund working capital requirements," he says. "Since then, however, several factors contributed to a cash flow crisis in the business, including the costs of the turn-around strategy, the prevailing difficult credit environment and a cash lock-up precipitated by Faritec's obligations in meeting its funder's financial covenants."
Tomlinson says that discussions were held with a number of different parties aimed at securing the necessary funding to ensure the sustainability of Faritec as a going concern.
"The conclusion of the facility with Shoden together with the loan provided by J&J meets this objective by immediately injecting sufficient capital into Faritec to ensure the group will return to positive and adequate cash flows into the future, enabling us to meet our working capital requirements to the benefit of shareholders, customers, creditors and employees," he says.
"After the conversion of the facility into equity, Faritec will retain our impressive BEE credentials, but with the added advantage of a strong controlling shareholder committed to working together with management and the board to enhance value for all shareholders," he says.
Frost & Sullivan believes that the working capital shortfall that has forced Faritec to find funding has come about due to two crucial factors. The first was its own accelerated acquisition spree, and the second was the economic crisis.
"Faritec went through a period of two to three years where there was a lot of acquisition activity," explains Frost & Sullivan ICT industry analyst Lindsey Mc Donald. "There was some overlap with these acquisitions, as some of the companies had the same services and expertise as others. Questions were asked over whether they should they have just focused on specialising and whether they had spent too much money."
Faritec argued that its client base was expanding quickly and it needed to maintain service levels. That necessitated acquiring additional capacity. However, when the financial crisis struck, Faritec suddenly found itself in a predicament.
"In South Africa we are only now really feeling the effects of high interest rates, fuel price hikes and the weight of the global environment, " Mc Donald says. "A lot of Faritec's deals are financed, so if their clients default, this would affect their cash flow."
These two factors combined to leave Faritec in serious need of cash and opened up the possibility of Shoden stepping into the breach.
"Shoden is very interesting because it provides complete data centre solutions, very much focused on the storage side," says Mc Donald. "Storage is a growing market in Africa, mainly due to issues of compliance. This is especially prevalent in the financial services industry where records now have to be kept for seven years."
She points out that companies like EMC already have a presence in South Africa, and this move by Shoden could be seen as an attempt to gain a greater foothold in the country.
"Faritec happens to be a good target right now," she says. "It needs the cash and Shoden benefits from its established presence."
Frost & Sullivan is seeing strong growth in storage throughout Africa, with South Africa, Nigeria and Kenya being at the forefront. The growing demand from Nigeria and Kenya in particular is going to push the need for storage dramatically, creating opportunities for companies like Shoden across the continent.
"In the next two or three years we are likely to see the uptake of storage into other verticals as well," Mc Donald says. "The retail sector is one in particular that will require these services."