How R1 became R70m for Don Group CEO

SOME five years ago, as banks threatened to liquidate the Don Group, Thabiso Tlelai stepped forward with a R1 offer for 30% of the company.

The banks were keen to place an empowerment partner into the teetering company and accepted his offer.

Now the company has been turned around, that 30% is worth R53m but Tlelai has not stood still. He has increased his stake to 40% now worth R70,85m at current market value.

The Don’s nine property assets in plumb areas, such as Rosebank, Sandton and Sea Point, were valued at R142,7m in 2005 and, according to one outside expert are worth at least R20m more. That adds 6,7c to net asset value of 25,4c.

How was the company saved?

First, entrepreneurs Eric Ellerine and Marc Wainer offered to purchase the Don’s debt from the banks. Its face value was R105m but they got it for R85m. The debt was backed by bonds over the properties. Ellerine and Wainer sold several of the properties at a nice profit to outside investors. They offered other properties over which the Don had right of first refusal to the Don.

Under Tlelai, the Don Group bought its nine remaining properties back for R60m. They have subsequently doubled in value.

The group has come a long way since its escape from insolvency. Total debt is down to R51,6m (R54,8m) and taking into account R3m of cash in the bank, net debt is only R48,3m. The group has assessed losses of R134,1m, so will not pay tax for several years.

The report does not disclose the remuneration of the five directors.

A more serious omission is occupancy. Tlelai tells Moneyweb that is because the key to some of the 415 suites covers two beds and others four, so total occupancy is problematical.

The lack of an occupancy figure is a deterrent to prospective investors, as the attraction of any hotel share is that once its overheads are covered, every additional guest night is virtually pure profit.

Strategy right now is to upgrade the rooms and make them convertible to flats, which can either be sold or let. Until the properties have been brought to true value, Tlelai says the Don will continue with the hotel suite business model. World Cup 2010 and the recently weaker rand bode well for the group, as it does for all other accommodation providers.

The company published its skimpy annual report for the period to last June only this week. It certainly is transformed. Revenue, primarily from guests at the suite hotels, rose 27% to R62,5m. The operating profit before depreciation rose 74% to R15,3m.

The numbers in the annual report are historical. The interim results will be published in February.

The moral of the story is that insolvencies are great opportunities when banks are over-cautious and blind to value.

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