Quizzing Brian Joffe: Has SA’s great capital allocator boobed on Adcock?

At Bob Miles’s annual Omaha Value Investor’s Conference preceding the Berkshire AGM, one of the presenters offered a list of the world’s great capital allocators. Warren Buffett, of course, was among them. So, too, John Malone of Liberty Media and the late Henry Singleton of Teledyne. But also on the short list was a name that gave the small South African delegation an opportunity to puff their chests – Bidvest’s founder and CEO Brian Joffe. Yesterday I spent some time with Joffe in front of the CNBC Africa cameras after the release of his R95bn group’s yearend results. As always, he was engaging and open, talking freely about his distress at not being able to see important additional information before acquiring a R3.9bn stake in Adcock; and his plans to list Bidvest’s global Foodservices operations in London – a precursor to a raid into the US, the only geography where the group doesn’t have a significant presence.  I love Sasha’s Naryshkine’s moniker for Joffe: The Magician of Melrose Arch. But many pundits question whether his magic has expired. Especially since the Adcock stock he paid R70 a share for is now freely available at a 25% discount. So, did Joffe boob on Adcock? Watch the video and make up your own mind.  – AH 

BRIAN JOFFE:  No, I’m not leaving the country.  I’m not leaving Melrose Arch and I think we’re pretty much committed to South Africa.  Sixty-five-odd percent of our profits are in South Africa and a bigger percentage of our revenues.  We’re optimistic.  As I said, it’s just unfortunate that in my mind, the politics interferes with the implementation.  I think everybody in Government knows where and what should be done, but I think politics gets in the way of implementation.  Unfortunately, that’s bad news, I guess, for the country.

ALEC HOGG:  You’re looking at a listing of your food services in London?

BRIAN JOFFE:  Yes, I think it’s in our announcement.  What we see is a continued growth of our food service business – very good equity markets abroad – still low interest rates and a lot of opportunity for us potentially, to expand, and we obviously need the capital to do that.  It’s complicated, doing that out of South Africa now with the devalued Rand, higher interest rates now, and probably still getting higher so I think there’s motivation to do that.  We’re not looking to divest out of the business.  We’re just looking to create some kind of mechanism for us to be able to improve, potentially, on the capital availability.

ALEC HOGG:  I know David Shapiro’s probably passed this onto you, but when we were at a conference in Omaha, one of the presenters at the Value Investors Conference went through the great capital allocators of the world and your name was included amongst them.  However, I do see that as far as allocation of capital, your results show that the Adcock acquisition has had quite a big impact on your returns (down from 30.1% to 27.6% for Bidvest overall). Give us the story there.  Are you sorry now that you went into it?

BRIAN JOFFE:  Look, I can’t justify it as being a good deal, so we have to start from the premise that we didn’t do a particularly good deal, but there are reasons.  The big disappointment was that we made a decision, based on what we thought was good information, which turned out to not be as good as we had anticipated.

ALEC HOGG:  How bad was that information?

BRIAN JOFFE:  Everyone may have a different view as to what to what the quantum of that is.  You’ve seen what Adcock’s results look like, so that’s an indicator of how badly they’ve done.

ALEC HOGG:  But sometimes, when a company acquires another company, you do write it down to make yourself look better, later.

BRIAN JOFFE:  We don’t have management control, so we’re not really in control.  If you look at what happened in the year to September 2013 (in Adcock), they didn’t have the best results but not the worst either.  The movement from September through to the 25^th January when they published the so-called trading update was a markedly worse performance.  There may well have been reasons for that, but I guess my criticism is ‘why was there not market update as we went’, bearing in mind that everybody knew it was in a price-sensitive era.  People were looking to decide whether they should sell or whether they should buy, and you went through the process of no updates between the publication of the November circular and the 25^th.  The 26^th of January; the day after Bidvest bought its shares, the company came out with a profit statement, which to me (timing wise) was a bit suspect.

ALEC HOGG:  Is there any legal issue?

BRIAN JOFFE:  No.  There may well be.

ALEC HOGG:  Can you chase the former executives?

BRIAN JOFFE:  At the moment, we haven’t been concentrating on that.  We’ve been concentrating on the positives – and there are some positives.  The fundamental reason for buying the company hasn’t changed.  That hasn’t changed.  All that’s really changed is the price at which we bought the shares.  Had we bought them at 50 or 40 then maybe this debate wouldn’t have been here and everybody would have said ‘look at what clever guys these guys are’.  Unfortunately, we got that wrong, so we’ve marked that down and we just have to get on with it.

ALEC HOGG:  That fundamental reason: is this a good business that’s maybe just been poorly managed and that you can turn it around, or has the information that’s come out changed your mind about how good the business is?

BRIAN JOFFE:  Fundamentally, this is a good business but structurally (in my opinion and obviously, time will tell whether I’m right or not), they’ve made some bad strategic moves.  They’ve moved some of their production from South Africa to India.  They made an acquisition in India, which hasn’t turned out to be that good.  The acquisition in Africa hasn’t been that good.  Zimbabwe hasn’t been particularly good.  They’ve lost a lot of focus in the local market.  They have some of the best brands and they’ve lost ground on those as well.  It’s a lot of retrieval of what Adcock was, I suppose, at the time of Tiger.  When Tiger unbundled, they also denuded the company of many of its strategic products.  When you lose some of your calling cards into the industry, you may be able to keep rowing for a bit, but eventually the boat sinks. 

To a large degree, that’s part of it.  They entered into an ARV tender where they make no return on the cost of raw material (never mind the overheads), so some difficult things need to be decided upon, but given some time and a little bit of patience and TLC, I think the situation is retrievable.  Whether one would get back to the thing being worth R70.00 or not, that’s obviously an unknown at this point in time.

ALEC HOGG:  But you are looking to bump up your stake because clearly, a lot of effort is going to have to be put in here.

BRIAN JOFFE:  Well, I’m sure you’ve seen there’s been a lot of speculation about that.  At this present time, we haven’t decided which way we should go.  From the time we approached the Competition Commission until the time we got approval there was a material amount of information, which became evident and which changed the strategic position of Adcock because a lot of stuff emerged such as write-offs etcetera.  For Bidvest at this point in time, to go and say we’re going to make a significant further investment without some clarity as to where the company’s going to be, I think would be a little bit dangerous.  Whilst I wouldn’t rule out the fact that we’d be interested in acquiring a much bigger stake, I think the timing of that is obviously, quite critical at this point in time and we need to know what’s going to happen there.

ALEC HOGG:  Even for you, R4bn worth of investment is a big slug, so you’re kind of in there.  You can’t walk away from it.

BRIAN JOFFE:  No, we’re in for sure, and I don’t think there’s a suggestion that we’re going to walk away from it, but I think what we do need to do as best we can, is to use our good officers to try to influence the way the company is going.  I’m the Chairman of the company and we obviously have one or two other directors that have been appointed to the Board.  Through this, we are obviously trying to influence the Board and management to move in a particular direction.  Up to now, that support has been forthcoming from the Board and all of us are working very hard to ensure that we can restore confidence in Adcock, which I think, will be done.  Confidence in the staff and confidence in the products…  They have some fantastic products.  It just needs some marketing to go with it – a little bit of spend – and a bit of TLC for the customers, and maybe we’ll get it back.

ALEC HOGG:  Just to close off with, your investment there is about two percent of your market cap.  You yourself are the Chairman on the Board.  It must have occupied your mind, both in the bidding process and clearly now, as well.  Is there not a worry that this might be distracting you?

BRIAN JOFFE:  Well, there’s always a concern that you’ll be distracted by small issues, but the Bidvest management team and the way Bidvest is structure, to some degree mitigates against the risk of us falling into that trap.  We have very, decentralised management.  We have a very strong Chief Executive of South Africa, a very strong Chief Executive of the food business, and to a large degree, we’re in succession mode.  I’m not young anymore.  Not old, but not young.

ALEC HOGG:  You’re 20 years behind Buffett.  You have a long way to go yet.

BRIAN JOFFE:  Well unfortunately, South African investors don’t like old men.  They like to get rid of them.  You and I shared a program once about succession and old men.  Of course, I am concerned and I am committed to try to put in as much of whatever knowledge I have into trying to fix the issue, but Bidvest is obviously our primary concern.