LONDON — It’s now common cause that the report circulated by Viceroy Research brought down the 90 000 employee-strong Steinhoff. The report exposed the accounting irregularities which Steinhoff eventually owned up to. Viceroy, a shadowy firm with just three full-time employees but an army of followers, has another South African company in its sights. On Tuesday, its Twitter account that has just over 5 000 followers said the Viceroy report on this company would be released before the end of March. On the Johannesburg Stock Exchange, Mr Market went crazy. Speculation that it was Viceroy’s target smashed the prices of multinational Aspen Pharmacare and three JSE-listed property stocks. In today’s episode of the Old Firm, David Shapiro and I examine what’s become known among traders as The Viceroy Effect. – Alec Hogg
Welcome to Episode 2 of the Old Firm, and in this edition, we’re having a look at what has become known as the Viceroy Effect. Well, it’s now common cause that the report, which was circulated by Viceroy Research brought down a company that employed 90-thousand people all around the world, Steinhoff International. The report exposed accounting irregularities, which Steinhoff eventually owned up to when its CEO resigned. Viceroy is a shadowy firm with just three full-time employees but it’s got an army of followers. It’s got another SA company in its sights and on Tuesday its Twitter account said that a report on this company would be released before the end of March. On the JSE (Johannesburg Stock Exchange) Mr Market went crazy. Speculation that it was Viceroy’s target smashed the prices of multinational Aspen Pharmacare and three listed JSE property stocks. In today’s episode of the Old Firm, David Shapiro and I will examine what’s become known among traders as ‘The Viceroy Effect.’
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Alec, we’ve gone through such a difficult time over the last couple of days because of the Viceroy or fear of Viceroy. To be honest, I don’t even know who Viceroy are and over the last couple of days I’ve been trying to work out who they are, who’s behind it, and even try and get a report but the market, for some reason, have been very sensitive to ‘The Viceroy Effect.’ In other words, they’ve identified companies that have embarked on very aggressive acquisitive strategies, where they might have used debt or shares in order to get there. So, I think people have been creating mischief in the account because not only did we see Aspen coming down quite significantly, and it’s recovered. I must say that it’s recovered from the very low levels that we saw only today and, also there was an attack on some of the property trusts. Yesterday, we saw NEPI and associated companies, Resilient, Fortress also coming under significant sell-off and then it picked up today. In fact, today they’ve come out with trading updates and we’re back in positive territory. But Alec, the point I’m making is if you measure the volatility, it’s enormous. We’ve had movements of 10% – 15% in either direction and causing a lot of tension or anxiety amongst those who hold it, looking for the reason.
Finding that reason is not that easy. Viceroy’s principles are taking a lot of trouble to hide their identity, even the well-networked Mr Shapiro, hasn’t been able to uncover much yet.
If you go onto their site it’s a dot.org website. There’s no pictures of anybody and they give a very brief description of who they are but you can’t get hold of anybody. I wonder if it just collects research from certain people or whether there are actually paid research analysts within it? So, I haven’t been able to make headway and I think the fact that they’ve released their Steinhoff report after the damage had been done, after the share price had fallen and we knew the news, and suddenly that attracted attention. Now, they’ve come out with a Tweet also saying that they’re looking at other companies, amongst which is a SA company or companies so, everybody is now trying to work out where it is.
It’s called ViceroyResearch.org, that’s the website. It’s got a very interesting piece of art and I know you are a cartoonist of some repute, Mr Shapiro, with a whole bunch of monkeys there, reading it looks like, in this case, financial statements with tulips or flowers of some kind. The piece of art tells you quite a lot of what they are pointing fingers at, presumably bubbles or assets that are overpriced.
Right, exactly but we don’t know. I don’t think anybody has really checked what they do. I’m not saying they’re bad. Believe me, I’m not saying that they’re bad. I just don’t know enough about them so, I’m not criticising the fact that they’ve come out with these reports and that but we need to know a lot more about them. Locally, Alec, you know the analysts. We know the local analysts. We know who covers the various companies. We’ve tested them, we’ve listened to them, we’ve read their reports so, you kind of get a feel for the quality of their work. In this case, we know very little about the people so, it’s very hard to reach any conclusions but of course there are traders on the market who take advantage of it and who put a little bit of trouble into the market and, of course, everybody panics and they create this huge volatility.
The person who’s come closest to uncovering exactly what’s going on with Viceroy is Bloomberg’s Renee Bonorchis. She sent the firm a list of questions and Bloomberg published them, and the answers, during the course of this week. Here, with the assistance of Amazon’s Amy and Matthew, are the answers to the questions that Renee asked the Viceroy team.
Amy: Which city do you operate from?
Matthew: New York.
Amy: Is it correct that there are three staff members?
Matthew: Yes, and we also use consultants where needed.
Amy: What are their names?
Matthew: We are anonymous.
Amy: Viceroy has said it keeps names under wraps out of security concerns but activists, shareholders, and investigative journalists disclose their details publicly. Why doesn’t Viceroy do the same?
Matthew: We prefer to avoid the distraction altogether. Our belief is that the research should do the talking.
Amy: How much money does Viceroy have in assets under management?
Matthew: We do not discuss this.
Interesting answers but we’ve got a lot more coming. Well, a research house like Viceroy, which targets overpriced stocks is like the pilot fish, which guides sharks. Except in this case it points out opportunities for hedge funds, which themselves specialise in selling short, i.e. making money when share prices fall. These financial market predators (sharks), tend to hunt in packs and like a school of those sea animals are very difficult to defend against once the target’s blood has started flowing. Lest we forget some people made an enormous amount of money out of the collapse in the Steinhoff share price. There were some who were short sellers. Maybe you can just give us some thoughts on that because clearly, Christo Wiese losing €3.5bn – would there have been someone on the other end who actually made €3.5bn?
I have no doubt but first of all in order to go short you have to borrow shares because you have to deliver into the market as though you own those shares that you’re selling so, you borrow shares from somebody. You sell them into the market. You take the cash. Normally, you’ve got to put security down and then obviously, when you buy back the shares, you now deliver those shares back to the person from whom you’ve delivered. That’s how short sellers work but today banks and a lot of financial institutions do lend out shares. They lend out shares, which are sterile and just lying there, and institutions can make money out of actually lending out shares. You’ve got to have courage but Alec, when you’ve got power and when you’ve got large institutions – if I decided that I was going to hit a company for whatever reason, I could quite easily do it. You don’t have to give an explanation. All you have to do is start selling shares and you can create a little bit of panic particularly if there are questions marks around that business. Then what it does is Chicken Licken, the sky has fallen, and everybody starts to follow and so the shares go down. I have no doubt that there had been a lot of trading or hedge funds, and institutions that made significant amounts of money out of Steinhoff and I think over Aspen, in the last few days, and certainly over the property trusts as well. We can never get to the bottom of it. In the olden-days you knew what was happening on the floor. Even when the first electronic trading took place we knew who was at the other side of the selling. We could identify the brokers’ number so, we knew who the sellers were. Today it is completely opaque. You can’t really get down to who’s there, other than the Stock Exchange and I’ve seen in this morning’s Business Day, Stephen Saad has called for an investigation into manipulation and asking the Stock Exchange or the Financial Services Board to look into some of the movements there. There hasn’t been any research around it or any cause of trouble. It’s just been one of those market movements.
David, you can see though, from the Aspen share price that there’s been quite a lot of short selling action on it for the last two months.
Yes.
If you go back to late November, it was at R315 a share. It bottomed yesterday at R243. That’s a big move in less than two months. Would it be a case of, and let’s just put a hypothetical scenario together. You are a short selling fund and you’re like a shark, and that’s what the short sellers do. You have a look around and you scan the horizon and you see, ‘okay, we’ve taken Steinhoff out because they were doing naughty things.’ There’s another company from the same geography. Maybe their accountants aren’t as trusted as they would be in other parts of the world, particularly now after the Steinhoff affair. Maybe they’ve also been overly aggressive in their numbers and in their acquisitions. They could be vulnerable and you then start selling shares that you don’t own – borrowing them, as you said in the script, and then you put together a research report, like Viceroy did with Steinhoff. That you put into the market and that almost becomes a self-fulfilling prophecy. This is a hypothetical situation but is that the way it works?
No, but you’re not far wrong. You can easily do that. First of all, I don’t think you can put the research report out afterwards but you can know of one or there can be a connection to somebody that you know is going to do that – yes, it’s very possible. You might not know the people exactly but you can – it’s very possible for that to happen. The problem is that you’ve got to be, and where we’re in the situation where we advise clients and where we’re not traders. It can lead to high-levels of anxiety and a lot of worries but that’s the market. Those are the kind of markets you have to live through today and you have to learn to overcome but it’s very possible. Remember that, as we’ve discussed, I think 70% to 80% of the market today is made up of traders, made up of high frequency traders, who can go either way today. They can either go long or they can go short. But I must tell you something – it’s a lot easier to sell a share down than to buy a share up. In other words, it’s much easier to sow panic than to actually get it going in the other direction, unless you start spreading rumours of inside and that. When a share starts to fall then you start to question, why is it falling, and then everybody gets nervous? They start to sell out as well so, yes but don’t think that this is a religious institution with high moral values.
Isn’t that part of the human condition though. Daniel Kahneman, in Thinking Fast and Slow: he did a lot of research into this. And I remember reading one of the chapters, which is devoted to the fact that human beings take bad news nine times more seriously than they take good news because bad news, for our forefathers, was existential. The rustle in the rushes could be a lion that’s going to come and eat you so, when you heard a rustle it was bad news and you ran for your life. Whereas good news, if it was food waiting for you there – it doesn’t matter, you can find out about that later.
Absolutely, a wonderful description and a wonderful analogy. It’s exactly right so that’s why you get the panics flooding into markets and people rushing for the door and only thinking afterwards so, dead right. That’s why bear markets are so violent and so ferocious. When bear markets come and you see a drop they’re sharp. Bull markets take a lot more time, they creep up. It’s almost ratcheting up but that is the psychology, dead right.
The interesting thing about these predators of the financial markets is that they are convinced, maybe they’ve convinced themselves, but they like to convince everyone else that they’re a force for good so, let’s get back to those Bloomberg questions.
Amy: How much money has Viceroy made by shorting Steinhoff?
Matthew: We will not disclose this figure. Our ethos is protecting consumers, investors, and integrity by making sure all the facts are known. We are not only about financial gain. We consulted with analysts in relation to Steinhoff, post the release of our report. With all fees paid into SA sureties.
You see, all heart, aren’t they? Well, some traders are convinced that Viceroy’s report, which is coming out soon, will expose a group of property companies that have been cashing in on the SA malady of indiscriminately shovelling money offshore.
The backdrop to it is that, Alec, over the last year to two years there’s been huge investment in property companies here. Namely, and you know the old maxim, ‘when the ducks are quacking – feed them.’ There was this kind of appetite for property. It started with NEPI (New European Property Investment), I think it was in Romania, there were shopping centres in Romania and generally, when people looked at it they were quite attracted to it, it had a very good yield but it’s moved on since then. Subsequent to that, we’ve had an enormous amount of property development and investment outside of SA, which has attracted a lot of interest but with that we’ve had a lot of paper shuffling within that group. There’s been a connection with the Resilient, which is Des de Beer. There’s been a connection with Fortress, there’s been a connection with Green Bay – all of these companies swapping shares, cross-holdings, and so on. The problem is that over the last few months or so, or even a year or so, because there was this big demand to take money out of SA and to invest outside of the country that you started to see the premiums go up to a point where some of these companies, not only were they geared, but they were also trading at double their underlying value. These companies are not cheap that I’ve mentioned. I’m talking of a very low based because I’m not particularly familiar with the property sector, either than looking at yields and certainly, I don’t know everything about it. But what I do know is they were quite heavily invested offshore, other than Resilient and, to an extent, Fortress, but they were quite significant. What happened over the last few days is, I think people have come to realise that maybe they are overpriced and once there was a bit of panic. Just mention the name Viceroy and down we come.
There’s been no public reaction from the property companies but Aspen’s CEO has come out swinging. Stephen Saad is saying, ‘let’s try and find out what’s behind this in Aspen?’ Will you ever find out? Isn’t fear one of those things that just spreads before anybody can unpack why?
You know what, if I was a regulator of course I’d start to look into it, absolutely no doubt. These kinds of movements undermine the stability of the markets. If it’s an international event, you can understand. If an atomic bomb goes off or if there’s a nuclear war or there’s a major crisis, a major terrorist attack or something like this then yes, you can understand the fear. But in these cases, there’s nothing driving it at all. I think there’s a duty from the Stock Exchange as well, to look into what was behind these kinds of movements. They should be able to build up patterns, and I would appreciate it because it does give you some understanding of what was behind it, whether there was mischief or whether there was anything real behind it. I would question the people who sold it.
Which is the cue to bring back Bloomberg.
Amy: SA regulators are investigating the role of rumours around Viceroy and subsequent share movements. What’s your comment on this?
Matthew: We welcome any investigation into impropriety. Viceroy does not speculate or gossip about its research and thus encourages people not to speculate on the identity of any companies we are researching and advise caution on trading on gossip. Viceroy complies with the laws and has not released research or discussed our focus prior to publication.
Amy: Did Viceroy setup a short position in Aspen Pharmacare Holdings Ltd., and all the listed property stocks before the rumours began?
Matthew: We do not setup positions to benefit off rumours. Our positions are both long and short based on our research.
Amy: To stop the rumours, could Viceroy not just say which company it’s looking into?
Matthew: That would be unprofessional as our work is based on thorough analysis and publicly honourable. Naming the company may actually constitute market manipulation as this fact or opinion would be baseless without our report. The speculation of widespread fraud on the JSE is reflective of a system where regulators are struggling with a lack of funding, allowing bad people to abuse the system, abuse the people and take advantage and underfunding in the government. We are most willing to assist regulators in this regard where we can.
Assist regulators? You see, they really do want to paint themselves as a force for good. Then again, it might just be a pre-emptive strike.
Believe me, if you come in with your dark suit and your sunglasses and you knock on the door and you say, ‘I’m from the FSB, and I want to know why.’ You’re going to create a little bit of tension there and let them explain, and you put it altogether but I think we need explanations. I think the JSE needs to have a very close look at it and I’m looking at the Resilient share price now, as you talk, and it’s perpendicular – it’s a massive drop from an all time high. Yes, the market might have been at a high, Alec. It might have been overpriced but normally you find it’s like letting air out of a tyre, it goes slowly. Not this kind of drop so, there’s definitely something behind it and I think they should investigate it.
In other words, not everybody runs for the exit at the same time, unless there’s some major external event.
Yes, absolutely.
While we’re talking about Viceroy’s research and Stephen Saad’s Aspen, and of course, Steinhoff behind that – what about the other SA company that’s been very aggressive in its global acquisitions and that’s Neal Froneman’s business, Sibanye Stillwater. Isn’t that one of those businesses that maybe the international investors will look at, or maybe a Viceroy-type operation will look at and say, ‘whoa, this one is overpriced?’
I wonder, and I’ve been a big follower of Neal and he’s aggressive but I don’t think to the point where there’s any, and when I say ‘fear,’ yes, he borrowed big money to take over Stillwater. In fact, almost the share cap of his existing operations but I think everything there was transparent and I think we’re entering into mining markets, which have got, I think, where people are a lot closer to the fundamentals than we imagine. He’s aggressive – is he going to be a winner or not? A lot is going to depend on the global economy and a lot is going to depend on the platinum price so, he’s the kind of person that I think speculators love or certainly mining people love to follow. There’s no doubt that analysts need to have a closer look at it and understand the assets that he’s buying. I think he understands the assets. I think he understands them very well, and that’s why he pays the kind of prices that he does and he comes in there with an aggressive strategy to cut out costs so, I don’t think he… As I’m talking, I’m trying to associate – could this be a Steinhoff, an Aspen, or property companies? No, I think Neal is Neal and I think you know what he’s doing and we know the businesses that he’s buying.
Yes, but at some point, in time you have to ask, how are you integrating all of these operations? In SA, and in the SA mining industry, they call him Pacman. In London they call him, Neal the deal so, you’ve got the South Africans saying, ‘whoa, hang on a minute Mr Froneman – are you really not biting off more than you can chew?’ Whereas, in London, they absolutely love him because he’s making a lot of bankers incredibly rich as well, with the fees that they would charge on these acquisitions. It reminds me, David, of that wonderful book called, ‘The Outsiders.’ I’m not sure if you remember it but I got my copy at the Berkshire Hathaway AGM, do you remember it?
Yes.
One of the people who was featured there is Tom Murphy from Capital Cities, and of course, in media I would have paid a lot of attention. They never, ever chased an acquisition. They always did deals when the price was right. He did some huge takeovers. In fact, in the media industry, he did the three biggest deals ever up to that point in time so, in other words, he did the biggest deal and then the next one surpassed that, and a third one when he bought ABC, he surpassed that still. That kind of slow and steady approach can work in acquisitions but with 70% of acquisitions failing surely you must put question marks against a highly acquisitive company like Sibanye, like Aspen, and unfortunately, we should have been doing the same with Steinhoff but it’s a bit late for that now, but a reminder the dimension data, with a similar story that all is not glitters, even though it appears to be gold.
I absolutely agree with you. I’m very cautious of companies that grow by acquisitions, and if they do grow by acquisitions it must be by stealth, very slowly and bolting on something that fits in nicely. Not necessarily taking over these big, bold debts because, as you say, most of them fail. It’s very easy to merge spreadsheets but it’s a lot more difficult to merge the actual cultures. It takes a lot of doing to do that. There are people who know how to grow companies. I’ve always admired Brian Joffe from that point of view. Stephen’s business, which is Aspen is actually a reconstitution of a business. He shifted it, and through his acquisitions he actually bought manufacturing facilities and he bought licenses and that in order to kind of refocus the business but still, and you’re dead right – a lot of acquisitions are very fast. It takes a long time to get the returns on capital that you want and I think Stephen will only get it far down the line. One that worried me was Famous Brands, where they were just picking up all kinds of franchises but coming back to Neal. I’ve got to say that I watch him from the side-lines. I don’t buy these kinds of companies. I didn’t buy Steinhoff, and I watch Neal from the side – I love the way he operates because he comes in… Remember Sibanye – what was the original strategy of Sibanye? Sibanye wanted to take over the goldmines that Gold Fields didn’t want. I think there was Beatrix, Dries, Kloof, and Randfontein they were wonderful mines in their day and his whole aim, Alec, was to take these mines. Extract what value there was because he was a good miner. Remember, he’s got a mining degree. He’s an engineer and he knows about mining. I think he worked with Gold Fields many times, and he had a history in mining.
Yes, he grew up in Harmony.
He was a good miner and he wanted to say, okay, let’s take as much as we can out and pay dividends. In other words, we’re going to run these mines down, take the money and goodbye, which was the old way that mines used to run but then he changed course. He’s changed course now and he’s started to go into platinum. Strangely, his son, Justin, is a very good platinum analyst and highly rated. Then he stated with Aquarius and buying Anglo Platinum Mines, if I’m not mistaken, and then this huge deal up in Montana, which is Stillwater, and now Lonmin. So, his platinum is probably as big as Anglo-Plats – he will produce it. So, I think he takes huge bets based on the platinum price and his ability to bring that platinum out at profitable levels so, there’s a lot of risk in that. Alec, those risks are in the share price. The share price hasn’t done tremendously or brilliantly. It’s around about R16 when he listed in, I think, 2013, I might be wrong in my adjustments and that. I think it was about R10. It’s seen better but markets haven’t overreacted to it. They haven’t given him the benefit yet so, I think he’s got to work on that.
Yes, you can buy Sibanye today at 2015 levels, although it did go above R30 a share in late 2016. David, just to reap and to perhaps put it all together. When you see these highly acquisitive companies it’s probably best to sit on the sidelines and watch, and when you see these dramatic changes to share prices, as happened yesterday and the JSE was shocked or rocked rather, in the property sector. Then, if you’re brave, you can buy when others are panicking?
You can but only make sure that you do your research and don’t find anything that’s wrong that’s behind it. Ask the story, and ask the questions – sure.
Well, I’m sure now you know a whole lot more about the Viceroy-effect. Until next time, so long.
