CEO Louw’s twenty million reasons for selling Adcock to Chileans won’t register with the only shareholder who now counts
Since Monday's publication of my Undictated column in Business Day, there's been interesting feedback. One group supports the view that a great South African asset shouldn't be sold to a relatively small family-owned Chilean outfit just because it hasn't been well managed. On the other hand, the "Sell" camp are upset at me suggesting a well-incentivised management duo had any influence, stating the board of Adcock followed a totally independent process. There are also quibbles about my assertion that CE Jonathan Louw has been guaranteed his R4m job, and my questioning of the "irrevocables". Make up your own mind after reading the piece. You might also be guided by the transcript of last week's media conference where Louw used the analogy of Adcock being the "bride" readied for the CFR "groom". Which kinda supports my point that management's attention has been on prettying up the business for sale rather than fixing it, an approach the Adcock's board encouraged. After my article was published, Adcock released a trading update for the year to end September 2013. The key disclosure is that HEPS will be 17% down on last year at 350c a share. Ahead of its 2008 listing, Adcock's pro forma HEPS was 376.5c. So after six years as a listed company, the business is now making less profit than it did when Tiger Brands unbundled to shareholders with such fanfare. Having underperformed so spectacularly, its management and board now want to convince the world it's best to sell the business? That's like putting your investment property on the market because a tenant has trashed it. Surely the more sensible approach is to spend a bit of time renovating it? – AH
I like Adcock Ingram's youthful CEO Jonathan Louw. The qualified anesthetist is bright, ambitious and energetic. He tries hard and has a ready smile. But I wouldn't believe a word he says about the need for his company to do a deal with Chilean suitor CFR.
Not that Louw peddles pork pies. But on this issue, he is massively conflicted. Adcock's incentive structure has given Louw twenty million reasons to convince everyone an outright sale is the best option.
Were the Chilean acquisition to succeed, Louw's share-price based incentives would deliver him a hefty R20.3m. Add in R9.3m banked from the same scheme last year and the freshly turned 44 year old will become a very rich man. With the added benefit CFR is guaranteeing his R4m a year job.
Not bad for someone running a business everyone now says is in deep trouble. Adcock's annual compound HEPS growth is just 2.6% since unbundled from Tiger Brands and relisted in August 2008. In those five years, pretax profit has only risen modestly, from R819m to R889m. Its market share is down to 9.7% from 11.3%.
Instead of being guided by him, Adcock's board should have insisted Louw was far away when they deliberated on the Chilean bid. Ditto CFO Andy Hall whose bonanza from a successful sale is R11.3m via his "phantom shares".
There's no public evidence Louw or Hall have been unduly influential on an Adcock board heavy in medics and engineers. But you have to wonder why the directors steadfastly resisted even discussing the obvious alternative.
The Adcock sale process was sparked in March when Bidvest founder Brian Joffe's expressed an interest. He has since gone to war with Adcock's directors – first for dismissing his approach as "opportunistic" and subsequently for refusing to engage.
Joffe, one of SA's most successful entrepreneurs, has a thin skin. He doesn't take rejection well. He regards Adcock as a gem which will flourish under different management. A team he would like to install and influence to repeat what he did with similar historic underperformers like Rennies and McCarthy.
CFR's chief executive Alejandro Weinstein is something of a Chilean version of Joffe. He also sees the obvious potential. Apart from a 123-year heritage, Adcock owns priceless brands like Myprodol, Panado and Corenza C; recently invested R2bn modernising substantial manufacturing facilities; and has established footholds in continental Africa and India.
Soon after touching down in Johannesburg, Weinstein told me his immediate priority was a fourth meeting with Adcock's 18% shareholder, the deal-blocking Public Investment Company. He promised "100% effort" to convince the PIC he "would solve….huge problems a new management has to address in a turnaround."
Adcock is "struggling for sales, for new ideas, for new products." Its salvation, Weinstein says, lies with CFR, not Joffe to whom he asks: "How are you going to fill up the facilities? How are you going to export? How are you going to execute the Sub Saharan strategy?"
Personal insults mean little in matters of this import. The PIC will make or break this deal. Period.
As you'd expect of the man responsible for investing the world's 6th largest pension fund, PIC head Elias Masilela plays his cards close to the chest.
A macro-economist whose book was good enough to be nominated for the Alan Paton Award, Masilela thinks long-term. He serves on Trevor Manuel's National Planning Commission and between public sector posts ran Policy Analysis at Sanlam.
Nobody is saying, but if they met last week Masilela would surely have told Weinstein he can't make a call until there's a published proposal. That box was ticked Friday when CFR tabled its official offer.
So Masilela and his team can now formally assess whether the CFR deal aligns with the PIC's stated policy to "play a pioneering and developmental driven role in the asset management space, thereby contributing to the country's development at large."
That, rather than vague allegations of "political interference" is where the key lies.
Weinstein says under CFR, Adcock's factories would run at full capacity rather than their current 50%. That would create jobs, not destroy them as he claims is certain with the third alternative of a private equity investment.
He says CFR would transfer technology and boost foreign exchange earnings for SA by generating fresh exports. He also makes much of the "foreign investment" angle, but that's oversold because cash would transfer to existing shareholders, not into fixed assets.
Weinstein warns that CFR will walk away if the PIC does not support his bid, likely sending Adcock's share price back into the R50s from around R70. That will resonate among performance-driven money managers. But not with the person who counts right now. From what we know of him, Masilela would shrug it off as a short-term blip.
Weinstein says his offer has 45% of the 75% vote needed via "irrevocables" from existing shareholders. Maybe. But you've got to wonder at the firmness of those commitments. Dave Foord, whose clients own 10% of Adcock, says he hasn't signed anything as it would remove flexibility. Surely he's not SA's only sane money manager?
The big question is why CFR has not made an all-cash bid. Weinstein ducked my question, claiming it's because Adcock owners want a slice of CFR. But if his stock is so appealing, why did these same investors not buy into the Chilean business in the first place?
Perhaps it's all a case of institutional shareholders so fatigued by Adcock's underperformance they just want out. If so, the CFR deal could work for them.
But judged on its stated objectives, there's no guarantee it will do the same for the PIC.
- Alec Hogg is a writer and broadcaster. He runs Biznews.com. The Undictated column appears in Business Day on Mondays.