SDD safe but Siltek subsidiaries may go

Johannesburg, 05 Oct 2001

Analysts and industry watchers agree that Siltek Distribution Dynamics (SDD), the largest IT distributor in the country, is probably safe from both liquidation and sale, despite the capital restructuring process underway at its parent company.

Siltek announced a delay in issuing its financial statements earlier this week after closing down its operations in Australia in July. It also warned of substantial losses due in part to SDD.

SDD has long been troubled by cash-flow problems and small margins. The share price of the Siltek Group plunged in July this year after rumours that SDD could be liquidated. At the time, Siltek denied the rumours but admitted it had considered selling the company.

But analysts say SDD, which currently contributes around 60% of total Siltek revenues, will likely be kept going with a cash injection from the sale of other assets. On top of their list is Siltek Telecoms, a profitable business seen as self-contained enough to be spun out of the group. Other contenders are Siltek Healthcare Solutions, Chemetrix, a supplier to the chemical industry, and SDD Namibia. A 51% stake in SDD Botswana has already been sold.

Those familiar with the Siltek business say it is likely to sell these niche players in search of cash and to focus its energies on SDD.

Siltek is in a closed period before the release of its results and would not comment on the speculation, but CEO Dave Lello says efforts are underway to improve efficiency at SDD.

"The terms with some vendors are not an issue when we fly in our stock, but it is if we ship it via sea," he says. "We are looking at those terms and the vendors are coming to the party."

A new financial system is also being implemented to allow the impact of relatively small changes, such as a modification in the method of shipping for a specific product, to be projected forward.

<B>Siltek timeline:</B>

1998 - Kunene Technology acquires a 20% stake in Siltek from Anglovaal.
1999 - During the course of the year Siltek acquires Workgroup & Crew, making Datatec a major shareholder, and also buys OTG and increases stakes in several other companies, including acquisitions in Australia. The restructure is driven by Kunene, which wants to see R150 million in available cash put to use.
In February 1999 MD Thinus Grobbelaar resigns to lead a buy-out of some divisions. His bid is later rejected and Tony Leng is seconded from Kunene to act as deputy chairman.
In November 1999 a new accounting system is implemented at SDD, and is later blamed for stock losses.

March 2000 - Kunene Software and Services is bought out of the group and Tony Leng resigns.
July 2000 - Kunene announces it will unbundle its Siltek stake as the benefits of the restructuring had not been realised.
August 2000 - Reports record operating profit for the year to June 2000.
November 2000 - Profit warning. "Remedial steps" taken.

February 2001 - Share price drops 34% after operating loss.
March 2001 - SDD accounting system put in place November 1999 abandoned, costs written off.
July 2001 - Australian operation closed.
Late July 2001 - Rumours that SDD is due for liquidation cause a run on the share. The rumours are denied, although it is admitted that selling SDD had been considered.
August 2001 - Warns of hefty loss despite improved margins.

However, the problems that face SDD are daunting. Lello says the remoteness of SA is a major factor, and not only because of shipping time. "In Europe, distributors can keep about three or four days of emergency stock, we have to keep 15 or 20 days."

Similarly, he says, Siltek has to front 45 days or more worth of cash for SDD, while European distributors can get away with 15 to 20 days at a third of the SA interest rate.

"The cost of the money we are putting into distribution is about six times that of a similar business in Europe and that money has to come from somewhere.

"The question everybody is asking is if Siltek in its current state has the money to finance a business that is so cash-negative," Lello admits.

A former Siltek employee says there are also factors such as insurance companies which put a limit on the value of any one shipment, causing a logistical nightmare for long-range shipping and increasing costs.

"They do their job tremendously well," the employee says. "Nobody could do it better and the entire channel is dependent on them and yet nobody is willing to give them any margin or even give them a break."