In the latest episode of Rational Radio, South Africa’s favourite market commentator David Shapiro unpacked the massive (and complex) put and call options entered into this week by Discovery founder and CEO Adrian Gore. The trades reported on the Stock Exchange News Service relate to Gore’s decision to borrow money to contribute his share of Discovery’s R5bn right issue that was conducted in 2015. The biggest individual shareholder with ownership of over 7% in the R73bn business, to retain this share of the business Gore put up his shares as security for the loan to follow his 2015 rights. As David Shapiro explains, the options are in place to protect the bank which lent him the cash. Also in this interview, David shares his perspectives on SA Airways and the similarities between Tongaat and Steinhoff. – Alec Hogg
Well that’s our signature tune “For the love of money”. David Shapiro is the man who follows money for his life. He joins us now, just about ready to go to Australia, so your silly season is beginning pretty much after this week.
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Yeah my whole year is silly season when I look after grandchildren, so it’s just a matter of which country I’m looking after them in. This time it’s Australia.
Funny that Dave, in the past we used to talk about the silly season and it just seems as though it’s fallen out of parlance now. I guess people are working a little harder today than they did 10, 20 years ago.
I think so. I think they have to. One of the reasons – certainly in our industry – is that the markets remain open 24 hours a day. You’ve got to keep tabs on what’s happening. So you can’t sit back and relax as we used to. The other thing is you’re on Internet bases systems, electronic systems and in the past when we started on the floor, there was always someone to cover your deals if you couldn’t be there. I noticed there’s quite a bit of activity around here, we’re in Melrose Arch and it’s made up of mainly restaurants and so you still see a lot of people in the evenings coming here for a drink or supper, but what you say is definitely right, the silly season as not as it used to be. The other thing, we’re bringing forward Christmas shopping with this Black Friday thing – everybody’s shopping now at the end of November – the numbers are staggering. I’m talking on a global concept, the December shopping is making way for late November shopping.
Well that’s the picture on the front page of The Business Times this week, kind of told it all didn’t it? David, The focus though in the business world, has been to do with a pretty awful report coming out on Tongaat. There seems to be similarities between them and Steinhoff. How are you reading what we got from PwC on Friday?
What disturbs me more than anything else, is that chaps like Peter Staude – I can’t tell you how many times I was in the studio with you and we used to interview him. He came across as a confident competent man – the same with Markus Jooste – I was difficult to question them, they were always in charge, charming kind of people. Why do they have to resort to the kind of tactics that they did? I think in Peter’s case – in an interview with you last time – I mentioned that there were certain areas in which they could diddle the numbers and this comes through as very serious transgressions. What’s concerning about the report, is that in this case, P.W.C. implicate the whole board. There was a cultural deference – no one challenged the accounting practices – and what Peter was doing was, bringing forward sales, doing a lot of trades, overstating sugar sales in Zimbabwe, all in order to cover finance deals. So there were a whole lot of things that took place which are concerning, but the big concern is, where are the auditors – in other words – where are the non-executive directors? These are things that should be picked up and that’s why they are gatekeepers. They are there to protect our interests and we rely on them. They haven’t come through once again.
I guess the one thing in Peter Staude’s favour is that the report has said that he didn’t steal to put money into his pocket like Markus Jooste, they did play with the accounting or with the books, so that the incentives could be achieved and they could be paid accordingly. Is there any difference?
Not really, in both cases you’re misleading people. There was no stealing but what happens is that you increase the sales numbers, you falsely increase profits, you bring forward profits that would have come through a year later, so there are all kinds of adjustments that has to be made. But he didn’t steal, he didn’t hide anything from that point of view – this was accounting shenanigans – I don’t know where the difference lies. It’s reckless type of stuff that you don’t have to do. You don’t need to do it, you don’t need to put through sales in order to manipulate your share price.
We’re going to talk to Chris Logan about that a little later. He’s been following it closely and in 2014, was already warning that they were going in the wrong direction. Something that’s been going in the wrong direction David – and it’s almost like a movie – is South African Airways. On the weekend we read the report in Business Times that there had been a report issued to the board – some months ago – with the previous CEO saying let’s do a merger with Ethiopian Airlines and we could have a sustainable business. But it seems like that fell on deaf ears and now it’s just going from bad to worse. You have an ear very close to the ground David. How are you reading all this?
The problem is that – at the moment they are struggling to pay their staff – the banks who could provide finance are not coming to the party unless government gives guarantees. Government are drawing the line and saying we can no longer give those guarantees because all it does is weaken our position. We’re trying to hold off a downgrade, but if we continue to guarantee these kinds of payments, of course we’re going to be downgraded. So they are drawing the line, they know that something has to be done and now we’re going to see whether government can stand that line or whether the unions are going to completely cripple the airline as we saw last week. So it’s coming down to that point. The problem is that some pilots weren’t paid or being paid in stages and when you get to that point, you know you’re in real trouble because – once the pilots decide not to fly the planes – then everything just falls in a heap.
So if the government doesn’t give a guarantee, the banks are not going to lend the money and they can’t pay salaries. Have they not paid salaries?
We’ve heard stories filtering through, at this stage we haven’t got confirmation, but there’s anecdotal evidence where salaries are being delayed. When you get to those stages – you’re really juggling the cash book – and you know you’re in trouble.
Let’s say the banks say, we want a government guarantee, the government says we’re not prepared to give you a guarantee, so the banks don’t lend, does it go into business rescue?
It must go into business rescue and all you’re doing is holding off the creditors. It doesn’t solve the problem because at the end of the day, this is a bloated airline – with far too many staff and far too many expenses – which you have to address. The business rescue people come in, lay off staff, consolidate things to become more efficient, maybe that is the route. I cannot understand why government is taking the third option which is trying to make something of it. This is a political move Alec.
Something that is not political but something that really caught my attention today on SENS was Adrian Gore and his share dealings. These numbers are just mind blowing David, what is going on there? There are call options and put options -nearly R1.5bn that’s involved.
I’m going to try and explain it and hopefully it comes through articulate and easy to understand. Where this stems from, is that some time ago Discovery had a rights issue – I think this was to fund the bank, they needed cash – it’s a couple of years ago, Adrian needed money to follow his rights and therefore he borrows from a bank, or he enters into the structured products. He wants to borrow money, so what the bank says to him – and I think in this case it’s probably RMB or someone associated with the group – they say yes, we will lend you money against the collateral of your shares, but we want protection. In other words what happens if the share price halves, then the collateral halves. We want protection beyond a certain point. So he enters a put.
What is a put?
That gives him a right to sell the shares at a certain point. If the share price falls beyond a certain level, he can sell them. He’s got protection at that level and the people who have lent him the money have got protection that the share price will not fall beyond that point but it costs him to get that protection. It cost him money. So what does he do on the other leg? He says ‘okay’ in order to pay the premium on the put option then I am buying – in other words the right to sell – I will sell a call meaning that he sells the right for someone else to buy the shares beyond a certain point.
So if the share price goes above R160, anybody can buy Adrian Gore out of Discovery. Wow.
Exactly, or buy those R8m shares. But if it falls beyond R80 or R90. He’s got the cover. Now what happened in this deal – this is a restructure – he entered into a deal, obviously which was making him feel very uncomfortable and that’s why he restructured, that’s why there’s another date – 2016 or something like that – that when those share price fell, (remember the share price fell below R100) I think he was right on the brink of being forced to put those shares. So I think Adrian has been under a bit of pressure. I don’t want to speculate in any way, I’m merely reading what’s in between the lines, I think this is a deal that’s been restructured on more favourable terms to help Adrian, but there’s no doubt that he’s still got this debt that hangs over him at a much higher price than the share price is trading at now. But it’s not the first person we’ve seen enter into this. Remember Richard Friedland entered into something very similar with Netcare and I think he was forced to sell the shares.
I guess you really can’t win on this – if you’re Adrian Gore – because if you don’t follow your rights in the rights issue, then investors are going to say you don’t have confidence, you want us to put more money in, where’s yours?
Exactly.
It’s hard to be a founder isn’t it?
It’s very difficult. I don’t think Adrian is starving, still think he can afford three meals a day, but I think this is a renegotiating of what was a very uncomfortable position for him.
David Shapiro and that’s the last time we’re going to be talking to him this year.
