Jayendra Naidoo pulled off one of the most incredible transactions in the history of corporate SA when he convinced the Public Investment Corporation (PIC) to advance him billions of rand to buy shares in Steinhoff and its listed subsidiary, Steinhoff Retail Africa (Star).
As if the amount wasn’t enough — R9.35bn — Naidoo was required to put no money down and earned more than R100m in fees for arranging a loan to himself.
Anybody approaching one of the nation’s commercial banks seeking R15bn to buy shares in two JSE-listed companies, and with no capital of their own to put towards the transaction while expecting the same bank to pay them for the privilege of arranging the deal, would most likely be labelled deranged and banned from the premises.
This kind of funding, on those sort of terms, simply doesn’t happen. But as we have learnt from the hundreds of pages of findings in the PIC commission report, what was going on at the state-owned asset manager under former CEO Dan Matjila over the past few years belonged in a parallel universe.
The nearest transaction that came close to this was Christo Wiese’s loan of about €1.5bn (R27bn in today’s money) from a consortium of the world’s biggest banks to buy shares in Steinhoff in 2016. There was a big difference though: Wiese had to put down 628-million shares as collateral, and it is unlikely that the likes of Goldman Sachs paid him a fee for doing so.
It was partly as a result of Naidoo’s relationship with Wiese that the transaction with the PIC came about. Naidoo still serves as chair of the board of Pepkor Holdings, as Star is now known after reverting to its original name after the Steinhoff scandal broke.
The PIC commission’s report has called for heads to roll in relation to the loan advanced to an entity controlled by Naidoo, a former trade unionist who was the government’s chief negotiator in the notorious arms deal of the 1990s, on the basis that they would advance transformation and broad-based BEE.
Just last week, former president Jacob Zuma lost his bid to appeal against a ruling that could see him going on trial for corruption in relation to the arms deal. Naidoo has never been accused of any wrongdoing in relation to that deal, which ensnared a number of politicians.
The 1,000-page PIC report released on Thursday draws attention to a number of questionable practices that saw that two entities under the control of Naidoo would have received about R15.6bn to buy shares in Steinhoff and its Star subsidiary.
The first leg of the transaction comprised the loan to buy shares in Steinhoff. This was done using a shell company called L101, 50% owned by the Government Employees Pension Fund (GEPF) while Naidoo’s investment holding company Lancaster held a quarter. The rest was to be held by a yet to be created BBBEE trust.
The reasons given for the PIC advancing such a large amount of money to effectively one individual was that Naidoo would be invited to join Steinhoff’s voting pool, which consisted of a small group of shareholders that collectively owned one-third of the furniture retailer and which comprised Wiese and Markus Jooste, the disgraced former CEO of the furniture retailer.
As part of this pool, Naidoo would be able to exert influence on the strategic direction of the company, and the PIC would have an “ally” in the group’s hierarchy. Implicit in the deal was that Naidoo was from a historically disadvantaged ethnic group, and together with the 25% owned by the BBBEE trust, was loaned the money to advance the interests of transformation.
But the BBBEE trust, and entry into the voting pool, did not materialise, states the report.
The trust was replaced by a non-profit company controlled by Naidoo with the PIC’s consent.
This, says the report, “was an inexplicable waiver of the PIC’s right to defer the transaction” as a result of Lancaster not meeting the conditions of the proposal.
“The PIC essentially imposed the creation of an empowerment trust on the Lancaster Group, but provided the funding without it being in place,” it states. For this reason, the employees responsible for this “material oversight” should face disciplinary action within the PIC.
What did materialise were extravagant fees paid to Lancaster Group: R22.8m in one instalment and R114m as an “underwriting commission”. This meant that the company 100% owned by Naidoo received R136.8m while being the beneficiary of a loan from the GEPF, the custodian of state workers’ pensions.
In conventional corporate finance, underwriting commissions are earned by financial institutions that provide large amounts of capital to guarantee that transactions take place — typically in things like bond and share issues.
As in the case of Lancaster and its underlying shell companies, none of the money being provided to purchase the shares in Steinhoff was coming from its own resources; it was provided by the GEPF with the PIC acting as its agent. The underwriting commission should by that convention accrue to the GEPF.
Naidoo testified that he had informed the PIC about the fee in writing as well as mentioning it to Matjila, but this was “not substantiated” by the evidence before the commission.
The report concludes the matter by recommending that the PIC obtain a legal opinion as to who, if anyone, should have received the commission. If it was indeed due to the PIC or GEPF, action must be taken to recover the money, it said.
Despite putting in place protection to secure its loan for the Steinhoff shares, the PIC would later remove it as part of a transaction to enable Naidoo, through another entity linked to Lancaster, to borrow R6.2bn from Citibank to buy shares in Star.
When news broke of the epic fraud at Steinhoff in December 2017, the shares plummeted. L101, with accrued interest, now owes the GEPF R11.6bn. The GEPF has begun writing off the loan.
Jayendra Naidoo said he was studying the report and would be in a position to respond only later in the week.
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