Christo Wiese and a complicated share transaction go together like Checkers and a heydays special. And in the latest proposal regarding the retail titan, Shoprite may issue 20-million shares to Wiese in exchange for a chunk of his high-voting stock. The price tag is a not inconsiderable R3.3bn.
That’s a lot of baked beans and, given mounting shareholder disquiet, in no way a gimme. Business Day asked Coronation portfolio manager Neville Chester what they find objectionable about the deferred share repurchase …
The quantum. These are shares which do not have an economic interest and that we think the value they’ve attributed to the shares is inappropriate.
One argument is that the shares give the owner negative control and are therefore valuable. How would you explain that to a lay person?
It effectively means they can block any kind of resolution which requires more than a 50% approval, and obviously, it would be quite difficult to even get something through with a 50% approval assuming that there’s always an element of shareholders that don’t vote. So that’s what the negative block means: that anything that would require a special resolution they can block. But because they don’t have more than 50% they can’t necessarily push anything through, willy-nilly.
Are these share structures quite useful for companies?
Mr Wiese himself points out that these are a hangover from the old days when he unbundled the various groups: Pepkor, Tradehold and Shoprite and there are still a few companies on the JSE that have historic high-voting shares. In terms of the new rules and regulations, those structures in that format aren’t allowed but you do still see them in certain markets. In the US, for example, in the tech stocks; particularly the stocks that are in early-stage, early-growth phases where they want to maintain control but raise capital.
If the value of what Shoprite is prepared to pay for Christo Wiese’s shares is what you find objectionable, what would be the right quantum and how do you even get to a figure?
It’s difficult because if you look at theory: how do you value an instrument? You value the future cash flows. Here’s an instrument which has no cash flows whatsoever and never will, but there is clearly a nuisance value or potential benefit to cleaning up the structure. The fact that (Shoprite) has progressed with this, there’s a number of offshore shareholders that don’t like the control structure and would like it removed, so there is some kind of value to the company to clean up the voting structure but it certainly wouldn’t be anywhere near the kind of quantum that’s been proposed at the moment in our assessment.
Are you prepared to say what you think would be a fair value?
It’s early days so I wouldn’t want to put a number out into the public domain other than to say we’re very far apart at this point.
Are you going to be rallying other minority shareholders to oppose this scheme?
There are already a couple of shareholders who’ve contacted us to talk about our view; not specifically rallying but we certainly do talk to other institutional shareholders.
Christo Wiese says there’s not going to be any negotiation, “not at all” — but do you think Shoprite would have to negotiate with minorities, that it would be the right thing to do?
It’s the nature of any kind of transaction — that’s the way one would position oneself. The moment you say you’re prepared to negotiate well then you’ve immediately weakened your position. That’s his prerogative, and our prerogative as a shareholder is to decline. And again to your previous point: we were happy with the status quo, this was not something the company started at our behest; we can understand the point that there may be people who have concerns around it but quite frankly we think that to give away equity at this point in time for something which doesn’t have an economic interest is inappropriate.
What is the cost to an ordinary shareholder? Is it simply earnings dilution?
Again, coming back to the earlier point about how you value a company: it’s the present value of future cash flows so you’re roughly giving away 3.5% of the company which is perpetual dilution — that’s 3.5% of the cash flows of the company that shareholders of the company will fail to get which currently they do receive. So you would be swapping a dividend stream of 3.5% of the profits of Shoprite in perpetuity for shares which have zero economic value.
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