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									                                FINANCE WEEK
                                 3 MARCH 1994
                                  By Ann Crotty

Damage Control
Trencor moves to limit W&A’s fall-out

Over the Christmas period Trencor chairman Neil Jowell got out of Hamburg just
before the disastrous flooding hit that city; a few weeks later he flew out of Los
Angeles just before the earthquake. Unfortunately he is not as adept at avoiding man-
made disasters.

W&A is a man-made disaster which Trencor walked right into just one year ago. At
risk is not just the R350m spent in acquiring a 30% stake in W&A but Trencor’s own,
formerly excellent, management reputation.

Through most of the 1980s and into the 1990s Trencor built up an excellent
performance record and was rewarded with an equivalent share price rating. Now
analysts are wondering how Jowell and his CE Ray Hasson could have allowed
themselves to be talked into any involvement with W&A.

With every bit of bad news that filters through to the market about yet more problems
at W&A it is not only the W&A share price that takes strain; so too does Trencor’s.
Ahead of the W&A deal Trencor was on a p/e rating of 21.4. A year later it has
slumped to a p/e of 12.7.

Certainly market sentiment wasn’t helped by the release last week of abridged interim
results from Trencor and news that none of the divisions achieved budget. That
interim eps increased by a nominal 6% would once have been easily digested by the
market given the backdrop of Trencor’s long-term performance, particularly against a
prolonged international and local recession.

But now analysts are raising questions about the quality of management – is there a
problem with its ability to undertake realistic budget exercises or is the problem
management’s capability to achieve realistic budget targets?

Additionally, the poor level of disclosure that was previously tolerated because of
management’s unblemished record is likely to be accepted from here on.

The perception in the market is that ongoing problems at W&A have distracted
Trencor’s top executives. Hence the urgency to come up with a firm solution to the
W&A disaster.

Sadly it seems Jeff Liebesman has a cancerous affect on shareholder wealth. He has
eroded it to the bone at FSI and W&A and, if Hasson cannot come up with a credible
rescue plan for W&A, Trencor shareholders will be considerably the worse off for
their exposure to Liebesman.

Sadder still is the fact that the erosion of wealth was avoidable. W&A’s asset base
includes a considerable percentage of fundamentally sound operations. Even
Liebesman’s hardened critics acknowledged this point. They were sufficiently
attractive to entice Trencor at a time when the whole thing looked as though it was
going to crumble around Liebesman.

The problem throughout was that financial engineering seemed to dominate
management strategy and priorities – and overshadowed the simple realization that
the medium- and long-term health of any company is reliant on the performance of its
operations. This critical perception encouraged a leading analyst to remark this week:
“Getting rid of the spin-twins (Liebesman and Neville Cohen) should help the
rehabilitation process.”

To a large extent Liebesman trapped himself in a mess of ever-more convoluted
financing engineering exercises almost from the day FSI made its rather cheeky bid
for control of W&A. it was not quite to the day. But six weeks after his R105m
acquisition of 47% of Waicor (W&A’s holding company) from Mannie Simchowitz
in September 1987, the JSE crashed.

Inevitably minorities took up the cash offer of R35 a share – a level never seen during
Simchowitz’s reign or sine – and Liebesman had to find an additional R120m. His
FSI group took on borrowings in an environment of increasing interest rates.

Much of what happened to FSI and W&A in the following six years has its origins in
that disastrous sequence of events. As the market saw it, all of the group’s
restructurings and rights issues were designed not with operational considerations in
mind but to relieve FSI’s cash flow constraints. An obvious remedy would have been
to sell off assets but Liebesman was much more inclined to be a buyer than a seller.

It was these sort of perceptions that ensured each new rights issue would have to be
on more generous terms to guarantee support – hence the current crippling debt

Back in September 1989 after yet another FSI/W&A restructuring Liebesman stated:
“The more settled structure of W&A will allow management to focus on the shop-
floor and deepen efficiencies.” Four years later in August 1993, at the time of the
release of June interim results, with Hasson at his side, Liebesman made the point that
head office was now much more tuned in to strategic operational considerations rather
than solely corporate activities.

He believed it would result in considerable bottomline benefits: “About two-and-a-
half years ago we took our eye off the ball in terms of operations to deal with
corporate issues. This is no longer the case.”

What are the options facing Hasson? It seems they are considerable. “We developed
a variety of scenarios and are now concentrating on three or four which we will be
presenting to our merchant banks. Whichever is adopted will give us the direction we
should be moving.”

Inevitably liquidation, or turning W&A into a cash shell, was onsidered but only
briefly. At the other extreme Hasson also considered “battling on and trying to pay
the interest bills”. This too was promptly ruled out – understandably given that the
R540m net proceeds from last year’s right issue doesn’t seem to have made much
impact with the debt burden. The middle ground comprises invaryuing degrees asset
sales, rights issues and debt restructuring.

Hasson will not be drawn on details. “A report will be drawn up outlining the chosen
strategy. We cannot anticipate the findings.”

The contents will be brought to the attention of the shareholders with the release of
W&A’s results later this month.

It seems a second report is also being worked on – by the group’s non-executive
directors. This apparently relates to issues surrounding the resignation of two
directors, Hasson will give no details.

On the possibility of taking legal action against any parties, Hasson refrains from
anticipating the contents of the report: “We must wait and see what comes up in the

Certainly high on the list of the “chosen strategy” is the cleaning up of W&A’s
complex equity structure – the patching up of desperate rights issues. There are
R4.03m of compulsorily convertible structures which, in the six moths to end June
1993, cost the company R33m. For some strange reason W&A management
accounted for this cost after the attributable profit line in the June results, thereby not
revealing the full extent of the weakness of the group in terms of earnings per
ordinary share.

On this point Hasson states: “Cleaning up the structure would be an important
achievement. Such cleaning up would presumably involve converting the debentures
into ordinary shares, a move that would result in Trencor’s 30% stake being
considerably diluted.

Who would take the equity and on what terms, and would Trencor subsequent allow a
rights issue which might bring its stake back towards 30%? Comments Hasson:
“Trencor will wait to see what the proposal is being taking a decision on familiar with
the type of assets in W&A’s automotive and maintenance and sit services divisions.
It would seem likely the preferred option would be asset sales from the group’s
consumer and industrial divisions, JD Group has already gone

Until the results and findings of the report are known later this month. Trencor as
well as W&A will not entice much positive attention. But on the assumption that
Trencor will be able to control the damage from this man-made disaster, the shares
looks over sold.

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