The small company's fortunes epitomise the boom and bust nature facing some smaller companies on the JSE's AltX market since the recession hit in late 2007.
Though Racec has been in business since 1956, it listed in September 2007 at R1.46/share with big plans to exploit what it believed would be a surge in infrastructure spending. But that month, the US subprime crisis erupted, which developed into a full-scale financial crisis. As money dried up, South Africa's grand infrastructure plan flopped and Racec's shareholders, led by 25% empowerment company Solethu, took a pounding.
In the last three months alone, the stock fell an alarming 74% as questions about its survival mounted.
But last week, Racec told shareholders it had a buyout offer from Grindrod. More than 53% of the eligible shareholders agreed to support it.
Racec's chief executive Gary Harrod, a 3.2% shareholder, is one of the investors who had given an irrevocable undertaking to support the deal.
The other shareholders have little option but to do the same. The small company, worth R32-million, owed R40-million to a consortium of funders led by Grindrod Bank. It could not pay the interest on the loan.
The 20c a share offer might seem shy of Racec's fair value in light of the fact that its shares were trading at five times that in January, at 103c. Depending on how the negotiations with Grindrod go, Racec could either be restored to its former glory, or dragged close to its demise.
A deal is far from certain at this stage, though Racec has agreed to make certain "undertakings" to Grindrod about the business but would not reveal what these assurances were.
Jannie Grobbelaar, Grindrod Bank's head of corporate finance, said the company had had some major cash-flow problem and was currently embroiled in a lengthy arbitration case. "If the offer does not come through, that would be a major concern because we'd have the right to put the company into default," added Grobbelaar.
Racec is sprinting through cash, however. The banks gave it a R40m loan on 12 July 12 and since then, Racec has already used R39million of that money.
If the offer succeeds, it will be allowed to restructure out of the public glare as Racec will be delisted from the JSE.
One reason why the company fell on such hard times was a nasty glitch in Sierra Leone, where an US$11m deal to upgrade 71km of its rail network turned sour. Racec entered into arbitration proceedings, but it revealed last week that this would only be finalised by October.
Racec said last week that it needed between R3m and R5m more a month to finance its working capital needs - pressure that forced it to seek more cash from Grindrod Bank.
Source: Business Times via I-Net Bridge
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