Lonrho’s bitter battle to retain the heart of its African empire

The big Australian leans back slightly, and then, in the macho manner that
gives away his background in the testosterone-fuelled mining industry,
announces: “I don’t mean to sound cocky. But we are Lonrho. We have
been in Africa for 100 years. If anyone gets in our way, we have no choice
but to stomp on their heads.”

Perhaps realising that he does indeed sound a little cocky, Lenigas, grinning
away, adds: “If we do something wrong, then fine, line us up against a
wall and throw rocks at us. Don’t you love my Australianisms?”

Head-stomping and rock-throwing are just about the only twists that haven’t
occurred in a rather extraordinary saga being played out on the Alternative
Investment Market (AIM), the junior stock exchange.

Rebel shareholders, the Zimbabwean Prime Minister Morgan Tsvangirai, the
investment legend George Soros, and even golfing superstar Tiger Woods are,
wittingly or unwittingly, personalities drawn into a showdown that echoes
the great rows of Lonrho’s “Tiny” Rowland era.

While this dispute is not the sort that would move a prime minister ? in
Rowland’s time, Edward Heath ? to describe events as the “unacceptable
face of capitalism”, the battle over the future of LonZim, a spin-off
of Lonrho, is almost as spectacular.

Rebuilding Zimbabwe

Lenigas, who is, today, executive chairman, took over at Lonrho in 2005. It
was no longer the great pan-African conglomerate of the 1960s, 1970s and
1980s. The company was on the verge of selling its last signature asset, a
majority share in Mozambique’s Hotel Cardoso, for $3m.

Lenigas pulled the sale, and went about creating the latest incarnation of the
great business empire. It is now active across Africa in an array of
sectors, including building materials, aviation, water technology, and
diamond mining, as well as hotels.

As the political situation in Zimbabwe started to improve, the Lonrho board
sensed an opportunity to invest ahead of the country’s anticipated
reconstruction. However, the directors did not want to use the Lonrho brand
in the country, so went about setting up LonZim. While Lonrho focused on
fairly mature investments, LonZim would be buying assets ahead of an
economic recovery.

This was spun off as a separately listed company at the end of 2007. The Aim
admission document made clear that the companies were expected to be all but
inextricably linked.

The four executive directors would be from Lonrho, holding the same roles. For
example, Geoffrey White and Lenigas are respectively chief executive and
executive chairman of both companies.

White says: “In the prospectus, we made it clear that LonZim would be
using Lonrho’s expertise to run the company for a management fee ? either
$500,000 a year or 2 per cent of funds invested. The directors on the LonZim
board receive £1,000 a month, the minimum salary to serve on the board of a
plc.”

Nearly 30 million shares were placed in the market at 100p a pop, raising
£29.16m for investment in Zimbabwe. Lonrho retained a 20 per cent stake.

Rebel alliance

At about the same time, AMB Capital, a South Africa-based investment bank,
started building ties in Zimbabwe. Andrew Sprague, the rugby union-loving
AMB chief executive, is Zimbabwean.

AMB saw the country’s potential, and hankered for a vehicle that could “act
as a conduit for investment”, says Sprague. If AMB could find such a
company, Sprague says there are parties willing to raise up to $30m for a
range of investments, including housing, roads and mining infrastructure.

Sprague spied LonZim. He knew there were both negative and positive views of
Lonrho which dated from the Tiny Rowland days. Africans considered the
company either a force for colonialism or a great investor, but on balance,
Sprague felt that Lonrho’s name was well regarded in the continent. The
LonZim name would help AMB to build a strong business in Zimbabwe.

At the start of this year, the shares, like most stocks in London, had
collapsed, in this case to just 15p. Two months later, AMB and Damille
Partners IV, an investment vehicle, were introduced and decided to buy up
LonZim shares.

AMB took a 20.75 per cent position, while Damille built up a 6.75 per cent
stake, the two parties paying an average of 16p a share. It is understood
that many of the shares originated from George Soros.

At the end of March, the parties wrote to LonZim’s non-executives. They
expressed concerns at the group’s investment strategy, believing that the
LonZim board had overpaid for certain assets, and argued that there were
corporate governance issues arising from the company’s ties to Lonrho.

The investors also called for an extraordinary general meeting, at which it
wanted to vote off the Lonrho-driven board and replace with two AMB
directors, including Sprague, and a duo from Damille.

If elected, AMB wants to review every asset on LonZim’s books and by the end
of 2010 would try to sell any asset that is not expected to generate a 30
per cent return for shareholders. The return is set so high due to the risk
of dealing in a politically unstable country.

Lonrho insists that this means AMB wants to wind up the company by the end of
2010, with the rebel shareholder effectively cashing in on a fire sale when
they had paid only 16p a share, while other investors would lose out. “AMB’s
interests are chronically misaligned to other shareholders,” White
alleges. “Most shareholders bought in at between 40p to £1 a share.”

However, Sprague says that at no point has AMB stated that it wants to wind
down the company. Rather, it wants to start from scratch, by selling or
winding down assets and investing elsewhere in Zimbabwe. “We never said
that we would liquidate the company. We just don’t like the assets,”
argues Sprague.

AMB is understood to be planning a stock exchange announcement tomorrow
detailing this position.

Tiger hunting

The most public dispute has been over LonZim’s $8.5m purchase of the five star
Leopard Rock Hotel, 220km south-east of Harare. Sprague argues that this
does not meet his 30 per cent return criteria: “You’d be lucky to get
your capital back if you sold it.”

AMB values the hotel at about $4m, while Lenigas says that his advisers
estimated that LonZim had snapped up the hotel at half-price. LonZim also
plans to refurbish the hotel at a cost of $1.7m and expand by 100 rooms.

Lenigas says that when this is completed, the Professional Golfers Association
has indicated that it will hold tournaments at the adjacent course. Clearly,
LonZim has images of Padraig Harrington taking on Tiger Woods at the venue.

At a breakfast promoting Zimbabwe at a Big Four accountant’s London base last
month, White introduced himself to Prime Minister Tsvangirai, mentioning the
purchase. “He said that tourism would be the sector that would develop
fastest in Zimbabwe, and the government has since announced that hotel
modernisation will be duty free,” says White.

But AMB is also concerned that Lonrho Hotels has been selected to oversee the
refurbishment and operations of Leopard Rock. The LonZim board maintains
this was a fair, independent selection process, while AMB believes it is an
example that the company is compromised by its Lonrho links.

Should Sprague and Christopher Vosloo, AMB’s executive director, succeed in
gaining places on the board, they will review Lonrho’s overall management
agreement with LonZim to check if it is legally binding.

Showdown

The EGM is to be held at 3pm on 30 July. But this will not be a simple vote to
replace one board with another.

The situation has been muddied by Damille’s decision last month to sell most
of its stake. The Damille board nominees, Brett Miller and Rhys Davies, have
withdrawn, although they are still formally on the ticket.

The decision to sell up has angered AMB. Sprague says lawyers are reviewing an
alleged agreement between the two that Damille would not sell up until after
the EGM. Miller counters: “There was no agreement between Damille and
AMB about not selling any shares prior to an EGM or at any time. Damille is
purely a financial investor, and the share value had increased by over 100
per cent on what the shares had cost Damille.”

Despite the tension between the former allies, Miller says that Damille will
use its remaining shares to vote for AMB.

Sprague is looking to enhance his position by arguing that Lonrho, now with
nearly 25 per cent of the company, cannot vote on a resolution to change
LonZim’s investment strategy. This is because any change would impinge on
the Lonrho’s chances of earning a management fee. White says that he has
obtained a legal opinion dismissing this argument.

Should Sprague and Vosloo win the election, they would have to work with two
of their rivals from Lonrho. Difficult, given that White would ultimately
like to merge LonZim with Lonrho. The relationship would also be
particularly tempestuous now that Lenigas and White have issued defamation
proceedings against Sprague in relation to comments made to a South African
journal.

And Lenigas won’t back down on the defamation suit, no matter the outcome of
the vote. “We take what he’s said very seriously, as it could harm
Lonrho’s dealings with African governments and investors.

“Geoff and I are merely the custodians and guardians of Lonrho, and we
need to protect it.”

Tiny Rowland would be proud of those words. And he would be all too familiar
with the effects of a bitter, very public dispute.

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