Transaction Capital CEO David Hurwitz is on a media and investor schmooze mission to repair damaged credibility, with the backing of some formidable shareholders who have upped their stakes in the past four trading days — notably Chris Seabrooke of Sabvest Capital and a former chair, and the second-largest shareholder, Coronation. This was after the loss of almost 70% of its market value the week before.
Judging by the share price reaction — a gain of 13% for the week but still 53% down on the R28.13 price the day before Hurwitz delivered that calamitous trading update — the market remains unconvinced.
I first questioned whether Transaction Capital’s valuation had got ahead of itself in January 2022, after some interesting directors’ dealings caught my eye. Shrewd capital allocator Seabrooke reduced his stake by almost half in late 2021 and early 2022.
Given the events of the past few weeks I asked Seabrooke why he didn’t offload his entire stake in the business at the time. Sabvest had retained half its holding on the assessment at the time that WeBuyCars and Nutun are high-quality growth businesses, the taxi industry should recover and other new initiatives in the mobile space should augment that division.
“We were clearly wrong regarding [SA] Taxi, but the remodelling now in process in that division is proactive and seems appropriate,” Seabrooke said.
Much of the market’s attention has been focused on the dealings of Hurwitz in December and the questions this raises about how much he knew, and when, about SA Taxi’s structural problems.
Margin call
After speaking to Hurwitz last week, it was clear he understands how bad this looks to the market from the outside, but insists it was all above board. To prove how bullish he was in November, Hurwitz said he had some share options that vested that month, “and normally what executives do when they have share options vesting, they either sell the shares and convert [them] into cash or they sell enough shares to pay the tax because it is a taxable event”. But Hurwitz chose to take money out of his own pocket and pay the tax and hold all the shares.
“I was in the mindset of keeping as many Transaction Capital shares as I could. But quite frankly, I did not anticipate this reduction in share price.” That triggered the margin call.
While I have the highest regard for Hurwitz, this does raise questions about the incentives when directors take leveraged positions in their own shares.
Many US companies have banned executives from hedging or leveraging their own stock. When the bank is on the line and they are being margin-called, how can a CEO think clearly (and in the best interests of the company)?
I’m all for directors being able to trade and provide market signals, but executives hedging or leveraging their own shares appears to be a misalignment of incentives. Seabrooke disagrees. As he sees it, the option to borrow to be more invested is a positive side of the coin. “If you fail, well there it is.”
Damaged reduced
That’s certainly the hope. But when it goes wrong, well, was Hurwitz being so bullish in November because he didn’t want to be margin called? A gamble that did not pay off?
The damage to Transaction Capital’s share price could have been substantially reduced if it had fed the information to the market on SA Taxi’s structural problems in November.
Seabrooke believes the share sale is a red herring, and on the issue of whether Hurwitz should have known the possible outcomes at SA Taxi earlier (like late 2022 or early 2023), “yes, almost certainly. But he and management say they only concluded on this situation late-February. Board advised early-March.”
This last comment from Seabrook struck me as it underlines how fragile trust is at the moment. And how does Transaction Capital fund its new GoMO book with confidence in underwriting clearly at a low?
Hurwitz says he is in discussions with an unnamed bank to fund the GoMo book by providing “credit guardrails”, in effect unsecured loans. The bank pays everything completely and bears all capital expenses and credit risk, while Transaction Capital handles the book on its behalf and receives a fee for originating the loan.
The opportunity in offering loans to clients who wish to buy older cars for which banks would not give secured credit due to collateral value and repossession worries is obvious given the expertise in WeBuyCars.
I suspect the publicity shtick is part of an attempt to get the share price back to a point where the capital raise option is less destructive. But important questions remain. The Santaco transaction surely has a negative equity component, while the amount guaranteed by Transaction Capital is debatable.
If Santaco gets a lousy deal, can it just make things complicated by having the industry play hardball with their loans? Some analysts I’m chatting to are having a look at the provisions and thinking SA Taxi might still be a bit light. As you can see, there are many unknowns.
Most fund managers see it as too difficult. But if I’d back anyone to have the chutzpah to pull it off, it is Hurwitz.
• Avery, a financial journalist and broadcaster, produces BDTV’s ‘Business Watch’. Contact him at badger@businesslive.co.za.
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