Grindrod Holdings on Thursday declared its “firm intention” to acquire the entire share capital of the AltX-listed Racec group, other than the 25.1% held by Solethu Civils.

Grindrod Holdings is a wholly owned subsidiary of Grindrod Freight Services (GFS), which is, in turn, a wholly owned subsidiary of JSE-listed transport and logistics firm Grindrod.

Racec is an engineering infrastructure business.

In a joint statement, Racec and Grindrod Holdings said the last few months had been challenging for Racec for a number of reasons, including protracted contractual disputes associated with a final contract close-out in Sierra Leone, as well as delays in “significant contract awards”, which had resulted in “severe cash flow pressure”.

Racec had also been formally notified of the breach of its debt service cover ratio covenant by Absa Bank and Grindrod Bank, the provider of its R45-million short-term mezzanine funding facility.

The groups noted that the arbitration process pertaining to the Sierra Leone contract disputes had started, but that the process was only likely to be concluded in October, which was after the repayment date of the mezzanine facility.

In addition, Racec required between R3-million and R5-million in working capital funding for its business and operations a month, with limited resources to fund these cash outflows in the near future.

As a result, Racec’s financial position was “extremely precarious”, and failing the implementation of the share acquisition, the options available to the engineering group would “be extremely limited” and would, in all probability, “result in significant erosion of value and the inability to fund working capital requirements and settle debt”.

GFS had since 2005 been engaged in the African rail sector and had been expanding its rail service offerings over the last four years. GFS believed the acquisition of Racec, through Grindrod Holdings, would complement its current service offering, as well as present synergies in its track maintenance and signalling contracts, resulting “in an opportunity for GFS to capture more of the rail value chain and to grow its offering to customers”.

In order to preserve the Racec business during its funding crisis, Grindrod Bank, a member of the Grindrod Group, has provided the troubled company with the mezzanine facility, of which R36.7-million of the R40-million available for draw down had been drawn down by Racec to date.

The mezzanine facility’s balance as at July 12 was R39.2-million.

Grindrod Bank had indicated its intention to support Racec in the short-term. However, such support was subject to the successful conclusion of the proposed transaction.

The joint statement by Grindrod and Racec on Thursday stated that Racec was in need of further funding, and that GFS was of the view that Racec should delist from the JSE, in order “to be appropriately capitalised and restructured in an unlisted environment”.

Grindrod’s acquisition of Racec was subject to a number of conditions, such as the Racec board making a recommendation to the company’s shareholders that they vote in favour of the proposed acquisition.