After the Bell: Are retail shareholders being ‘rope-a-doped’ in the Boxer listing?

Ever since the 2008 Companies Act introduced the US nomenclature of the Initial Public Offering (IPO) for new listings in SA, new listings on the JSE have been anything but. Bookrunners, the investment banks who arrange IPOs, have seen no contradiction in calling a new listing an IPO while carefully specifying that they will offer shares only to “qualified investors” and not to the public at large. They do this because it is simpler and easier. Minimum fuss, maximum fees.  

In practice, it means the bookrunners knock on the doors of SA’s 10 or so large institutional investors and ask them: a) if they want to invest on behalf of their clients, and b) how much, both in price and in volume. The people left out are retail investors, who have the disadvantage of being a large number with not a huge amount of readies. Bookrunners persuade companies that it is far too complicated to include retail investors, because the company then has to go the whole hog and register a prospectus which will have to be legally compliant and checked off by the regulator and all of that boring stuff. The regulator is the Companies and Intellectual Property Commission (CIPC), and they are incompetent, aren’t they?

What has often happened recently is that companies have issued just something called a “pre-listing statement”,  in almost all respects identical to a prospectus, but approved only by the JSE with no involvement of the CIPC. It may save two weeks on the transaction timetable by excluding the CIPC — but more importantly, it gives the bookrunner unfettered discretion to decide who gets to participate.  

But what about the listing later this year of the supermarket group Boxer, part of the Pick n Pay chain? An investment banker and long-time activist for financial inclusion, Paul Miller, points out that the Boxer “IPO”, as it is described, seems to be heading in a questionable direction from a financial inclusion and fairness point of view. 

First, the Boxer “IPO” is very large — this is not a case of fiddling with the carburettor, it’s an engine refit. The idea is that Pick n Pay will reduce its debt essentially by selling around half of its stake in Boxer, which will simultaneously be listed separately. 

There are 454 Boxer stores in SA and the company is opening new stores like crazy. It will probably end its financial year with 55 more stores and is likely to open 200 new stores by 2026, doubling sales in the process. We don’t know yet what the valuation of the new company would be, but in South African terms, it promises to be a pretty big listing — and plenty popular. Profit margins are excellent, growth is good, and on a price-to-sales ratio basis the valuation could breach R12-billion, which would be impressive since Pick n Pay’s valuation is only R17-billion. But caveats galore here: the difference between the highest conceivable valuation and the lowest is huge, as it always is. 

Anyway, Miller points out that the circular published by Pick n Pay makes it clear that the bookbuild will incorporate only “qualifying investors” —  legalese for the big 10 or so investment houses. He points out a contradiction here: Pick n Pay shareholders have been asked to approve the process — that’s the point of the circular. 

One of the most sacred rules of stock markets … what am I saying, there is nothing sacred when it comes to stock markets. Let me try again. One of the most important, crucial, vital rules of stock markets is that all shareholders should be treated equally. If you are going to pay a dividend, you have to pay all shareholders entitled to dividends equally. If you are going to issue shares, everybody should get a proportional bite of the cherry. 

Overall, you cannot discriminate on arbitrary grounds against any particular group of shareholders, even if they tend to ask embarrassing questions at the AGM, or do not approve a circular or commit some other indiscretion. The idea is fundamental to corporate governance and is designed to foster trust and fairness in the relationship between shareholders and the companies in which they invest.

But it is those same 10 institutions and their Cape Town friends who know that they will be “qualifying investors” that are being asked to approve the circular. How do we know that these “qualifying investors” aren’t implicitly being encouraged to approve the process to ensure they get a slice of the bookbuild? There is a clear conflict of interest here — unless the IPO is actually an offer to the public. 

The listing involves a company that is very retail — absolutely the definition of retail. Technically, retail shareholders, an increasingly important but beleaguered category of market participants, should be part of the process. But isn’t this even more urgent when the potential shareholders may also be customers? “Does the board of Pick n Pay really want to allow the bookrunners to spit in the faces of their customers?” asks Miller.

To be fair to Pick n Pay, this door is not yet explicitly closed; many ways might be found for retail shareholders to participate. However, if history is anything to go by, that is not the idea as of now. 

In some ways, this action is typical of SA’s market: it’s very institutionally focused. Plenty of mutual back-scratching takes place. For Miller, this is part of the problem: inadvertently, institutional players are ruining the very market they depend on.

You could argue, well, yes but the million-plus EasyEquities punters and all the other retail investors could buy the shares as soon as they hit the market and no great harm will be done. But they will miss out on a listing bump if there is one, and in this case, the chances of a listing bump are pretty high.   

The irritating thing is that all the players in this transaction and many others, including the advisers in the transaction, Rand Merchant Bank, have explicitly supported the notion of financial inclusion in a host of good-practice documents signed over the years. And yet, in its own small way, this example suggests what we in our hearts know: there is a public relations process, and there is the real world.

 And never the twain shall meet. DM