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Posted 2022-05-09 15:17:13  
Kenilworth Racing Transparent with Stakeholders

The follow up response from the meeting at Kenilworth by Kenilworth Racing is a follows. 

The Board of Kenilworth Racing (the KR Board) and its sole shareholder the Thoroughbred Horseracing Trust (the Trust) report that they held a stakeholder engagement meeting at Kenilworth Racecourse on Thursday, 5 May.

We address this letter to stakeholders in an effort to clear up some uncertainty which may exist since the engagement and to make clear the Board’s and the Trust’s position in relation to some of the issues discussed at the stakeholder engagement.

The stakeholder engagement was an opportunity (and intended) for:

The KR Board to present an update on Kenilworth Racing (KR) to stakeholders which included sharing financial information (such as details of the extent of KR’s debt), as well key events that have transpired since Phumelela Gaming and Leisure (PGL), the previous Managing Partner of KR, went into Business Rescue;
The KR Board to communicate its consensus belief that KR is not viable or sustainable in isolation, and that we believe a sale of all, or part of KR’s assets (most likely to an existing Operator) is necessary to ensure the continuance and long-term sustainability of horse racing in the Western Cape;
The KR Board to communicate that a partner or benefactor must be found given that no funds exist to drive any turnaround strategy;
The Trust to communicate its alignment with the KR Board, and outline the process to be followed for discussing any potential transaction(s), conditions of sale and ultimately enter into any negotiation for the sale of some or all of KR’s assets (as may be required in the best interests of sustaining horse racing in the Western Cape going forward);
The Trust to communicate that it (the Trust), in its capacity as the sole shareholder in KR (i.e., because it owns 100% of the issued share capital in KR), is responsible for steering, negotiating, and concluding a transaction (for the disposal of assets) with any potential suitor;
The KR Board to reiterate that, during this process, the KR Board will remain responsible for the operational requirements of KR and are committed to all their responsibilities and duties;
The KR Board to communicate that it will assist the Trust where required in the transaction process referred to above, but it is the Trust (as shareholder) that will ultimately be required to sanction the terms of such a transaction with a potential suitor;
To communicate that, to this end, the Trust has mandated Mark Currie, Pieter Graaff and Kevin Somerville to consider and evaluate potential suitors and proposals, and revert to the other Trustees (and, to the extent required, the Board of KR) with a proposal for approval. In addition, the Trust has agreed to appoint an independent transaction advisor(s) to assist with, and advise on the details of any such transaction;
A discussion of some of the parameters by which any proposals will be measured, i.e., what is important to stakeholders of Western Cape racing in terms of choosing a partner and negotiating a transaction that remains true to the objective of the Trust in ensuring the sustainability of horse racing in South Africa;
To confirm that 4Racing has formally expressed an interest in a transaction and would like to engage with the Trust accordingly; and
To confirm and make clear that the Trust invites any and all other expressions of interest from any and all other interested parties and that all such expressions of interest will be evaluated on their merits.
Current Financial Reality
PGL went into Business Rescue in 2020, and the immediate direct implications for KR included:

The appointment of a Business Rescue Practitioner (BRP), who exercised his power to cancel the stakes agreement as an “onerous agreement”, thus removing the protection KR enjoyed in terms of the “Stakes Pot” covering losses, (i.e., The Stakes Equalization Agreement);
Limited support to KR by the BRP and PGL through the Management Agreement resulting in certain functions being adopted locally by KR where possible / prioritized; and

A dispute around the ownership of PGI and an immediate impact on revenue and cashflow emanating from PGI.
At the same time, there was the nationwide Covid-19 lockdown with a devastating (and continuing impact) on the full value chain with a particular impact on revenue for KR.

 

How did KR survive:

By means of a R30m loan facility that was underwritten by Rand Merchant Bank (RMB) and secured by a R42m surety package provided by Mary Oppenheimer and Daughters (MOD) in 2020. This (security package) was provided in good faith without the security that had been requested being implemented prior to the time of drawdown. The additional R12m in security was requested by RMB to cover a RMB security shortfall of R12m on the KR overdraft of R50m (secured by a 2nd Continuing Covering Mortgage Bond (Bond) of R38m on the Milnerton Property).
PGL continued certain trade payments with KR because of the existence of the Sustainability Agreement and the impact thereof on the Stakes Agreement pre the business rescue date (which differed to the working arrangement between PGL and Gold Circle (GC));
A further R13.5m loan was required in February 2022 to fund a shortfall relating to poor trading conditions during the Cape Summer Season caused largely by the impact of Covid-19 restrictions (exacerbated by the discovery of the Omicron variant) – this loan was provided to KR by 4Racing upfront and without the security requested being implemented prior to the time of drawdown; and
Support from the Racing Owners Association (ROA), particularly through the rebates to owners and topping up of stakes in 2020 / 2021.
It is important to reiterate that prior to business rescue, the KR Board was managing a going concern protected by the Sustainability Agreement and supported by a management contract with PGL. Management of the business, including betting and other functions, were outsourced to PGL.

However, once business rescue commenced, and these agreements fell away, KR was left to go at it alone and had to, amongst other things, carry all shortfalls / losses, with no access to cash flow funding outside of MOD (and essentially try and find a solution for a loss-making business).

Furthermore, the funds from PGL dividends previously received by the Trust to potentially support KR dried up pre business rescue with PGL not declaring dividends.

This was almost immediately followed by the lockdown due to Covid and an almost instant drying up of revenue to KR (and the industry at large). That stakes were paid at a disproportionate level to revenue, is testament to supporting bodies like the ROA (who thankfully had funds available) and to the difficult cost cutting measures taken by the KR Board to keep the business afloat.

KR would be a healthy business if it did not have to pay stakes and relied on betting only. But that is not the function of an Operator. If the KR Board took the view of stakes being the balancing factor, stakes would have reduced dramatically to close the gap to profitability but resulting in what would surely have been a mass migration of stakeholders to other racing provinces.

PGI settlement and possible further MOD support
In terms of the PGI settlement (resulting from the settlement of a dispute between Operators and PGL), KR is entitled to an amount of R25m, to be paid by PGL. PGL did, however, previously provide surety to RMB in an amount of R50m at the time of demerger in 2014 by means of a first Bond registered over the Milnerton property as security.

As such, PGL was requested to hold R50m in cash by RMB and consequently, PGL can only pay KR the PGI settlement (of R25m) when RMB releases PGL from the surety.

In order for RMB to release all Bonds over the KR properties, a guarantee for all KR’s debt of R80m to RMB would need to be implemented. MOD has already provided a R42m guarantee on this facility in 2020 and have offered their support to KR to increase this guarantee to R80m.

If this were agreed, the following could be possible:
This would allow RMB to relieve PGL and KR of the Bond over Milnerton, meaning that the R25m PGI settlement could then flow to KR;
The PGL Business rescue process would be a step closer to being concluded resulting in a final dividend being declared of which a significant portion would be paid to the Trust; and
Critically, it will relieve KR of the pressure to repay the RMB facility until December 2023, allowing time for a fair and reasonable process to be followed in concluding a transaction with a potential suitor to secure a sustainable future for KR with a suitable partner.
All support provided by MOD to date is not conditional on a transaction being concluded with 4Racing. However, should KR conclude a transaction with a party other than 4Racing, MOD will reasonably be required to be released from the R80m guarantee.


Kenilworth Racecourse

Kenilworth Properties
The KR owned properties include Kenilworth Racecourse, Milnerton and Philippi training centres, sections (approximately 4 hectares) of Durbanville Racecourse, and a long-term lease on the balance of the Durbanville Racecourse with the City of Cape Town (with a revisionary clause).

Properties have long been touted as core to any strategies relating to the sustainability of racing in the Western Cape. While KR has always been considered asset (property) rich, the reality is that none of these properties can be disposed of without significant investment elsewhere given the responsibility of KR to continue racing.

The KR Board signed a Memorandum of Understanding (MOU) with a property company in 2021 to investigate consolidation strategies, including a proposal to build a training facility at Kenilworth Racecourse which comes with its own environmentally sensitive matters.

Realistically, the building of a new training facility will not be possible without a significant injection of capital, irrespective of whether such a strategy would allow for a sale of Milnerton, for instance.

Next steps
We have noted the stakeholder complaints regarding day-to-day operations and the KR Board assure stakeholders that actions will accordingly be taken to ensure that an optimal customer experience is maintained. Stakes will continue at current levels out- of-season with a view to implementing a similar approach to in-season for the year ahead.

We reiterate that, during this process, the KR Board will remain responsible for the operational requirements of KR and are committed to their responsibilities.

Given that a transaction is likely to involve the issuing of shares and/or a sale of shares and/or a disposal of assets which will require, inter alia, shareholder approval, and since the Trust is the sole shareholder in KR, the Trust has resolved to mandate Mark Currie, Pieter Graaff and Kevin Somerville to consider and evaluate any proposals and potential suitors, and to revert to the Trust and the KR Board with a proposal for consideration and approval.

The appointment of independent transactional advisor(s) to support the process is also in progress.

The KR Board has received an expression of interest from 4Racing which will follow the process outlined by the Trust to engage with a potential suitor. However, as mentioned, the Trust and KR Board invite all other potential suitors to engage with the nominated Trustees to explore any and all opportunities. Every opportunity will be considered on its merits.

 

Some of the critical aspects for consideration in exploring a proposed transaction will include:
Further engagement and finalization of extending the RMB lending facility to 31 December 2023 to allow a reasonable time to explore all available options;
Appointment of independent transactional advisor(s);
Engaging with potential suitors to find a suitable partner with a proposal that includes a sustainable transaction that safeguards KR and its properties for the perpetual use for horse racing;
Strong focus on diversified revenue streams;
Client centricity aimed at meeting the needs of punters, owners, racegoers, trainers, jockeys, grooms, tv viewers, etc.;
Effective marketing strategies, broadening and retaining customer bases;
Transparency and regular communication to stakeholders; and
Strong focus on digital transformation.
The above list is of course not exhaustive, and we invite further comments and input from stakeholders.

An important point to clarify is the nomination process of directors to the KR Board.

Any stakeholders who are interested in becoming a KR Director need to go through the probity process of the Western Cape Gambling and Racing Board (WGCRB) and are welcome to send through their CV’s and details to the Trust or the ROA who have the authority to approve the appointment of directors.

In summary, we are fully aware of the urgency to find the best solution for KR and our commitment is to keep all stakeholders informed through the process of finding a sustainable solution for the future of KR.

From the KR Board and Thoroughbred Horse Racing 

 

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