MICHAEL AVERY: More questions than answers ahead of critical Fortress vote

The Fortress vote scheduled for March 18 continues to divide the market, with retail investors (notably Dave Hazelwood, an active commentator on Twitter) insisting that options being presented are a veiled attempt to benefit executives at the expense of Fortress A (FFA) shareholders, while some analysts I speak to remain convinced it is the best choice in a bad situation.

The importance of the vote was re-emphasised by the well-guided interim results. Fortress reported distributable income of R830.5m for the first half, below the benchmark to satisfy the FFA entitlement of 84.1c per share, which grows by the lower of 5% or consumer price index.

To recap, the Fortress board want to  — temporarily, not permanently, as implied in my column in February (“Fortress shareholders held hostage by infelicitous structure”, February 27) — amend its memorandum of incorporation (MOI) to provide FFA & FFB shareholders with an equal pari passu dividend for any periods in future where the FFA minimum entitlement is not met. If passed, this would be a positive surprise for long-suffering FFB shareholders, but most likely a negative surprise for FFA shareholders.

Fortress indicated its intention to distribute 75.9% (R630m) of first-half FFA distributable earnings, implying 30.85c per share for FFA and FFB shareholders, which will require shareholder approval. Hazelwood believes because the FFA dividend escalates at 5% a year, if you bought back FFA shares you’d see a “massive return on investment” for FFA and FFB holders.

Speaking to CEO Steve Brown on Friday, he acknowledged that buying back A shares works to a point, and in fact Fortress did execute on that to an extent in the first half, but added that once the market cottons on to the strategy it becomes increasingly difficult as the market chases the price higher.

Negates argument

Madalet Session of Denker Capital remains unconvinced by Hazelwood’s thesis. “The price of FFA is essentially its net asset value (NAV),” she says. “The distribution not paid is permanently lost to the A shareholder and the longer this is expected to last the worse off the FFA investor is. All else [being] equal, this would mean a lower FFA share price.

“It also negates the argument that buying back FFA shares results in an immediate x% return to the company — if distributable income doesn’t grow to match the FFA entitlement, the value of/return from FFA is quite unclear (except in the event of liquidation).

“The longer available income is less than the growing, but non-accruing, A claim, the better off someone must be, but it definitely isn’t the A shareholder. I am open to being persuaded that FFB doesn’t singularly benefit from the retained income.

“Parri passu was definitely the right decision when NAV accrued equally to both classes, but now it is more complicated. I think FFA shareholders would be fools to forego the income as per the proposal. They are not entitled to any of it.”

A twist in the tale emerged late on Friday when Hazelwood pointed to potential insider trading by Brown, who revealed during the results call on Friday morning that management had engaged certain shareholders on the principle of the MOI change during the fourth quarter last year. Brown subsequently purchased 200,000 FFBs worth R639,584 on December 31, according to Sens.

The broader market was only informed of the MOI change proposal on February 17. At first blush it doesn’t look good. A call to the leader of the directorate of the market abuse investigation team at the Financial Sector Conduct Authority, Alex Pascoe, on Saturday revealed that the FSCA has received a complaint of insider trading and is investigating.

I asked Brown via a WhatsApp message to clarify what on the surface looks to be a serious complaint of insider trading, and he asked for more time to respond via email during the course of the week. However, in the interim he maintains that the “claim is baseless and not in breach of the [Financial Markets] Act if you look at the facts”.

So there are more questions than answers before a critical vote, which will determine the future of Fortress.

Where are the heirs to Spicer’s legacy?

I was stunned to learn of the sudden, unexpected death of Michael Spicer. My interactions with him were primarily during the years of his steering Business Leadership SA. He shares something in common with my late friend David Gleason, in that they were both employed by the Anglo American Corporation and were both closely involved — albeit at significantly different times — with the iconic Gavin Relly, the man who became the first non-Oppenheimer to chair what was at once Africa’s largest mining and industrial conglomerate.

Spicer was punctilious and charming, always polite. He possessed a formidable intellect and an extensive command of language (he was rarely lost for a word).

In its glory days Anglo sought to recruit into its ranks the brightest and best, and Spicer encompassed the attributes the corporation prized most — sound training, high literary skills, an acute ear for political nuance, a broad world vision, and an easy ability to cut to the heart of problems.

Spicer’s legacy raises the question of what role business should be playing now, as SA skirts closer to the edge of failed statehood than at any time during his tenure, in which he advocated for a bolder voice from business.

• Avery, a financial journalist and broadcaster, produces BDTV’s Business Watch. Contact him at badger@businesslive.co.za.