Shoprite’s R3.3bn payout proposal to Christo Wiese could easily be voted down

It’s complicated. It always is. Years ago, when Pepkor was just a little fledgeling thing, shareholders agreed to give its dynamic founder Christo Wiese special voting rights in order to protect the growing entity from rapacious competitors who might have bought it to close it down and remove a competitor.

Years passed, and Pepkor grew and Shoprite was founded, and it grew into the African continent’s largest supermarket chain. And, as per that original shareholders' agreement, Wiese’s controlling shares grew with it. Earlier in 2019, Shoprite announced it intended to make Wiese an offer for these shares, and that deal was announced last Thursday.

The Shoprite board announced that it would buy the high-voting shares and cancel them. In exchange, it would issue new shares in Shoprite to pay for them. Those new shares are currently worth about R3.3-billion, which would be what Wiese would pocket.

The board’s argument is that the deal would simplify the company’s voting share structure and align the company with international best corporate governance practice. This is because all the shares after the deal would have the same voting rights. This, the board said, would appeal to institutional investors and would have increased a positive demand for the company’s shares.

Wiese’s 305.6-million deferred shares control 32.2% of Shoprite’s voting rights, and they were issued to Wiese in 2000 at a nominal value of 0.1c a share. After the deal, the voting interest of minority shareholders will increase from 57.7% to 82.2%. Or to put it another way, Wiese’s voting power will come down from 42.3% to 17.8%, being 3% more than the 14.8% he currently holds.

The weekend press reported that Wiese is, unsurprisingly, happy with the outcome. But some fund managers disagree, including asset manager Coronation, which happens to be the largest institutional shareholder outside of the Public Investment Corporation, the fund manager of the pensions of government employees.

Karl Leinberger, Chief Investment Officer at asset management company Coronation, which holds about 5% of Shoprite on behalf of clients, said the company would recommend voting against the board’s proposal. Coronation is the largest institutional shareholder of Shoprite outside of the Public Investment Corporation and Wiese’s investment entities.

Leinberger said it would be voting against essentially because the proposal was an extremely high price to pay to extinguish what is, in reality, a comparatively low level of risk.

The shares do offer a high level of voting rights which could potentially constitute a governance risk, he said. But in this case, they lose their voting interest if the holder’s economic interest drops below 10%. In addition, the current legislative context is completely different from the one that existed when they were issued, since legislative protection against governance transgressions was now much higher.

The company is handling the issue in an exemplary manner, he said, but “our main point is that the risk the shares pose is a lot lower than the value being placed on them”.

“The shares have really no readily ascertainable monetary value, so essentially, what shareholders are paying for is votes at an annual general meeting. It is possible to construct a context where there might be risks associated with high-voting shares, but in this case, we don’t think the risks are that high, and certainly not high enough to justify this expense,” he said.

Shareholder activist Theo Botha agreed, saying he too just doesn’t see the risk.

“They should just leave it (the shareholders' structure) in place. Shareholders put it there, they must live with it.”

The key question, Botha said, is, who asked for this? The board hasn’t answered that question.

The nascent opposition might be more crucial than it seems for two reasons. First, the deal is a related party transaction, so Wiese can’t vote because he is the subject of the transaction. Second, the threshold that must be obtained to pass the deal is unusually high, 75% of voting shareholders.

But Wiese can take solace from one quarter; the stock market has taken the proposal in its stride, and Shoprite actually ended the day just in the green on Tuesday, after at one stage dropping by 2%.

The vote takes place in September, and it may very well be close. DM