Pepkor chair Jayendra Naidoo received a R120m fee from Steinhoff’s 2016 equity fund-raising deal after his consortium borrowed several billion rand from the state pension fund to participate in the transaction.
The underwriting commission raises questions about the reasons for compensating the former union leader, whose firm’s balance sheet was unable to bear the financial risk entirely taken by the Government Employees Pension Fund (GEPF).
An underwriting commission typically is paid to investment bankers for having made a commitment to assume the risk of buying all the shares to be issued in an equity fundraising.
Steinhoff, which is fighting for survival after uncovering a big hole in its accounts a year after the transaction, needed as much as €2.4bn (about R36bn) to fund its aggressive acquisition spree, which included buying US-based Mattress Firm and local footwear retailer Tekkie Town.
Naidoo’s wholly owned investment holding company, Lancaster Group, initially approached the Public Investment Corporation (PIC) — the custodian of R2-trillion of public servant pensions — to acquire more than R10bn in Steinhoff shares. But this was later modified, and a new company called Lancaster 101 borrowed R9.35bn from the GEPF to acquire the shares, with the PIC arranging the loan on behalf of the GEPF.
With the collapse in the price of Steinhoff’s shares, used as collateral for the loan, the GEPF wrote off nearly half of the loan to Lancaster 101 in March 2018. It is expected to take another writedown when it publishes its accounts for 2019.
Steinhoff nearly collapsed in 2017 after it revealed accounting irregularities that later turned out to be fraud, wiping off more than R200bn of equity, with the PIC losing more than R20bn.
Lancaster 101 is 25% owned by Lancaster Group, 50% by the GEPF, and 25% by a nonprofit foundation created by Naidoo.
As part of the share sale, Steinhoff agreed to pay Lancaster an "underwriting commission" of 2.5% of the value of the new shares purchased, equating to a fee of €8m (about R120m). Paying an underwriting commission is a standard feature of companies looking to issue and sell large quantities of shares through a process typically referred to as a rights issue.
Because demand for the shares is unknown, a company such as Steinhoff may employ an investment bank or another large institutional investor (such as the GEPF) to underwrite the issue. This entails the investor guaranteeing the purchase of the shares not taken up by the market. To compensate the investor for the financial risk inherent in underwriting an offer, investors are paid an underwriting commission, similar to the insurance premium insurers charge for underwriting specific risks.
There is a chance Lancaster 101 can recover some of this money if it is successful in its legal claim against Steinhoff, which is being pursued by shareholders including former chair and one-time top shareholder Christo Wiese.
Naidoo, who was a chief negotiator in the 1990s arms deal that was the subject of a corruption investigation by the police and a judicial inquiry, told the PIC commission of inquiry last week that he was paid the entire fee via Lancaster Group. This was with the knowledge and consent of the PIC and its former CEO, Dan Matjila. However, Matjila did not recall the fee when asked about it.
The PIC and GEPF did not respond to questions.
"It was paid at the discretion of Steinhoff for the efforts Lancaster Group had made in contributing to what they saw as the capital raising efforts," said Naidoo, indicating he was not remunerated for bearing the risk of underwriting the shares.
When Business Day put it to Naidoo that Steinhoff’s statement referred to an "underwriting commission" whereas he had indicated something more akin to an "introductory" or "finder’s" fee, Naidoo declined to elaborate. In his testimony at the commission, Matjila said the PIC’s decision to facilitate Lancaster 101’s acquisition of the shares was to improve the governance of Steinhoff by putting an ally of the PIC on the board.
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