WHAT’S DRIVING A SERIAL RISK TAKER?
By: Marc Hasenfuss
CHRISTO WIESE has made shareholders at Shop-rite a lot
of money over the past two decades. Yet the man is taking
a lot of flak for giving the thumbs-up to a private equity
deal that has the potential to make shareholders even more
money in the years ahead.
For a business personality at the centre of a storm in South
Africa's asset management industry, the retail tycoon and
investment legend seems determined to keep a level head.
He knows there will be difficult and frustrating days
following the proposed (and increasingly controversial)
restructuring of Shoprite Holdings, the supermarket giant
controlled by Wiese - a transaction that involves a R13,2bn
buyout spearheaded by private equity specialist Brait.
However, he's somewhat perplexed about the carping on
the fairness of the buyout offer and hints at legal action
from a variety of asset managers. Is Wiese - hardly known
for his saintly ways in SA's rough and tumble corporate
sector - in this instance more sinned against than sinning?
The deal will ultimately see Shoprite delisted from the JSE.
Though minority shareholders (those that held shares at the
end of trading on Friday, 24 November) have the option to
remain invested in Shop-rite through a new vehicle (see
accompanying report), most asset managers - who manage
third party funds - are precluded by their own regulations
from holding shares in unlisted companies.
Understandably, the crap has hit the air-conditioner (see
report on asset manager reaction), with asset managers
doing most of the hurling.
The deal, which looks likely to achieve the necessary
support (50% plus one share) thanks to Wiese voting his
special shares in favour of the transaction, has been labelled
"abusive", "mean-spirited" and "potentially damaging to
SA's reputation as an investment destination".
While coming under severe criticism from some quarters of
the asset management community for his perceived part in
the Shoprite buyout, Wiese isn't keen to retaliate against his
detractors. But he does point out: "I don't run my business
life with the objective of making enemies or making people
cross. You don't survive 40 years in business by doing
that..."
One of the strongest criticisms levelled against the Shoprite
transaction is that such a private equity deal removes an
opportunity for people to invest in a company. That
criticism pre-supposes that there's an obligation for
companies to list or remain listed. Obviously there isn't,
and changing market conditions (whether unbundling or
corporate consolidation is in fashion at a given time) really
determine what's good for a particular company.
Wiese tells Finweek: "Personally, I don't carry a torch for
delisting or listing... both have their place. And at certain
times there's an advantage to being listed and other times a
disadvantage."
The private equity trend is growing by leaps and bounds
worldwide. SA has been late on the scene, but certainly
private equity is a phenomenon that's here to stay.
Wiese admits that Shoprite had already been the subject of
discussions with a number of private equity players prior to
Brait's advances. "But in the end Brait was the only one to
put an offer on the table..."
"What you also need to realise is that we (Shoprite) were
approached by Brait. We never looked for a deal, but when
Brait made the offer, the board had the responsibility to
determine, with the help of independent advisers, whether
the offer was fair and reasonable and then to make a
recommendation to shareholders, who are the ones who
decide whether they want it or not."
Wiese argues that people need to understand the nature of a
private equity transaction. "There's nothing sinister or
mystical about Shoprite's private equity deal... essentially,
the business remains the same. But what changes is the
capital structure. Basically, you accept greater risk for
potentially greater reward."
The truth is that if minority shareholders think the Brait
deal is good for Shoprite, they have the option of staying on
board.
Those who opted to stay aboard Wiese's retail investment
company Pepkor when it delisted in a similar deal
involving Brait in 2003 are certainly not unhappy about
their decision. Suggestions are that Pepkor has increased
markedly in value since delisting.
Ironically, at the time of Pepkor's delisting Wiese advised
parties who were not participating in the unlisted vehicle to
use their proceeds to buy Shoprite shares. The shares were
then trading at 650c on the JSE.
Naturally, you have to sympathise with the asset managers'
predicament. Fund managers - unless they get special
dispensation - can't participate in the unlisted vehicle. But
you're tempted to say that being precluded from remaining
on board Shoprite is an asset manager's problem. Their
exclusion certainly isn't the fault of either Shoprite or Brait.
Outspoken shareholder activist Theo Botha thinks asset
managers haven't got a leg to stand on concerning the
Shoprite matter.
Botha says fund managers also knew about the special
control structure in place at Shoprite - which was set up
more than a decade ago, when the Pepgro (parent company
for Wiese's retail interests) structure was dismantled and
operating entities unbundled.
"Asset managers could have approached Wiese about that
contentious structure. Have the asset managers really
applied their minds for their investors? Do they bother to
attend AGMs?"
Botha argues that Wiese brought his part to the deal by
adding value at Shoprite over the years, whereas fund
managers may have neglected to apply principles of good
corporate governance to their investment. "By not taking
issue with the control structure, they effectively condoned
it. They had the power to protect the minorities."
Some market observers believe Wiese shouldn't be voting
on the transaction, which is effectively a related party
transaction, since he's both a seller and a buyer in the
proposed Brait deal.
Wiese admits: "I'm in a difficult position, being both
executive chairman and the largest shareholder in Shoprite;
discharging my fiduciary duties as a member of the board
but as a shareholder I'm fully entitled to consider the offer."
Of course, Wiese never hid or disguised the fact that he
owned special voting shares (that don't attract dividends).
What's the point of creating such shares if you can't vote
them?
A clinical observation would suggest that the effective 2
600c/share offer for Shoprite is fair. Shoprite listed in 1986
at 100c/share, which means the compounded annual return
over two decades (excluding dividends) averages out at a
rather useful 18%.
Wiese says: "Shoprite has done very well by its
shareholders... nobody can have a single qualm about that."
Over the short term the offer also looks compelling. In
November last year Shoprite shares were trading at around
1 600c on the JSE and in April this year (at the time of the
first cautionary) the shares were at 1 990c. Frankly, it's
difficult to come to any other conclusion that the Brait-led
proposal represents fundamentally a good offer for Shoprite
shareholders.
What Finweek finds really fascinating is that since April
and November this year, a staggering 40% of Shoprite's
issued shares have changed hands. That certainly suggests
some institutional/asset management churn. That not only
means that some professional parties were caught short, but
that a number of Johnny-Come-Lately opportunists may be
disappointed with the level of the buyout, as Shoprite's
shares enjoyed almost a 20% speculative uplift between
April and November.
In a research note, well-known retail analyst Syd Vianello
declares the deal fairly priced. However, he questions
whether there should be an "exit premium". He believes
investors need to be compensated for "giving up their right
to invest in Shoprite in perpetuity" within an environment
where their ability to invest in food-related shares is
already restricted to three shares (Pick 'n Pay and Spar).
Vianello is an astute analyst - but his inference that the
"right" to hold shares carries a premium is way off kilter.
While shares do present shareholders with an opportunity
to invest, there's certainly no right bestowed on
shareholders to hold scrip in perpetuity.
Surely it's understood that when an investor buys a share
that share carries operational risks and could be subject to
corporate action that may curtail investor involvement. In
any event, did shareholders pay for that "right" when they
bought Shoprite shares?
Under the circumstances - and knowing what transpired at
Pepkor (Wiese's other retail conglomerate bought out in a
private equity deal with Brait some years back) - it seems
that major investors may be hamming it up in order to push
for a higher buyout price at Shoprite.
Pepkor's initial buyout offer was increased from an initial 1
000c/share to 1 100c/share and finally 1 200c/share. In
hindsight, the increased offer at Pepkor was prudent,
knowing now that Pepkor has hit its straps thanks to
buoyant economic conditions that have boosted retail
business across the board.
However, at this stage it seems the chan-ces of an increased
buyout offer at Shoprite are remote. Still, attempts - via the
intended legal action by asset managers - may indeed
prejudice ordinary shareholders wanting to participate in
unlisted Shoprite's future fortunes. That's a consideration
that hasn't been widely debated.
What Wiese does take particular exception to are comments
last week by shareholder Coronation Fund Managers,
which suggested the conditions attached to the buyout
proposals would threaten SA's status as an international
investment destination.
Wiese counters: "That's hogwash. Foreign investors will
test the merits of an international investment destination by
asking whether parties act according to the rules. In this
transaction all the rules and regulations have been
followed."
Wiese also adds that if the Shoprite buyout proposals risk
driving away foreign investment "then why is the major
portion of R9,5bn of the R13,2bn buyout price expected to
be sourced from offshore investors?"
Ultimately, Wiese feels the private equity path is the
correct option for Shoprite at this time. "At my stage of life
(he's 65), such a private equity deal isn't that attractive,
especially considering that the payoff is usually about
seven to eight years' away.
"But I'm not the only guy in the game. There are 30- to 40year-olds in Shoprite who could benefit from this
transaction. This business runs on people and we have to
take their interests into account as well."
THE LEGEND LIVES ON…
By: Marc Hasenfuss
RETAIL TYCOON and serial risk-taker Christo Wiese
remains one of the key "movers and shakers" on the JSE even if his two biggest points of presence, Pepkor and
Shoprite, are gone and in the process of going.
Considering that only a handful of years ago Wiese still
held sway at an enlarged BoE banking and financial
services group (now tucked into Nedbank), the "boykie
from Upington" accounted for more than a sliver of the
JSE's total market capitalisation in the late Nineties.
While his presence on the JSE will diminish in terms of
market capitalisation if (or should we say "when"?) the
Shoprite buyout gets the green light, Wiese's achievements
will linger on for years to come. Apart from growing retail
chains Pep and Shoprite from a handful of small stores in
outlying areas into South African chain store powerhouses,
Wiese is also renowned as a brilliant dealmaker.
He took a fragile Boland Bank (scooped from under the
nose of Absa) and, through a series of mergers, took control
of BoE, which was then enlarged from a specialist boutique
into a fully-fledged banking group. The eventual outcome
was fairly tragic, with an ambitious BoE in essence being
rescued by Nedbank amid the small banking crisis of the
late Nineties.
Wiese also worked his magic at neglected low-cost housing
developer Ilco Homes and used the business as a platform
to build (via Monex) the sprawling Century City complex
outside Cape Town.
But it hasn't always been easy. Pepkor took a painful body
blow in the late Eighties when executives failed to take
forward cover on foreign loans. Then Prime Minister PW
Botha's Rubicon speech sent the rand sprawling and Pepkor
found itself in rather a tight squeeze.
One story goes that Malbak - hearing of Pepkor's
predicament - made overtures concerning taking over the
bruised retailer. Malbak sent down executive Arnold
"Nols" Louw to negotiate with Wiese. In the end Malbak
was fobbed off and, by the end of the deliberations, Wiese
had convinced Louw to become Pepkor's MD.
Perhaps Wiese's greatest corporate coup was snatching
Ocean Diamond Mining Holdings (ODM) from under the
nose of Remgro's Trans Hex - much to the irritation of
Remgro chairman Johann Rupert. Basically, Wiese
accumulated a major position in ODM - one of few junior
miners to deliver consistent production from marine
concessions - effectively positioning himself between
bidding rivals Trans Hex and Namco (which bought the
business for a premium and then promptly hit the rocks).
Detractors claim that Wiese can be a bully and an outright
opportunist. But a close associate describes him as an
"absolute genius". "People say Christo is a corporate
marauder. That's not true. He builds businesses and his
track record confirms that."
Another close confidant says: "Christo applies his mind to
his investments... and I can assure you he has the most
fertile mind on the JSE. Sometimes as an investor it pays to
follow what he's buying into..."
For the record, Wiese has built quite a portfolio of small
cap investments - some of which confirm his reputation as
a risk-taker. Wiese holds a controlling stake in listed
agricultural and industrial products supplier Invicta (a stake
that has richly rewarded a patient Wiese over the past
decade) and has more recently secured a 10% stake in
adventurous financial services counter PSG (using his
significant stake in liquor group KWV as leverage).
Wiese also holds strategic stakes in promising vehicle
tracking specialist Digicore and revitalised fluorspar
producer Sallies - which are viewed as classic, high
risk/high reward situations.
Wiese says that he's been hammering home the notion to
his children that the greater the potential reward, the greater
the risk. "One really has to put a lot of energy into
managing the risk down and the reward up."
More than a few market watchers believe that Wiese will
play an increasingly important role in PSG - which holds
control of Capitec Bank, the highly profitable low-cost,
mass banking initiative.
With Pep and Shoprite showing a penchant for in-store
banking, a possible strategic linking of retail points of
presence with Capitec's products and services could be
compelling.
Others believe that Wiese could - via PSG - still play a
major role at KWV Ltd. PSG holds a strategic stake in
KWV, which in turn holds a strategic (and valuable)
interest in giant liquor producer Distell (which is partly
owned by Remgro). Wiese plays down the PSG situation,
noting that "the company has done remarkably well and I
like the people". He says there are no current plans to
increase his stake in PSG beyond 10%, though he concedes
that might change. "I've quite enough on my plate at the
moment. But when you wake up on a beautiful morning
you realise there are so many opportunities out there."