Tim Cohen: Shoprite v Wiese and the small matter of R4bn

LONDON — Was delighted to see my one-time colleague Tim Cohen has changed horses, the former Tiso Blackstar inmate having joined the Daily Maverick to kick off its business coverage. Described by president Cyril Ramaphosa in his 2018 Davos Off Piste talk as the “doyen of financial journalism”, Tim has an impeccable pedigree and a contact book built over decades of sensible, insightful writing and editing of South African business. His talents have been put to good effect in the piece below on Shoprite’s efforts to distance itself from the man who built it. The article, naturally, appeared first on the website of his new employer, with whose permission it is republished. – Alec Hogg 

By Tim Cohen

Shoprite announced last week that it would be initiating discussions with Wiese, formerly one of SA’s richest men whose wealth was savagely decimated in the Steinhoff debacle. The value of these very unusual shares was not revealed since there will be a tricky and potentially fraught negotiating process to ascertain their value.

The problem for Shoprite is that these particular shares had been valued previously during the aborted acquisition of the Wiese-controlled Pepkor group by Steinhoff. Financial circles have been buzzing about this valuation and whether it, in fact, establishes a precedent.

It became a hot debating point about whether Shoprite should pay anything for the shares beyond their nominal value of 1c/share.

The pre-listing statement for what was then going to be called the Steinhoff Africa Retail Ltd, or Star, envisaged that Steinhoff, which had a few years before listed in Germany after an acquisition spree, would buy big chunks of Pepkor and Shoprite.

Wiese was heavily invested in both Steinhoff and Pepkor, the company that was the genesis of his retail empire. It was envisaged that Wiese would be paid for his various stakes in Steinhoff shares, but when Steinhoff’s valuation collapsed at the end of 2017, the deal was scrapped.

All this would be water under the bridge, except for a single sentence in convoluted finance-ese in the Star pre-listing statement, which gave Wiese “call options” – the right but not the obligation to require payment at a price – on Steinhoff shares.

The sentence says the consideration payable for the implementation of the call options has been determined based on, inter alia, a share price of R215 per Shoprite ordinary share for the about 128.2m underlying Shoprite ordinary shares, an amount of R4bn attributable to the deferred shares and an additional R4bn for cash and cash equivalents held by Thibault, one of Wiese’s operating companies.

Hence, Steinhoff was essentially proposing to buy Wiese’s 128.2m Shoprite shares for R28bn, plus R4bn for cash in Thibault. But the important part for the current discussion is the second part which says “an amount of R4bn attributable to the deferred shares”.

These shares are an oddity, and they are usually given to founders in order to allow the notional guiding force behind the company to have more influence in the direction of the company than ordinary shareholders have. This is precisely what happened in this case. In a previous announcement to the stock exchange way back 2012, the character of the shares was defined. Shoprite was raising money at the time and shareholder permission was required to prevent this founders portion from being diluted.

An annexure essentially makes three important points: The shares cannot be converted into any other class of shares; they do not give Wiese the right to participate in profits and dividends, and they fall away completely if Wiese’s share in the company as a whole falls below 10%.

But they do give Wiese increased voting rights, and this is crucial to the current debate about their value. As it stands, Wiese owns about 14.8% of the Shoprite shares, and the deferred shares give him voting power equivalent to around 32% of the stock. This 45% voting power makes him four times larger than the next largest shareholder, the Public Investment Corporation (PIC) which own about 11% of the stock. Hence, by entering into these negotiations, Wiese is essentially offering up his control — but not entirely. Another relevant, and perverse, factor is that when Shoprite CEO Pieter Engelbrecht announced that Wiese, for years the powerhouse investor in the group, would effectively be standing back, Shoprite’s share price immediately bounced 7% notwithstanding the fact that Shoprite announced on that day its worst interim results in decades.

Pieter Engelbrecht, chief executive officer of Shoprite Holdings Ltd., gestures as he speaks during a news conference in Cape Town on August 22, 2017. Photographer: Halden Krog/Bloomberg

Even though for years Shoprite has traded at a premium to its net asset value, suggesting a well-run company valued by shareholders, now it appears they are delighted at the prospect of Wiese’s departure as the controlling shareholder.

Fairly or unfairly, shareholders now think Wiese’s Midas touch has gone.

The other possibility is less embarrassing for Wiese; it’s possible shareholders just didn’t like the structure because it does diminish the stature of remaining shares and potentially allows larger shareholders to ride roughshod over the interests of minorities.

Engelbrecht obliquely referenced this point in his presentation, saying:

“In the last two years, we have engaged with investors on a one-on-one basis to address concerns like the compilation of the board, our remuneration policy and the capital structure.”

The shares form part of a two-tier capital structure long disliked by shareholders, where ordinary shares exist alongside deferred shares. However, the deferred shares, which carry 32.3% of the voting rights of Shoprite, are ring-fenced and held by Thibault Square Financial Services, Wiese’s investment business.

For Engelbrecht, the negotiations about the value of the shares will be particularly tricky since even after the sale, Wiese will remain a big shareholder, and hence, essentially, his boss.

Financial analysts are slightly at sixes and sevens about the value of the shares because on the one hand, Wiese is giving up control, which usually does have a substantial value. But on the other hand, the existence of the shares doesn’t seem to have boosted the value of Shoprite in recent and they are not transferable, so what would Shoprite actually be buying?

“Their real value is not really clear. I think they could be valued at anything from R3m to R4bn” said one.

However, others are emphatic. Evan Walker, an analyst at hedge fund manager 36one, says: “Shoprite should not be paying one cent for these shares. They have no economic value and offer no value to remaining shareholders in the hands of Shoprite.

“The bottom line is that Shoprite has run its business very effectively for decades with those shares in place; why does Shoprite need to buy them now when the business is struggling to produce real growth for its shareholder? The valuations done by Steinhoff and Wiese at R4bn was just another way to screw over minorities,” he said.

Karl Leinberger, Chief Investment Officer at fund manager Coronation says, “While the shares have significant voting rights, they have absolutely no economic rights. Therefore, we would be inclined to value them at the low end of the range. “

In an interview with Daily Maverick, Wiese said he found the views “uninformed”.

There would have to be a “fair and reasonable” valuation of the shares, and shareholders would have to vote on the outcome of that independent assessment.

“It’s not a matter that they cannot be sold. In terms of the aborted deal, the shares were valued after a formal process. Investment banks do have formulas for these things, particularly by looking at similar transactions.”

Wiese was referring to other occasions where pyramid structures were collapsed and family control was relinquished. One fairly recent example was at Shoprite’s big rival Pick n Pay, where the share price bounced even after the Ackerman family only partially gave up control in 2016.

One other curiosity remains. Why is Wiese doing this? On this topic, there is also much speculation. Wiese has previously said he hardly ever invests in anything where he does not have control. When asked this question, Wiese said that in a sense, he had already made peace with the sale of the deferred shares as part of the Star transaction.

These special voting structures were considered around the world, but particularly in SA, as slightly antiquated.

“At the end of the day, my group will still remain the largest shareholder in Shoprite; I am a long-term holder,” he said.

“And you know, I am the age that I am”.