The Editor’s Desk: EOH, Hulamin & the rot in SA’s corporate world

Corruption and mismanagement are far from a uniquely public sector problem, as the tales of EOH and Hulamin show. Hulamin has succeeded in destroying billions of rands in capital over the last decade through sheer poor judgement and bad management, while EOH has found itself mired in a billion-rand corruption scandal that reaches all the way to board level. In this episode, Alec Hogg and I discuss this sorry state of affairs, looking at how these companies managed to get so far off the rails. We also discuss the latest developments in the Bosasa/Cyril Ramaphosa case, looking at the Public Prosecutor's Friday decision that Ramaphosa is guilty of an offense. – Felicity Duncan.Hello and welcome to this week's episode of the editor's desk right here on BizNewsRadio with me, Felicity Duncan and Alec Hogg. Hulamin, Alec, Hulamin, Hulamin, Hulamin. .___STEADY_PAYWALL___.I have been looking over some of the numbers just this morning. And you know, I haven't checked in on it in a while and it's actually just a shocking story. I'm looking here: the share price is down 90% since it was unbundled in 2007 – unbundled from Tongaat Hulett – and the market cap has collapsed from about R8.6bn in 2007, down to R740m. And that's during a period also of significant inflation. So the real loss, in some sense, has been even worse. .And it seems to just come down to terrible, terrible management, really bad management, even though, of course, the managers have been rewarding themselves very generously with perks and money and bonuses and whatnot. But the company has just been run into the ground..It's an extraordinary story isn't it? And also re-emphasising the problems that the whole culture of Tongaat has inflicted over the past 10 years. Chris Logan has been an outspoken critic on this, and we had him on Rational Radio this week. We unpacked some of the information there. He was on our radio show a few weeks ago talking about Tongaat. And now he's gone from Tongaat onto Hulamin..Also read: Chris Logan: Hulamin managers even worse than at former parent Tongaat.But there are a number of these companies that have been so badly managed and somehow have been given a free pass by the media, by – well, not by investment analysts, because they simply vote with their feet and sell and leave. But definitely, they haven't been highlighted, or the problems haven't been highlighted in the way that they should have been. Hulamin is one of these..It's a critically important company in Pietermaritzburg, the capital of KwaZulu-Natal. It is a company that should be doing incredibly well. The rand has fallen in the last 12 years since it was unbundled, the prices of steel or aluminium rather, which it sells into the US market, have risen. It just has been badly managed. It hasn't gone the route that all other companies in its field have gone – using a lot of scrap metal, recycling scrap aluminium and using that to sell forward. It's just been bad management and that's what Chris Logan has highlighted. And that's what the market has actually been telling us for the last 10 years, as you correctly say, it's a more than 90% decline in the share price since the unbundling..A real story of just poor management. Chris points out that the executive committee, for instance, has ballooned from seven people to 13 people. When you don't know what to do, you tend to just create another committee within the corporate field, and then it's easy enough to pass on the blame to others..It's a bad story and one that, hopefully, shareholders are going to look at and say this far and no further, and start fixing it. Fortunately for Hulamin shareholders – about the only upside there – is that they do not have the debt that Tongaat has got. Tongaat is effectively owned by the banks now, but its previous subsidiary Hulamin isn't owned by the bank. It doesn't have too much debt. But the shareholders have really taken a lot of punishment on this one..Ja, it's a good reminder that poor management is really by no means restricted to the public sector. You know, there's always so much focus on how badly – rightly so, of course – a lot of focus on how badly managed things like Eskom have been. But it's not a uniquely public sector problem. Look at Hulamin. I think it's been almost worse managed, in some ways, than Eskom because it's really directly sapping money out of the pockets of shareholders. So, it's a good reminder that bad eggs can get in anywhere. .And I think that the story at EOH is another, similarly good reminder that corruption is also by no means exclusively a public sector problem. Now the EOH story dates back to about 2014 – I believe the transactions that have come to light as being problematic were 2014 to 2017 – and EOH has been doing a lot to repair the damage done there. But a R1.2bn scandal there, a series of transactions that have implicated top management, implicated people on the board, a lot of money stolen from the company and it's having some serious repercussions for current staff and for current management..Well, it's quite interesting, because the rescuers of EOH, and you have to put it in that context, are the same people who have gone in and acquired a controlling interest – or not a controlling 100% – of Tiso Blackstar. So, these are guys who've done very well in the African continent, who are now looking to buy companies that are under stress and fix them..Also read: EOH hit by state contract fraud; uncovers R1.2bn in suspicious transactions.But I don't think they realised quite how deep the malaise went at EOH. I know they're still sticking with it and they'll be looking to fix it up in time. They brought in Steve van Coller, who's ex Barclays Capital, well, the ex-CEO of Barclays Capital and he spent a couple of years at MTN. He is a corporate banker and he would be the right person to fix this from two aspects. The one aspect is to start offloading a lot of those acquisitions that were made, which perhaps were not good acquisitions. And secondly, is to bring in the correct governance..But EOH is a story of a company that was highly entrepreneurial. It funded its acquisitions… well, it fuelled its share price by making more acquisitions, at a lower cost than it could issue the shares at. It was a little bit like what Dimension Data did in the 1990s. A very similar story here, where EOH had a charismatic chief executive in Asher Bohbot, he then had a very high share price that they pushed quite aggressively and then used those shares to buy other companies at lower PEs than the sky-high PE of their shares..And a company called 36one – Cy Jacobs picked up on this and started reporting on it and started going short on EOH shares a few years ago. Where the corruption began at EOH… one doesn't know how far back it goes, but PWC forensic auditors have – as you say correctly – identified that it was at least five years ago, and that there was quite a lot of bad stuff that happened there. But it could go further back than that..The important thing about EOH though, is the share price did collapse from where it previously was. It now has new controlling shareholders, it has a new chief executive, and it's got a chance of regaining…I doubt if it can regain its old share price, but it might regain some of the old credibility that it had in the past..But spot on. There's a lot of… whenever you see companies that are rising too fast, too far – stop and reassess. Stop and look at it, because often there have been some cracks that have been papered over and those cracks tend to become chasms. Because in business, things don't happen overnight. It's very rare that you get an overnight success story that has got any sustainability to it. Business takes time. It's like a tree. If your roots are deep and have been created over many years, then that tree will be stable. If suddenly you put a huge tree above the ground without any roots… Well, when the wind comes along, as it always does, that will fall over..Indeed and a salutary reminder, also, that corruption flourishes when both governments and companies are willing to engage in bad transactions and willing to pay bribes and whatnot. You can't really have one without the other almost. And clearly the rot, in terms of corruption, goes quite deep in South African institutions. But there's also good and encouraging signs in the fact that so much is now being uncovered and being punished, being publicised, and efforts being made to regain and recoup the money that was taken and that was lost. .Now, another development on the public corruption front this week has to do with Cyril Ramaphosa and the allegations around the campaign payment from Bosasa. We've seen the Public Protector on Friday really going after Cyril. She has ruled that he violated the Constitution and executive ethics code. Now, I know you have some strong opinions on this story and I'd like to hear what you have to say on this one..Ja, Felicity, the first thing that you can say is, I mean, really do me a favour. The guy who was in office in the past took an effective – and effective number is a billion rand. And I'll tell you why it's effective a billion rand for Nkandla, because the money that he took to upgrade Nkandla was funded over a 20-year bond, because that's what happens when you're running a deficit in a government. And if you take all the interest payments that specifically went to pay for Nkandla, you're talking about a billion rand..So, let's put that one side. Unfortunately, what you can't do is say, hang on, but this guy is a completely different president to the president we had in the past. We've got to now assess the current president on his own merits..Also read: Mkhwebane strikes; Ramaphosa hits back – Bosasa stuck in the middle.So, here are the facts of the matter. Ramaphosa's re-election campaign received R500,000 as a donation from the Bosasa scoundrels. When he was asked about this in Parliament, because somebody knew, one of his enemies knew about it, he didn't know that they had made the R500,000 contribution. He thought that they were referring to his son, Andile, who had dealt with Bosasa in some transaction in East Africa. So, Ramaphosa answered on that basis..He then went back, did his research, found out that there was indeed a R500,000 contribution to his campaign. And then he asked his team… I guess, would have given them some quite strong words: A) why did you accept it, but B) to please not accept the money and give it back, in the same way as the ANC in the Western Cape gave back Iqbal Survé's million rand that he contributed to them, because they presumably felt it wasn't from the right source..Now the Public Protector, who's a Zuptoid through and through, who's incredibly incompetent, as we've seen over many instances that she has attacked, she is now not being deviated. She's continuing to go after Ramaphosa..And the real tragedy here is, because she is the Public Protector, and because she follows in the footsteps of an incredible public protector in Thuli Madonsela – who is internationally renowned and did her job incredibly well to get rid of and expose a lot of the corrupt in South Africa – some media outlets are using the, if you like, reflected glory of Madonsela and using the office of the public protector, which has now been desperately contaminated, as having credibility, which it doesn't..So, all of this is the antibodies of the corrupt, who are being attacked by the Ramaphosa campaign. He's got new people in the National Prosecuting Authority who are reputable and forthright and focused, in Shamila Batohi and her deputy Hermione Cronjé. You can expect that they are getting very, very close to the problem areas there..At SARS, there has been a re-installation of an investigative team there to look at counterfeit cigarettes, who are people who have been funding some political parties and clearly some other miscreants as well..So, what's happened here is that the forces for good, if you like, are getting very, very close to the problems, or due to the corrupt people and then there's a kickback from the corrupt side..It happened in Brazil, with Operation Car Wash. But the consequence in Brazil, it's almost like the caravan moves on, the dogs will bark… Over there, you've got the equivalent, in a US sense, of having the president, the leader of the House, and the leader of the Senate sitting in jail today, along with another three dozen of their cohorts. Lula da Silva, who was the president of Brazil – one of the most popular presidents in its history – is serving a 12-year jail sentence. But you can be sure that Lula also tried his level best and stirred up quite a lot of antagonism amongst his supporters in the time when he was under attack. And it's not surprising to see the same thing happening now with Zuma.

The Editor’s Desk: EOH, Hulamin & the rot in SA’s corporate world

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