Ten months ago, Bidvest founder Brian Joffe approached the board of Adcock Ingram with an unsolicited offer to buy two thirds of the business. Adcock’s shares were then trading around R50. Joffe’s cash and shares offer was worth R63. He was rebuffed by the board of directors as being “opportunistic”. Since then a cash and shares offer by Chilean group CFR has been supported by the same board. Yesterday Joffe made an all-cash offer at R70 and warned that he would be launching a legal challenge against the CFR/Adcock agreement. That happened this morning. This is the first time Joffe has spoken publicly on the subject. He came into CNBC Africa this morning. We have also published an executive summary of the legal papers served by Bidvest today. Click here to read it. – AH
To watch this CNBC Power Lunch video click here
ALEC HOGG: With us in the Power Lunch studio is Brian Joffe, the Chief Executive, and Founder of Bidvest. Bidvest, as you would well know, has launched a counter-offer to CFR – the Chilean company’s approach towards Adcock Ingram. Well it looked – for the Chileans anyway – to be home and hosed. That isn’t the case because the deal actually started off Brian, when you approached Adcock Ingram in the March…
BRIAN JOFFE: Yes, when we originally approached them, the share price was at about R50 per share and obviously shareholders are doing quite well now at R70-odd. We feel that there is an opportunity with the right management and skills in place, to develop Adcock into its old glory.
ALEC HOGG: The right management – what have these guys been doing wrong?
BRIAN JOFFE: I don’t want to get involved in what they’re doing wrong, but I think the proof’s in the pudding that the company over the last number of years has just declined year-on-year, compared to the brilliant performance of Aspen.
ALEC HOGG: So the opportunity is there, there is an asset, and you think you can turn it around.
BRIAN JOFFE: Yes, we’ve obviously done some homework on it and I think there are certain parts of the business that we can immediately add to. There are certain other parts, more specifically; if you take generic part of the business maybe, we’re going to need some strategic input from a partner. We’ve lined much of this up and hopefully, we’ll be able to deliver just what the shareholders need.
ALEC HOGG: You have lined it up? I say this because the response this morning from CFR to your offer yesterday was that you don’t really know much about pharmaceuticals, the plant is half-empty, and they can deliver throughput into that plant. How can you?
BRIAN JOFFE: What’s interesting is that plant was built by the South African management that everybody’s rating at the moment. They spent about R2bn in CAPEX, so it’s at the low, and the CFR Company is obviously looking to get control of this by using expensive paper to acquire assets that have basically just been renewed. If you have a look at what their proposition is about synergies; they’re talking about selling more, but in the final analysis the CFR shareholders are getting about 83% of the benefit and the Adcock shareholders – about 17%, so one can see who’s doing the better deal.
ALEC HOGG: How do you work that out?
BRIAN JOFFE: Well after the transaction, because of the shares situation, Adcock shareholders will own about 17% of the company – of the combined company – and therefore obviously be entitled to 17% of whatever synergy benefits there are.
ALEC HOGG: But they are also getting cash.
BRIAN JOFFE: Yes, they’re getting cash for half of their shares. But for the piece that they’re going to participate in… There have been many words about these so-called synergies of $400m. Well it’s nowhere near $400m because that’s $400m over an undisclosed period of time and most of that relates to revenue, not to profits. My guess is that it’s not attributable to the Adcock shareholder. It’s not a significant amount of money. So whilst we may not know what we’re doing, we don’t have to do a hell of a lot to match what the Adcock shareholders are going to get out of this transaction.
ALEC HOGG: Brian, you did mention yesterday that you had a legal challenge.
BRIAN JOFFE: Yes, by the time this is broadcast, we will have served papers on various respondents alleging that there is financial assistance in this transaction and non-compliance with the statutory requirements of setting up the Scheme Meeting. In our legal opinion, their meeting is void and therefore unlikely to succeed.
ALEC HOGG: Just explain that in layman’s terms: financial assistance.
BRIAN JOFFE: Well, since CFR cannot finance the transaction itself because it’s bigger than itself, it is using Adcock’s assets, and gearing Adcock’s assets in order to effect the transaction.
ALEC HOGG: Like a management buyout, or the old leverage buyout?
BRIAN JOFFE: There are certain procedures you have to go through in order to go through the use of the assets, and they haven’t complied with that.
ALEC HOGG: That is part of the story as well, I suppose, but once you go to court it can drag things out. We know from the Harmony/Goldfields takeover battle in South Africa…the reason it didn’t succeed was because Goldfields managed to drag it out. Is that your tactic here?
BRIAN JOFFE: It’s not really a tactic. It’s either legal or it’s illegal. In our sense, it’s illegal, and as a shareholder we are obviously concerned as well, that if it is drawn out for a protracted period of time, it’s not going to be good for anybody. We therefore decided that we’re making an offer which is a lot more certain, and on that basis shareholders need to decide whether they want to get involved in this protracted debate as to whether it’s legit. If it isn’t legit…even in a year or two years’ time when it may get to whichever court, it can be reversed from day one and so the shareholders are going to be in a huge mess, but this is the legal/technical stuff. From our point of view, we see the benefits in the business case of Adcock – not, obviously, the legal case.
ALEC HOGG: It’s almost as though you have three strategies: you mentioned the legal case now, and if it goes on for years, it is going to create uncertainty. The other strategy is a R70 per share cash offer. You’re an R85bn company. Why not offer R12bn or R15bn, if you want it that badly?
BRIAN JOFFE: Well firstly, R70 is very comparable to their offer. Our R70 today is all in cash and it’s certain. Under their offer, we don’t know whether it’s going to be certain and the present value of their R70 – and it’s not R73.00. It’s less because their share price is trading down – so the present value of our offer is better than their offer. If you take into account… we will be able to declare dividends almost immediately, whereas they’re going to have to wait until the full implementation of the scheme, which could drag out until March, April, or May of next year.
ALEC HOGG: I suppose on the other hand, your offer does not include the injection of debt – a point you were making a moment ago.
BRIAN JOFFE: Yes, I think that the real issue around Adcock Ingram is do the shareholders believe there is potential in Adcock Ingram. If they do, it’s better for them to get 100% of their upside – or near 100% if they’re going to sell some shares in Adcock Ingram – rather than to take CFR which is an unknown entity and highly priced. If you have a look at their transaction, they’re using expensive paper to acquire an underperforming asset.
ALEC HOGG: You did put R70 cash on the table yesterday. Have you had any reaction yet?
BRIAN JOFFE: Yes, yesterday we acquired nearly 900,000 shares. It was early days and obviously, as we get close to the meeting we will see. A lot is going to depend on how everybody votes. It’s not only us. The PIC is obviously an important component piece as to what the outcome is going to be and we obviously watch with interest what they’re going to do.
ALEC HOGG: The PIC is your biggest shareholder at Bidvest. Clearly, you can talk to them any time you want to. One does when it’s your biggest shareholder.
BRIAN JOFFE: I don’t think it’s that simple. The PIC is very aloof in this particular matter. They’ve put up many walls in order to safeguard their decision-making process. We haven’t had the opportunity of using Bidvest as a vehicle to be able to talk to them. Whilst we have had one meeting with them, they are, as I said, very careful on the governance in this particular case.
ALEC HOGG: How much do they vote? There’s a lot of confusion. I had a look through the Adcock Annual Report 2012 – the most recent one – and in there it said that they vote 14.4% of the Adcock equity, yet there’s another number that says 12%. Do you have any insight?
BRIAN JOFFE: Firstly, I think there’s the issue about treasury shares, which of course won’t vote and BEE shares, which can’t vote. If you take the percentage that the PIC could vote…as I understand it, it’s 18.9%.
ALEC HOGG: All right, so once you take those two other issues out…18.9%. You have 4% – a little bit more after yesterday – nearly 5%. Well that I suppose, gets back to what we said right in the beginning of this whole debate and that is the PIC has the swing vote.
BRIAN JOFFE: Yes, I don’t want to say it like that because I think every shareholder has the right to understand and to vote. In my opinion, the shareholders haven’t been fully informed as to what all the pros and cons are in this transaction. Even if you have a look at the documentation, if you look at the JP Morgan report, they themselves haven’t done any of the work on the synergies. They say they’ve relied on the management, so it’s untested.
ALEC HOGG: The (Adcock) management are not going to stay on if you take over?
BRIAN JOFFE: I don’t know. That will obviously be up to them.
ALEC HOGG: The board is certainly not going to stay on. They’ve rejected your initial approaches.
BRIAN JOFFE: Look, I feel like a very rejected soul. What can I say? (chuckles) At the end of the day, this is business. It’s not personal. In a way, they’ve tried to make it personal. From my point of view, this is just a pure business proposition. We were the guys who sought out Adcock in the first place, identified its shortcomings, and hopefully we’ll be the guys who can fix it.
ALEC HOGG: If you went in initially in the early R60’s share price, what made you change your mind to believe it’s now worth R70?
BRIAN JOFFE: Well, the deal is a little bit different to where we were before. Remember, we were bidding for 60% of the company originally. We were giving part-Bidvest shares and part cash, which got it to about R63/R64 per share. We decided, during the course of the last week, that we needed to up that in order to be sure that we were comparable in relation to the price that they had offered. It’s therefore a little bit different and we’re obviously not getting control at 34.5%, but we’ll obviously be able to yield some kind of influence.
ALEC HOGG: You’ve used that 34.5% before with Amalgamated Appliances and Mvelaserve. Is it a similar strategy, you’re employing here? You can do it quickly….
BRIAN JOFFE: Well I don’t know what the second step will be. We obviously don’t know what the relationship between us and the other shareholders will be post the transaction. On the assumption that everybody is onside with us, of course, we would like to see ourselves get to a better controlling position over time. But it’s unknown at the moment.
ALEC HOGG: The chairman of CFR is in the country at the moment – Daniel Salvadore. He says ‘this makes no sense for South Africa. This only makes sense for Brian Joffe’.
BRIAN JOFFE: I think that’s a bit rich, coming from them, seeing that they control 52% of CFR. I have about 1% of Bidvest. Seeing that they get 83% of the benefits and the Adcock shareholders get 17%. I think it’s a bit rich. I think he should really think about what he’s just said.
ALEC HOGG: Again getting back to the PIC, from what the PIC has explained to us about their strategy – would this resonate?
BRIAN JOFFE: As I said, I can’t talk for the PIC. I think we’re concentrating on our Bidvest strategies, what we think is the best for Bidvest and for Adcock. Of course, our primary responsibility is to the Bidvest shareholders. Adcock will remain listed and we have a fiduciary duty if we are involved in it – and certainly, in its management – to make certain we deliver the best performance. All I can say is that this is not the first time Bidvest has gotten involved in buying underperforming assets and our track record speaks for itself. We’ve been around for 25 years and we’ve grown from very minimal beginnings of about R8m to R80bn, so it hasn’t come out of nothing.
ALEC HOGG: If you take McCarthy’s, which was in a similar situation, if you take Rennies going back before that: do you see Adcock as perhaps being more attractive as a turnaround prospect than those two were?
BRIAN JOFFE: Look, each of them has their own scenarios. The one thing with Adcock is that it’s more regulated than some of the other businesses that we’ve bought. Therefore, the rate of change and the ability to change quickly is of course, to some degree, impaired in certain parts of the business. In the segment of over-the-counter products they have, the way they deliver, the computer systems, management motivation, our ability to scale up, to fund acquisitions for Adcock…there are a multitude of areas that I think we could add to quickly. We’ve never in the past really had any confrontation with managements we’ve acquired. They’ve all bought into the Bidvest philosophy and strategy. 95 percent of all the business that we’ve bought…the management at the time of acquisition are still there today.
ALEC HOGG: Well, it doesn’t look like that will be the case in this instance. Brian, what happens from here? We have a vote on the 18th of December. What happens from your perspective?
BRIAN JOFFE: Well obviously, the vote will happen if of course, the legal action doesn’t interfere with that: the board of Adcock, the Regulators, and everybody who will have to take the decision. The banks that are funding this are at huge risk if we are right and they are wrong.
ALEC HOGG: How so?
BRIAN JOFFE: They’ll have no security and they’ll have lost money against the transaction that’s going to get unwound. And this is a lot of money, so the banks themselves have a lot to lose and I assume that they’ll revisit the situation. They’ll presumably take their own opinion in this particular matter, and then we will see how it develops. What’s interesting of course, why they chose the 18th of December is because everybody, including myself, is supposedly on holiday.
ALEC HOGG: Well, we look forward to that. Just to close off with, though, you’ve also bought a few shares in Telkom. Are you planning something similar there?
BRIAN JOFFE: Look, Telkom has also been an underperforming business, but what has impressed us about Telkom currently, is the new management team. They’ve certainly showed, from our point of view, some degree of professionalism and I think that it will all go well for the outcome of Telkom over time.
