Unlucky Vox

Vox CEO Doug Reed has also been at pains to convince shareholders that the 50% fall in the share price in just a week had nothing to do with the operating fundamentals of the business. He says the business is not only healthy, but the group has just concluded a record month.

The share`s slide began when it emerged that brokerage Dealstream was in trouble. The JSE issued a press release on 22 September warning against trading in contracts for difference (CFDs), as these are not regulated by the securities exchange.

The JSE disclosed that Dealstream had failed to meet its obligations with regard to transactions on its proprietary account on the JSE`s financial derivatives division and, as a result, all its proprietary positions would be transferred to its clearing member, Rand Merchant Bank.

CFDs are unlisted derivative products that allow for high-risk/high-reward trading on stocks without actual delivery of that stock. Parties to the contract agree that the seller will pay the buyer the difference between the current value of a security and the value at contract time. Essentially, investors trade on the stock price, without owning the underlying share.

Initially, dealers said there were rumours on trading floors that Dealstream`s collapse was as a result of risky trading in Vox and uranium miner Simmer & Jack. However, analysts have dismissed the Vox connection, pointing out that the Vox share had been stable for months. Vox has also said that its directors` accounts with Dealstream had positive cash balances and the directors were not in default of their margin requirements.

Vox disclosed the following day that the broker held R30 million of the telecoms group`s cash, "the recoverability of which the company believes has now been materially prejudiced". It explained on Friday, 26 September, that it had used Dealstream to buy treasury shares in the open market.

Analyst Irnest Kaplan, MD of Kaplan Equity Investments, says R30 million is not a significant amount of money, given the market capitalisation of Vox before the share fell. At R2.20 per share - closing price before Dealstream`s collapse came to light - Vox had a market cap of about R2.6 billion.

Vox has also calculated the impact of the events and told the market that the maximum potential after-tax loss in relation to Dealstream is less than 5c a share.

So what hammered the Vox share price?

At the time of writing, much is still conjecture, with investors waiting for some clarity. But part of the reason, according to Kaplan, is that investors and other stakeholders did not know at the beginning what was happening in the wake of the Dealstream collapse. "People are nervous because they are not sure what this means for shareholders," he says. At the same time, there was already nervousness in the market because of the global financial crisis, which exacerbated the matter.

However, there has also been speculation that Vox shares have been dumped onto the market, causing the price to fall. Rand Merchant Bank said in its statement relating to Dealstream that in terms of the broker`s default and JSE regulations, RMB had taken over Dealstream`s portfolio of diversified local shares at a market value of about R1 billion. Unconfirmed talk on trading floors is that RMB has subsequently been offloading Vox shares.

Vox itself has said that its board believes that the share price decline is a function of the close-out of derivative positions after the Dealstream collapse and has nothing to do with the business, which is sound. Another analyst agrees. He says Vox appears to be a healthy company caught up in "a string of events not directly of its own making. It`s unfortunate."

However, on the upside, Kaplan says that the share might turn up again, which could present a buying opportunity.