Rian du Plessis, a successful merchant banker and corporate executive before his 10-year reign as CEO at now struggling Phumelela is furious about the destruction of shareholder value at the company he left generating an annual profit of R155m. In this stinging interview, this ultimate insider, who is also Phumelela’s fourth-biggest shareholder, discloses that he personally offered to pay up to R300m for one of the numerous plum assets in the company, but was ignored by the business rescue practitioner. Du Plessis says Phumelela’s creditors, who vote on Tuesday, would be wrong to support vote an apparent lifesaving offer from wealthy horse breeder and owner Mary Slack Oppenheimer. Her bid, which is supported, would give creditors just over 70c in the rand, but shareholders very little. Du Plessis says the Mary Oppenheimer and Daughters‘ offer is vague and opaque and from what he can see of it, substantially undervalues the company. He reckons the offer from UK group BetFred is much the better one. – Alec Hogg
While most people were tied up with Covid-19 and lockdowns, there’s been a fascinating Battle Royale in the South African horseracing industry. We heard last week from an organisation that calls themselves MOD – that’s Mary Oppenheimer and daughters – riding to the rescue of South African racing. And then this week, a UK operation called BetFred put in a very generous offer, double what we’ve seen so far. The former chief executive of Phumelela, the man who’s been taking a lot of heat over the decline in the business, Rian du Plessis, joins us. We go back a long time. I remember your days at RMB and then the work that you did at Comparex, a big computer company. When you then moved to Phumelela it was almost like you’d taken a step backwards. What motivated you to go into Phumelela to take over as CEO?
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Rian du Plessis: You may recall that I bought the European business Comparex from the listed company, put a small team together, and we turned around that business within 18 months. And five years later, we sold it and we did reasonably well. I was bored. And along came Bernard Kantor and Markus Jooste and they said we’ve got this company, it generates cash and its got real international potential. You’ve proven your skills in the international arena. Don’t you want to take on this challenge and internationalise this business? And I looked at it and I thought, yeah, why not? There was an opportunity to grow the international business quite aggressively. And I must say that the revenue from the international business grew under my watch, the 10 years that I was there, from about 20% to over 70% of the total revenues.
And when you left Phumelela, what was the state of the business?
Rian du Plessis: I left in September 2018 after the auditors had signed off on the July 2017 numbers and Phumelela had made R155m profit. We had also announced on the 22nd of July that the business model of Phumelela was not sustainable and that we wanted to return racing in an orderly manner to racing’s stakeholders. And that was the official strategy when I left – that was the official plan.
What happened? Because we now see Phumelela in business rescue, we are told that the company is bankrupt and were it not for benefactors coming to the rescue that they wouldn’t be horse racing in South Africa into the future. So when you leave it is R155m in profit – today it’s losing money hand over fist and it appears as though it’s on its knees.
Rian du Plessis: Alec, well, the return to racing did not happen. That was step number one. You’re running a business model where your operating costs, which are mainly salaries, water, electricity and the like, those increased by more than inflation every year and betting on racing decreases every year. So it was evident that they would be a catastrophe somewhere in the distant future. But what accelerated it was the removal by the Gauteng Gambling Board of the 3% Sports Development Levy, which happened, I believe, somewhat late in 2019, robbing the company of more than R80m worth a lot of bottom line. That accelerated the position. And then obviously Covid-19 just came in and brought to the day of reckoning much sooner.
Why didn’t the racing assets get given back to the racing community?
Rian du Plessis: And I don’t know, Alec, Bernard Kantor was chairman at the time and John Stewart, my successor. There was an attempt to rebuild the bridges with racing and to see whether they could run the business on that basis. I continued suggesting to the board that that was not the appropriate strategy, that it was disastrous. But I’m afraid that didn’t happen under my watch.
Just from your own perspective, I remember seeing often that you bought into Phumelela, you actually bought shares. So presumably at the time, you were running the place, you had an impression that it did have a bright future. Did you sell all your shares at the time that you left?
Rian du Plessis: No, I kept every single share. My family and I are the fourth biggest shareholders of Phumelela so it’s painful to us what has happened there.
Subsequent to what has occurred, where are we sitting right now? Because up until last week, it appeared as though shareholders would be lucky to get anything back.
Rian du Plessis: Yeah, I noticed with interest the BetFred offer, which is on the face of it to me, a very, very good offer and it looks as though shareholders would get somewhere between one and two rands and that creditors would be paid in full. I would have hoped that one could sell the racing assets alone and keep the other profitable businesses being SuperBets, BettingWorld and Interbet and trade out of trouble. But that’s now not on the table. There’s a meeting of affected persons, which is creditors, shareholders and employees on the 1st of September, which is Tuesday. And creditors will be required to vote. They can vote either in favour of the MOD deal or they can vote to postpone the business rescue and ask the business rescue practitioner to come forward with a new plan that incorporates the BetFred offer.
Is it as simple as that? They could actually turn down the BetFred offer, even though it is substantially higher than what’s been put on the table?
Rian du Plessis: Yes, they can. I’d be most surprised if they were to do that. But yes, they are fully entitled to do that.
What is the difference between the two offers?
Rian du Plessis: Well, Alec the BetFred offer fully disclosed. The MOD offer is not disclosed at all. The only thing that is disclosed is that there’s R550m of post-commencement finance that’s put in place in three equal tranches ending October next year. What is not clear to me is why Brian Riley said on your show that he expects the racing assets being the three racecourses, Teletrack, the Tote and PGI (Phumelela’s international business) to be concluded and sold to them within three months, which removes all of the loss-making businesses. So I don’t know what the need for post-commencement finance really is. To be quite candid I would far rather want to know what I actually offered to buy the business. That’s more important than post-commencement finance. You don’t need post-commencement finance beyond the sale of the loss-making businesses.
Read also: Mary Oppenheimer Daughters gives horse racing R100m lifeline
So why would the creditors vote in favour of the offer that’s been put on the table, given the way you’ve explained it?
Rian du Plessis: Well, I think, firstly, the BetFred offer is R100m more of post-commencement finance. I think the first 200 million flows five days after it’s approved by creditors and the rest stand to be corrected, I think, end of October. So it comes quicker and in less tranches. It’s only two tranches and more than a year ahead of the R550m put forward by Mary Oppenheimer and Daughters. And then there their offer is fully disclosed. Their offer is a minimum of R875m and an upside of R925m. The competing part of MOD’s offer is opaque, it hasn’t been disclosed, which really makes for it to be very difficult to vote in favour of it.
When we had our discussion last Thursday on BizNews, on the webinar with Charles Savage and Brian Riley, I raised questions about SuperBets. Given the involvement of Markus Jooste in Phumelela and given the track record that he had of buying companies or using the listed vehicle to acquire companies and then to skim off the top. Now, you were in charge at Phumelela at the time of the SuperBets transaction. And when you look at it today, it doesn’t look like a very clever transaction.
Rian du Plessis: Well, Alec, hindsight is a perfect science. At the time, SuperBets was unquestionably the market leader in fixed odd bookmaking in South Africa. They made R120m after tax. And they had revolutionised bookmaking in that they had set up these hypermarket type shops. When the traditional bookmaker shop was 50 to 150 to 200 square metres theirs ended up being over a thousand square metres. So they brought something completely new to bookmaking and to Phumelela. The price that we paid was a net seven multiple because it took us a year to implement the transaction and we required that we offered an eight multiple, but they had to keep a year’s profits inside the company. So we paid a net seven multiple, which, to be quite honest, I don’t believe it is overpaying in any shape or form. Not for that kind of business.
What’s happened to SuperBets subsequent to that?
Rian du Plessis: Their profits decreased quite a bit in 2019. And I understand from the management accounts that for the first six months of the 2020 financial year they made R40m again. So they were on track before Covid-19 to make up to about R80m again this year. Which, given what’s happened is not bad at all.
Rian, just with the SuperBets deal. Now that there’s so much questioning around it, how confident did you feel at the time that Phumelela made that purchase?
Rian du Plessis: Well, best illustrated by putting your money where your mouth is. Alec, I underwrote and followed my rights in the rights offer, and my family put in R50m into that rights offer that funded the SuperBets deal. I can’t believe that there’s any other proof better than putting your own money on the line.
Fifty million. That’s a big number. And what is it worth now if you have a look at what’s happened to Phumelela subsequent to your departure?
Rian du Plessis: Well, it’s nothing if it goes into liquidation. I think on the MOD side, we’ll probably get somewhere between one and two rand, which would mean that I would get somewhere between R5.5m and R11m.
So you’ve got a very strong interest in making sure that create the shareholders as well as, I suppose, creditors are properly looked after in this whole process.
Rian du Plessis: Well, one would hope so. Unfortunately, in this process, shareholders don’t have a vote. We attend the meeting and I believe we can speak. But we were not afforded a vote.
What is BetFred? Who are the people there?
Rian du Plessis: It’s Fred Done who owns the business. I stand to be corrected. Details of it are published in their own church, Chelmsford Racecourse in UK. They own the UK Tote and then I think they have some 1500 betting shops in the UK and they have a presence in the US and elsewhere as well. It’s a serious concern. They also own, I think, 7% of William Hill.
So they’re are a sizeable business. But would they be following the same process that you proposed, which was to give racing back to the racing people?
Rian du Plessis: No, I don’t believe so. According to what they’ve announced, they want to continue with the running the racecourses, et cetera.
Is that the best way of doing things, given the way you were plotting the path forward when you left as CEO?
Rian du Plessis: It’s not the way that I would have done it, but, you know, each one unto themselves. So I would have said, you know, that they fit it in with a strategy. Big pools. PGI is a very, very strategic asset, unique in its kind. And running the racing is something that they have experience of. The picture (broadcast rights) of South African racing is very strategic to them because the UK bookmaker shops display it every day. So I think that there are a variety of reasons why the Phumelela assets are very strategic to them and why they will look after them very well. I know them from having sold them media rights. Phil Siers was at SIS at the time and we sold our media rights to then when he as there at the time.
The $64 000, as they put it on American TV – having been Phumelela’s for ten years, knowing the business probably as well as anybody on the planet, which of the two offers would you be inclined to support? The BetFred or the MOD one, and why?
Rian du Plessis: Unquestionably, the BetFred one. The simple reason is, I don’t know what the MOD offer is other than they are lending money. I don’t know what the offer is and it’s opaque. It’s not been disclosed, which is concerning, to be frank about it.
And if BetFred were to be successful in this bid, would they be good for South African racing in the long term?
Rian du Plessis: I believe so. They would not want to spend all of that money to drive racing into the ground. In fact, they would want to see it flourish, otherwise, their investment would be at risk.
R80m shareholding from one or one of the assets with a 50% shareholding would suggest that assets within four million are worth considerably more than is being perceived at the moment.
Rian du Plessis: Yes. I believe so. SuperBets should be making between R80m and R100m in a normalised year; Interbet should be making R35m a year and Phumelela gets 50% of that; BettingWorld with some help and new IT systems should be making about R50m a year. And then SuperWorld, which is see-through 75% share for Phumelela, should be making at least R10m a year. So, there are good businesses in there.
Are you involved at all in the BetFred offer?
Rian du Plessis: No, I’m not. In fact, I made a competing offer for PGI. I offered between R200m and R300m for PGI and in the alternative, I offered between R100m and R200m for Turffontein.
Has that been considered at all?
Rian du Plessis: I have not formally been informed that it has been turned down, but it doesn’t feature in the business rescue plan. So I can by deduction only surmise that it has been turned down.
Rian, I don’t understand a lot of this. When you left, the business was doing well. You know the assets. You’ve personally made a bid for some of them. It appears as though there’s a lot of value that is going to be lost if the current process continues. Yet the racing industry is fully supportive or seems to be highly supportive of the Mary Oppenheimer and Daughter’s offer. What’s going on here? It doesn’t add up.
Rian du Plessis: Well, there is obviously natural tension between the racing industry, which wants to get the assets at a cheaper price, and the interests of creditors and shareholders in Phumelela which want a fair price. That’s where the tension arises.
Just take us through all of this, a lot of people don’t quite understand what the business rescue process is. If creditors vote in favour of the MOD R550m funding on Tuesday, does that mean that MOD then gets to acquire the assets as well?
Rian du Plessis: No. Aside from the BetFred deal the MOD process, if I could call it that, simply says they’ll put in enough money by post-commencement finance, that creditors could be paid up to 72c in the rand and with a bit of luck, maybe more. But that presupposes that all of the assets will then be sold and an attempt will be made to settle as many of the creditors as possible. But the value of the assets that are to be sold to Mary Oppenheimer and Daughters has not been disclosed. And that is definitely, by deduction, I look at it and I can’t see that it could be close to R550m.
Is that sale a done deal after Tuesday – and really let’s just take Turffontein as an example. You said you were prepared to personally put in an offer of R100m for Turffontein. Does it mean that’s the minimum that the asset will be sold to Mary Oppenheimer and Daughters for? Or is there another bidding process that comes in or do they just pick it up as part of this deal?
Rian du Plessis: I don’t know. I think they just pick it up as part of this deal, Alec. I must make it clear that my offer for Turffontein was in the alternative. I couldn’t afford to buy PGI and Turffontein. So I offered to buy PGI for between R200m and R300m and in the alternative, if my bid was unsuccessful, I offered between R100m and R200m for Turffontein. The reason why the range is large is I’ve had no information made available to me on these assets and I’m working from the information I was privy to when I was CEO which is two years ago.
In your previous life, you were a merchant banker. How would a merchant banker have handled this whole process because it doesn’t seem from what you’ve unpacked for us, that it is going in the most efficient manner?
Rian du Plessis: I think transparency is the word. The business rescue process is a transparent and consultative process. So I think that if I was handling the process, I would be more transparent. I would put full details of the Mary Oppenheimer and Daughters’ offer alongside that of BetFred and put it put that to creditors and other affected persons and say, have a look at this. These are the two options. That’s what I would have done.
