Aventura Turnaround Strategy: briefing

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Public Enterprises

07 November 2001
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PUBLIC ENTERPRISES PORTFOLIO COMMITTEE

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
7 November 2001
AVENTURA TURNAROUND STRATEGY: BRIEFING

Chairperson: Mr. Martins (ANC)

Documents Distributed:
Briefing Document: Disposal of Aventura Resorts as a Business Enterprise (see Appendix)

SUMMARY
The Protea Group is currently in the third year of a five-year agreement to manage Aventura. Despite the turnaround efforts of the Protea Group, these have not eliminated the need for ongoing government funding. The Government has intervened to the tune of R37 million to bailout Aventura for 2001. Given these realities, the strategy has shifted from disposing of Aventura in toto to selling assets piecemeal in order to raise capital and minimize negative cash flow. The initial priority is the disposal of the Aldam, Bloemfontein, and Christiana resorts which are the most draining.

MINUTES
The Chair opened the meeting by noting that in the absence of the invited representative of Aventura, representatives of the Department of Public Enterprises would present the briefing on this resort operator.

Mr Lucky Montana, the Department's Director of Parliamentary Services, noted that, contrary to popular belief, the Department is not only looking at privatization of large parastatals like Telkom, but is also focusing on smaller entitities like Aventura.

Ms Msomi, the Department's Director for Corporate Governance, presented the briefing text. She highlighted and elaborated upon several issues. Most importantly, she stated "emphatically" that Aventura's operations are not profitable, largely due to the drain created by the Aldam, Bloemfontein, and Christiana resorts. The Department has estimated that it would take R109 million to refurbish Aventura's properties. The government is not prepared to supply these funds, and would also like to avoid the infusion of as much as another R100 million, which may be necessary over the course of 2002 to maintain and upgrade operations in order to keep the entire business afloat. The Protea Group is currently in the third year of managing Aventura pursuant to a five year agreement. Despite the turnaround efforts of the Protea Group, these have not eliminated the need for ongoing government funding on an interim basis, even without refurbishment. The situation, both operationally and in terms of saleability of Aventura's assets, has not been helped by the deteriorating world tourism in the wake of the 11 September events.

Given these realities, the strategy has shifted from disposing of Aventura in toto to selling assets piecemeal in order to raise capital and minimize negative cash flow. The initial priority is the disposal of the Aldam, Bloemfontein, and Christiana resorts.

Ms Msomi noted that the Finance Minister has granted Aventura a reprieve from the "recapitalisation requirements" of the Public Finance Management Act (PFMA), which is essential to make Aventura partly or wholly saleable. In conclusion, she stated that a task team will be formed to consider the modalities of implementing the government's decision to dispose of Aventura and/or its assets on an expedited basis, with the Protea agreement to be re-evaluated periodically over its remaining two year term.

Discussion
In response to a comment from Mr. Maphalala (ANC) that undervaluation of parastatal assets seems to be common, Mr Montana indicated that action has now been taken to create departmental capacity to make independent, internal valuations, thus minimizing reliance on share valuation and outside analysts.

Mr Mohlala (ANC) noted Ms Msomi's indication that the government had already issued "financial undertakings" of R37 million for Aventura in 2001, and asked how this compares to government "interventions" elsewhere in the world.

Ms Msomi replied that this action was similar to public/private initiatives in other countries, for example, the US government bailout of the airlines in the wake of 11 September). It is the government's policy to intervene when necessary to create conditions for eventual disposal of its assets on favorable terms. This policy was vindicated by the experience with the Transnet pension fund, and applies to Aventura.

Concerning the R37 million undertakings specifically, Ms Msomi noted that R30 million (R25 million to ABSA, R5 million to Standard Bank) was to provide Aventura with an operating credit facility. The undertaking was authorized by the Finance Minister in accordance without the PFMA, but was already inadequate at the time it was given, as another R7 million was needed to cover Aventura's debt. Concerning the future, she indicated that it was "not likely" that further undertakings would be required IF assets are disposed of in 2002 as hoped. However she acknowledged that if the three named "draining resort units" are not sold, more money will be needed. She noted that the Finance Minister has indicated that requests for further funds will not be favorably received.

Mr. Maphalala (ANC) observed that it is obvious that serious problems remain, and asked what would happen if the three "draining units" prove unsaleable, and whether other plans had been made to dispose of them and "stop the bleeding".

Ms Msomi replied that the Department is sensitive to these issues, and that the task team may assist in formulating further plans if these units are not sold in the shorter term. Among the options which might then be considered are liquidation of Aventura, or providing the assets on a "give away" basis in the furtherance of other government programs such as local development. However, taking these steps would be a "last resort" as liquidation would have other implications, and giving the assets away would not address ongoing financial liabilities.

The Chair then thanked the presenters, and adjourned the meeting.

Appendix:
PRESENTATION TO THE PORTFOLIO COMMITTEE : O7 NOVEMBER 2001
THE DISPOSAL OF AVENTURA RESORTS AS A BUSINESS ENTERPRISE

Background
·            Aventura has been in financial difficulties from 1996 to 2001.
·            Government, as the shareholder in Aventura, resolved to dispose the whole of Aventura as a business enterprise with the view that Government' s exposure through Aventura was to be curtailed when this asset was sold.
·           The preferred bidder was Kopano Ke Matia Investments Company (Pty) Limited, an empowerment company.
·           The potential purchaser, Kopano Ke Matla, was unable to raise the necessary funding required for the transaction, and the deal fell through.
·           The offer that had been received from Kopano Ke Matla was R94m and was structured to account for certain liabilities being transferred to the empowerment company at the time of the acquisition.
·           The net cash component was R30 m and this was to be utilized to settle existing creditors e.g financial institutions, leaving nothing for the shareholder.

Protea's Turn-Around Strategy
·           In 1999 and as a result of the deal falling through between Government and Kopano Ke Matla, Government resolved to appoint a management company to turn Aventura around for a period of five years and thereafter to dispose Aventura when it was viable to dispose same.
·           It was always Government's intention to dispose Aventura as a business enterprise.
·           Protea is now on the third year of its term of management of Aventura.
·           Protea embarked on a turn around strategy on inter alia:
·           Lead Aventura to profitability and self-sustenance
·           The Club Prive which constituted a major liability. Club Prive was converted into a Holiday Club Scheme. The benefits associated with the conversion.
·           Cost-reduction and cash flow management
·            Improved marketing
·            Improved insurance management

Challenges to the Turn Around Strategies
·            Aventura an asset required significant refurbishment. Today the refurbishment costs are estimated at R109 m.
·           Assets were not properly valued and documented. A valuation for insurance purposes has since been undertaken.
·           Club Prive liabilities
·           Interest on loan funding was too high
·           Staff morale was very low.
·           In 2001, Aventura was in a state of serious financial difficulties due to factors mentioned above as well a harsh business realities of competition, harsh climatic conditions and changes in legislation regulating the financial management of State Owned Enterprises.
·            Government remedied this situation by issuing letters of comfort to Auditors in order to release financial statements.
·            Government also issued letters of undertaking to Aventura totaling to R30m

Short-term resolution of Aventura's financial management crisis
·           The Board in conjunction with Government resolved to dispose the three business units, which could not be turned around and were becoming a cash drain to the profitable ones.
·           The three resorts are Aldam, Bloemfontein and Christiana. Government agreed to grant Aventura a reprieve to recapitalize the proceeds of the sale with a view to prepare for the long-term disposal.
·           This was a major break through for Aventura since without this reprieve Aventura would have had to be liquidated.
·           The short-term disposal process of the three non-viable business units is currently under way.

Long -Term disposal strategy
·           It had always been government's intention to dispose Aventura in an environment that is conducive to disposal.
·           Whilst Aventura financial state has not significantly improved, it has stabilised.
·           With an additional letter of undertaking for R7 m which has recently been granted to Aventura, and the recapitalization reprieve the environment will be conducive to the disposal of Aventura.
·           The Task Team to consider the modalities of disposing Aventura will be made up of the members of the Department, members of the Board of Aventura as well as external consultants to provide expert advice as and when necessary.
·           The disposal process will specifically be undertaken with a view to benefit Black Economic Empowerment and Small Medium and Micro Enterprises, but most importantly the communities in and around the resorts of Aventura.
·           This was part of the Cabinet granted in August 2001.
·           The evaluation process of the Aventura assets is currently under way with a view of compiling a prospectus.
·           The Aventura resorts will be disposed in single and or multiple units to allow for greater participation of wider groups of interested parties.
·           This will also allow the disposal of units as and when all the necessary procedures have been completed with regard to that individual unit.
·           Those business units subject to land claims will not hold back the sale of units which are unencumbered.
·           The disposal plan is anticipated to be completed around 2002.
·           The detailed strategy will be for the task-team to compile and implement.

Conclusion
·            Aventura's financial difficulties have caused Government to rethink its plan for a five-year turn- around strategy and has decided to dispose Aventura sooner.
·           Protea' s contract will be assessed from time to time as and when the disposal occurs in terms of the remaining responsibilities and the attendant obligations.
·           In the short-term there will be a disposal of the three business units and a recapitalization of the proceeds in preparation for the long-term disposal strategy.
·           The Task Team will attend to the necessary in disposing Aventura in accordance with the Cabinet decision.

            Performance Monitoring and Benchmarking Unit, Department of Public Enterprises



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