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By Gavin Jacobson*
Earlier this year, shareholders of Pick n Pay Stores (PnP Stores) and Pick n Pay Holdings (PnP Holdings) approved the removal of one of the last remaining listed pyramid structures on the JSE, by replacing it with an innovative unlisted ‘B’ share structure.
The PnP Holdings pyramid structure, in effect for over 30 years, was introduced in 1981 by the Ackerman family to prevent a hostile takeover of the group and to ensure the founding family retained ultimate control of PnP Stores. The Ackerman family owned 52.9% of PnP Holdings which, in turn, owned more than 50% of the shares in PnP Stores.
Dual-listed pyramid structures are no longer regarded positively by the JSE or institutional investors and, for some years, the Ackerman family had been looking for a solution to eliminate the legacy pyramid in a manner which retains the Ackerman family’s control of the retailer while also benefiting the company and minority shareholders.
A key requirement of the Ackerman family in the absence of the pyramid was to enable a modernised, simplified structure, but to achieve this in a manner that would not alter their control position nor confer any additional rights or obligations relative to the status quo. The new structure had to meet corporate governance standards within the family’s structures, requiring approval by the non-family trustees, before it was taken to the PnP Group, which included the respective independent boards of both PnP Holdings and PnP Stores. The family and its advisors explored various options and alternative structures over the years and ultimately settled on the approved mechanism that satisfies the objectives in a manner adjudged to be beneficial to all shareholders.
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The unlisted ‘B’ share structure was designed as the optimal solution to unwinding the pyramid structure. ‘B’ shares were selected as they could be uniquely designed to only hold voting rights (with no economic rights), place certain transfer restrictions and to govern their overall use. The ‘B’ shares were designed to maintain the Ackerman family’s status quo without either affording the family any new rights or disenfranchising them. It also allowed numerous benefits to shareholders at all levels. Under the new structure, the ‘B’ shares would allow the Ackerman family the ability to vote their effective voting under the pyramid structure. Another key tenet of the ‘B’ shares is that they are effectively “stapled” to the ordinary shares so if the Ackerman family disposes of ordinary shares then the corresponding ‘B’ shares must be disposed of in the same transaction. The ‘B’ shares are not perpetual and can unwind over time resulting in all shareholders having voting rights equal to their economic rights.
On 25 July 2016, shareholders voted in favour of removing the pyramid control structure, dissolving PnP Holdings and unbundling its PnP Stores shares to its shareholders. The transaction was finalised in late August leaving a single JSE-listed entity, PnP Stores. The Ackerman family abstained from voting in respect of the transaction thereby leaving the minority shareholders as the sole voting parties. With this limitation of the voting solely to minorities, 99.35% of the shares of PnP Holdings gave their support to the transaction, while 82.5% of PnP Stores shares were voted in favour of the deal.
The transaction resulted in the Ackerman family receiving their direct share of 26.9% of PnP Stores ordinary shares as part of the unbundling, while other PnP Holdings shareholders received 25.8%. Concurrently, the Ackermans were issued the off market ‘B’ shares by PnP Stores, to replicate their voting rights prior to the transaction (at 52.9%).
The transaction realised numerous benefits for other stakeholders too. It removed the distraction and complexity of value arbitrage to which the previous structure gave rise, and allows management to focus on one listed company.
Investor funds now have one listed entry point, which should over time translate into increased funds flow into the single ticker and demand for the shares. Removing the pyramid structure also increased the free float from around 46% of shares to 73% improving the weighting of the stock in a number of indices including the FTSE/JSE SWIX, which is employed as a benchmark by most South African fund managers.
The increased weighting may also help attract more international investors as a higher free float leads to the share being included in more international indices.
The simplified structure should also provide an improved framework from which to raise capital for future growth including rights issues which previously had limited potential. In addition, the costs and the administrative burden resulting from having two listed companies will be reduced.
Minority shareholders experienced a voting dilution (by 36% for PnP Holdings and 34% for PnP Stores), though this should be offset by the other tangible benefits including the enhanced liquidity in PnP Stores shares and the elimination of the PnP Holdings discount, which at the time of voting amounted to 16.2% less than the implied see-through value of its stake in PnP Stores. The dilution is not expected to materially impact shareholdings under the new structure as shareholders will continue to have similar levels of influence going forward.
The deal was complex. It was conceived, rigorously debated and guided through strong governance checks and balances so as to ensure the ultimate proposal satisfied differing stakeholder objectives – the PnP group, the Ackerman family, regulators and minority shareholders all had different requirements which needed to be aligned.
Numerous regulatory hurdles had to be overcome to progress the transaction. Several engagements took place with the JSE and the Takeover Regulation Panel during which the various aspects of the unwind structure were scrutinised, in particular to ensure that the ‘B’ shares didn’t unduly prejudice the minority shareholders of the company. The final structure received a positive endorsement from both regulators which was particularly favourable for shareholders as the regulators are often seen as custodians of minority shareholders.
In the end, the transaction met the requirements of regulators, the companies, the controlling shareholder and minorities. Post the transaction, PnP Stores has effectively been set up on a new growth path and given the correct framework to deliver shareholder returns in a challenging environment.
- Gavin Jacobson is a Corporate Finance executive at Rand Merchant Bank.
