JOHANNESBURG — JSE-listed Grand Parade Investments is a food and gaming company that boasts brands such as Burger King, Dunkin Donuts, and SunWest International, but it has gone through a rough time of late. Just last week it reported a net loss of R106m, while its share price has fallen by more than 70% from 2014 levels. Meanwhile, Burger King has reported six years of losses in South Africa. However, there’s now a group of activist shareholders, with a combined stake of just over 12% in the company, who want answers and a new board at Grand Parade Investments. They are so intent on forcing accountability that they’ve called for a special meeting at the end of October 2018. One of those shareholders is Denker Capital. And in this interview, Ricco Friedrich of Denker Capital explains what’s going on. – Gareth van Zyl
Ricco Friedrich of Denker Capital, thanks for chatting to us today.
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You’re absolutely welcome, Gareth. Thanks for having us.
Denker Capital along with other shareholders is pushing for a special meeting at the end of October. You’ve called for a new board among other measures. Can you tell us more?
Yes, if I give you a little bit of a background on this. So, Grand Parade has been through quite a challenging period over the last 24 months. But the challenges that they’re facing probably started five or six years ago when they embarked on the change in strategy moving from an investment holding company to owning and operating assets. The first one that they were involved with was Burger King South Africa and if you have a look at the results as you highlighted earlier in the introduction, we’ve seen six years’ worth of losses in Burger King South Africa. We’ve seen a turnover in leadership in the business. I think three CEOs in as many years, two CFOs and an enormous amount of capital that has gone into not only Burger King South Africa, but also some of the other food assets such as Baskin-Robbins and Dunkin Donuts.
The concern for us is twofold, but relates largely to the board of directors, particularly the non-executive board of directors. We questioned their skills and their experience in guiding and directing the strategy of the business and, certainly, that’s borne out by the very poor set of results that the company has just put out. But we’ve also questioned the independence of the board. Many of these members, two of them, in particular, have served for 21 years and a third for over ten years and that really brings into question their ability to independently challenge the executive management team on the very poor decisions that have been taken that have resulted in a huge destruction of shareholder value in the last two to three years.
You want new non-exec board members to come in?
We have engaged with the company previously as Denker Capital and some of the other shareholders independently have also had discussions around some of these concerns that I’ve highlighted. Some of them have made specific recommendations and we also highlighted concerns around management incentivisation, capital allocation and the high turnover of leadership in the business and, unfortunately, it just came to nothing. There was no change whatsoever and the only way that we can really implement change in the business is by replacing the board and I’m referring to the non-execs, who are there to hold the management team accountable for the performance.
We don’t believe that the current non-exec boards are in a position to be able to do that because they haven’t demonstrated that. That’s why we want the change. Shareholders are not responsible for setting the strategy of the company or for appointing the executive team – they are there to appoint the non-execs that ultimately hold the management team accountable for the performance and that has not happened in the last two or three years.
Together with the other active shareholders you all essentially have a 12% stake in the company. So, how confident are you of getting other shareholders to agree with your concerns and possibly making the requisite changes?
In terms of the regulation to call an extraordinary general meeting, you need a minimum of 10% either from a single shareholder or a combination of shareholders. Since the first announcement went out about the AGM being called, you’ve obviously seen the share price respond quite positively. I think it’s up about 25% or 30% since the company put out the first announcement a month or so ago and we’ve had numerous calls from many shareholders who are equally unhappy but haven’t necessarily seen a way out or been able to facilitate or agitate a change.
Therefore, there are far more than 12% shareholders that are equally frustrated with the performance of the business and you only need to go back and have a look, for example, at the last annual general meeting what percentage of shareholders voted for example, against the incentive scheme or the remuneration policy of the business. There are many other shareholders that have been coming out of the woodwork that now have an opportunity to vote.
Getting into the nuts and bolts of the Grand Parade Investments business, you mentioned earlier about Burger King. Now when Burger King launched in South Africa, I think back in 2013, its Cape Town outlet had queues snaking around the corner for days. There are now over 80 stores of this business in the country, but from a business perspective, it hasn’t performed as expected. What do you think has gone wrong there specifically?
It’s obviously been a tough trading environment, but that aside, I think there’s been a sequence of many poor decisions that have been taken in the business right from the beginning such as not correctly identifying the right sites, involving the services of a professional in terms of doing proper demographic studies and making sure that the stores that you’re opening are likely going to be feasible in the long-term. So I think that was the first challenge. The second one was not appointing any experienced person from the quick service industry whether it’s locally or globally to run this business. That was one of the recommendations that we made to the management team before and every time a new CEO or a person left we were told that it’s not essential to have somebody who has industry experience and it is a tough industry, especially if you’re trying to bring an international brand into South Africa.
We’ve seen a number of others try to do this and it’s difficult. Therefore, the third point (or maybe I’ll leave it there) is that the business model perhaps has potentially faced a number of challenges right off the bat in that to set up a Burger King. The capital requirements in terms of opening a new store was significant, as high as maybe opening a Spur. But a Spur is a big restaurant, it seats 400-plus people, so you have much higher turnovers. I think not necessarily understanding that or having the experience in understanding that equation came back to bite them.
That again comes down to who are the non-execs that are assessing and making the decisions and approving these strategies? Because it wouldn’t have taken a lot for an experienced team to realise that there were certain things that needed to be done right from the beginning and if they weren’t done it was going to result in the situation we see now, which is six years’ worth of cumulative losses, and R1bn Rand that’s been invested almost in Burger King South Africa alone. We think that the brand is a fantastic brand and that it has great potential, but we need the right management team in place or the right board to be able to direct and attract the right people to run that business.
Looking at the chair, Dr Hassan Adams, what has his response been to all of this and as a shareholder what has your take on his response been?
As mentioned earlier, we have engaged with Mr Adams personally in the past. We’ve engaged with the lead independent director at the company as well, we know some of the other shareholders have and it is has amounted to absolutely nothing. On some of the recommendations that have been made and on some of the concerns that have been highlighted on the issues that we’ve raised from a remuneration perspective there has been no willingness to improve the governance in the business whatsoever. And that has unfortunately left us with no choice but to follow this route.
Shareholder activism still seems like quite a new thing in South Africa, but do you think it’s going to gather steam over the next few years?
There’s absolutely no doubt that’s the case. I think you have already seen quite an uptick in terms of the level of shareholder activism in companies like Group Five. Obviously, this is before the Steinhoff incident of last year and I think it’s only going to increase, particularly in an environment where returns have been quite low, it’s imperative that there’s good corporate governance in place in businesses ultimately to maximise value for all stakeholders, not just shareholders.
Ricco Friedrich, thank you so much for chatting to us today, it’s been fascinating finding out more about this issue.
You’re absolutely welcome, thanks for the time.
Press statement:Â Shareholder governance concerns lead to Extraordinary General Meeting
GPI shareholders are seeking new directors to address governance and capital allocation concerns
In a Stock Exchange News Service (SENS) announcement on 26 September 2018, shareholders were notified of an Extraordinary General Meeting (EGM) to be held on 31 October 2018. This follows several failed attempts by these shareholders (who in aggregate hold 12% of GPI shares) to constructively engage with the GPI board about governance concerns, poor results and the departure of several key executives. The shareholders wish to elect four new non-executive directors to the GPI board to provide skilled and independent oversight. The shareholders have also requested that all existing non-executive directors be put forward for re-election to reinstate good corporate governance.
Good governance leads to sustainable and healthy businesses, and GPI is no exception.
After a period of good performance which largely came from the company’s success in the gaming sector, the share price has declined by more than 70% from 2014 levels. This has resulted from poor execution on its food strategy, concerns around capital allocation and governance which has resulted in the company reporting headline earnings per share losses in 2017 as well as a significantly lower dividend.
Despite the current financial underperformance and poor execution, according to 12% of GPI’s shareholders, there is significant value to be unlocked for all shareholders through an improvement in corporate governance.
Shareholder concerns about GPI governance
Extended director tenures lead to concerns around board independence.
Good corporate governance standards require that a board should comprise of a majority of independent non-executive directors. The GPI board currently comprises of five non-executive directors, two of which have been on the board for 21 years (Mr Abercrombie and Ms Mlambo), while Dr Maharaj has been on the board for 10 years. The extended tenures of GPI’s non-execs result in a lack of independence, especially when the existence of an executive chair (Dr Adams) on the board puts an even greater demand for independence on the remaining board members.
Poor alignment of remuneration structure with shareholders’ interests.
Total bonuses paid to executive directors amounted to R15 million in the 2017 financial year, while the group made headline losses and the dividends paid to shareholders halved.
The current board’s skills and experience is not aligned to the company’s strategic intent.
GPI’s shift into the quick service restaurant (QSR) industry in recent years and the reduced exposure to its gaming assets require a board with relevant industry skills, knowledge and experience. Shareholders are concerned that the current board does not have the necessary skills and experience to support GPI’s plans to grow in the QSR industry. This is vital to the long-term success of GPI given that the board sets the company strategy and is responsible for holding management to account on the execution of this strategy. The proposed directors have significant experience in a broad range of applicable industries including gaming, fast moving consumer goods and the QSR industry.
A spate of divisional executive departures indicates leadership challenges.
The departure of two chief executive officers in the past 18 months – a chief financial officer and the chief executive officer of Burger King South Africa (BKSA) – suggests that the current governance structures are not sufficient to attract and retain the best talent which is a crucial underpin for GPI’s long-term success. A strong, independent and appropriately skilled board is needed to hold management to account.
Shareholder concerns about GPI capital allocation decisions and poor financial performance
Significant investments in the food division of the company are loss-making
Estimates indicate that GPI has incurred approximately R1 billion of capital expenditure and cumulative net losses in the foods division up to the 2017 financial year which combined equate to around 100% of the current market capitalisation of the company. Poor execution of this strategy has resulted in the businesses consistently missing the targets initially communicated by management. In spite of the poor performing and questionable execution on the BKSA business, the company embarked on an expansion plan in Dunkin Donuts and Baskin-Robbins with cumulative losses to date of R58m and no clear business plan on the turnaround strategy. It is vital that an experienced management team with a proven track record are appointed to ensure successful execution and improved returns on the large capital already invested.
The Spur purchase and sales decisions highlight poor capital allocation
Further capital allocation concerns relate to GPI’s purchase of Spur Corporation (Spur) shares after the initial purchase (in 2014) of 10% of Spur shares via a B-BEEE transaction. In October 2016, the company announced it had agreed to buy up to R779m of Spur shares from Coronation Fund Managers at R40 per share or a 25% premium to the market price at the time. Fortunately, shareholders blocked this transaction. GPI however continued to buy Spur shares in the open market and last reported to own 17.79% shares – but offering no tangible strategic rationale for this. Spur shares now trade at R24.40 (as at 26 September 2018), which is below the average cost at which GPI acquired them and significantly below the R40 share price at which the company made the offer to Coronation Fund Managers. Management has publically stated that GPI now wishes to sell its stake in Spur. At current market prices, this would mean selling them for below GPI’s average cost price.
Weak financial performance results in lower dividends for shareholders
The financial underperformance of the business has seen headline earnings per share (HEPS) fall steadily since the rollout of BKSA started. Adjusted HEPS averaged around 25 cents per year from 2009-2014 and has now declined to a headline loss of 4.59 cents per share in fiscal 2017. Equally, the last dividend paid of 11.5 cents per share is nearly half the average annual dividend per share (including special dividends) of 21 cents for the period 2009-2017, despite significant asset disposals. Shareholders are concerned that earnings and dividends could continue to fall further as more capital is allocated to the loss-making foods business.
Change is needed to restore confidence and unlock value for all shareholders
The persistent share price weakness and significant share price discount of 74% to the intrinsic net asset value indicates the market’s lack of confidence in GPI. A strong and more independent board, equipped with the relevant skills and experience, is vital to restore confidence, protect the dividend and unlock significant value for all stakeholders.
The shareholders who together hold 12% of GPI shares
| Representative | % holding | ||
| Denker Capital (Pty) Ltd | 1.91% | ||
| Excelsia Capital (Pty) Ltd | 2.30% | ||
| Kagiso Asset Management (Pty) Ltd | 5.41% | ||
| Rozendal Partners (Pty) Ltd | 0.81% | ||
| Westbrooke Alternative Asset Management (Pty) Ltd | 2.17% |
Proposed candidates for non-executive director roles at GPI
Cora Fernandez
Cora is a CA with a 12-year track record in the private equity industry, during which time she served on numerous boards, board subcommittees, advisory boards and investment committees. Her latest role (2013-2016) in the role of Chief Executive of Sanlam Investments (SI)’s institutional business, which gives her strategic insight into investments and listed business strategy execution. Before joining SIM, Cora was the Chief Executive Officer of Sanlam Private Equity. In her 12-year tenure in private equity, she served numerous boards and board subcommittees.
Mark Bowman
With an MBA from UCT and a BCom from WITS, Mark has an exceptional long-term track record of delivering growth for SABMiller in a range of leadership roles including Managing Director of SABMiller Africa. His success has been based on a relentless focus on executing FMCG brands, ensuring actionable strategic outcomes and building effective supply chains in Europe and across South Africa. He also sits on the boards of Tiger Brands, Dischem, Mr Price and Distell, and is a member of the remuneration committees, audit and risk committees, and investment sub-committees of these boards.
Ronel van Dijk
With experience as Chief Financial Officer of Spur Corporation Limited and as Chief Operating Officer of Spur International, as well as a member of the board, Ronel has financial experience combined with first-hand industry insights of the food distribution business, both locally and internationally. This enables her to add immense immediate value to the food division of any business seeking to operate in multiple jurisdictions. Ronel is a CA, and completed her articles at Arthur Andersen, which gave her exposure to clients such as Seardel (including Prima Toys) and Langeberg (a division of TigerBrands).
Seapei Mafoyane
With an MBA from WITS and a BSC degree in Microbiology from the University of Natal, Seapei currently serves as the CEO and Executive Director of Shanduka Black Umbrellas, the enterprise and supplier development partner to, among others, Transnet SOC, Lonmin PLC, Anglo American, Exxaro and Mitsubishi Hitachi Power Systems Africa. Before this she was a business performance and capability strategist at SAB, the Head of Customer Strategy in the credit division of Standard Bank, and the Functional Head of Vitality at Discovery Health. Seapei serves on the boards of JSE-listed Rolfes Holdings and Timken South Africa, and is a trustee of the Timken Community Trust.
