Is Ithuba's number up?

27 October 2019 - 09:47 By ASHA SPECKMAN and PENELOPE MASHEGO

Ithuba Holdings, holder of the National Lottery operator's licence, and Johnny Copelyn's Hosken Consolidated Investments (HCI) are set for a bitter face-off this week as their prolonged battle for control of the lucrative R8bn lotto contract enters the high court.

HCI, which is listed on the JSE, controls casinos at Gold Reef City and Montecasino in Johannesburg and Grand West in Cape Town, as well as other gaming assets. It approached the South Gauteng High Court to hear the matter on an urgent basis over concerns it raised on governance at Ithuba and its management company, Zamani Marketing and Management Consultants.

But Ithuba CEO Charmaine Mabuza says the court bid is part of a continued attempt by HCI to take over the lotto licence, which it lost out on in late 2014 when Ithuba won the contract.

HCI gave Ithuba a R325m loan in 2015 as it struggled to secure funds to execute operations after it won the licence. Ithuba made a R400m repayment to HCI within a year of receiving the loan, with interest.

That means the funding agreement falls away on repayment and HCI would have no further claim at all, Mabuza said.

"They gave us R325m. At this stage, excluding the capital, we've paid them R400m. That's more than a loan shark."

HCI sought and won in arbitration after accusing Ithuba of breaching the funding agreement by settling a five-year loan it received from HCI earlier.

The early repayment of the loan triggers HCI's step-in rights. This was ruled in arbitration earlier this year.

Yunus Shaik, a director at HCI, said: "You can't when you are suddenly irritated with your funder when he is trying to get you to comply with the agreement say to him, 'Look, here's your money, I'm cancelling the agreement.' "

In August HCI said it had applied to court to make the arbitration ruling legal. Ithuba has applied to review the arbitration, which may only be heard next year.

Mabuza told Business Times on Friday: "Their [HCI's] real interest is to take over the lottery through the back door, that's the bottom line."

In her affidavit, she said the ability of HCI to exercise its right of oversight as per the arbitration ruling will give it among other things rights to a merger as envisaged by the Competition Act.

The rights allow HCI to appoint directors of Zamani and Ithuba and to exercise full management control over the companies.

Shaik dismissed suggestions of a takeover, saying HCI was only trying to step in for "performance management".

In spite of this, HCI had notified the Competition Commission of a proposed large merger, which Shaik said was merely in compliance with the arbitrators' decision.

Mabuza refuted allegations of poor governance, saying: "HCI is not a shareholder. Ithuba has got a board with qualified CAs, competent representatives, and they have a different opinion.

"The real reason should be why is HCI is purporting to act on behalf of shareholders, what is the real interest?"

HCI's matter will appear before the high court on Tuesday.

The company is seeking an order to
interdict a management fee payment from Ithuba to Zamani or have it reduced to 3% from 4.67%.

Shaik said the model Ithuba used when it bid and won the lotto contract provided for staffing costs and the fees Zamani was meant to earn.

As per the model, Ithuba was meant to pay Zamani 2.5% of the total revenue from ticket sales in the first year and 3% from the second year. But Ithuba has been paying Zamani 4.67%.

"So when you are charging 1.67% in excess, you are helping yourself to a very substantial sum of money.

"The owner of Zamani Marketing is the CEO of Ithuba and they are also shareholders in Ithuba," Shaik said.

He added that as related party companies, Ithuba and Zamani had not followed proper procedure regarding the transactions they entered into with each other.

HCI also claims that Ithuba did not account properly for the payment of the management fees in its annual financial statements for 2016 and 2017, a claim Mabuza denies.

It wants to interdict Ithuba from paying management fees to Zamani.

However, Mabuza argued in court papers that documents were provided and an HCI representative was present at Ithuba board meetings where the fee hike was tabled.

The 2016 financial statements were also discussed and approved at a board meeting of Ithuba in June that year, with an HCI representative in attendance.

"There's no urgency in the matter," said Mabuza.

"Their application is in our view is to try and disrupt the lottery, which I think ... has got huge implications for South African lottery players and for good causes. There's no grounds whatsoever in what they are saying - both on urgency and on merit.

"Courts can find in their own way, and we have trust in the courts, and if they find in favour of HCI there's the implication that HCI will be taking over the lottery through the back door."

"We will have to review our position on whatever the court finds.

"The reality is we are not about to give up . we believe it's our right contractually to pay them off ... We will take it to the highest court if necessary."