on Sovereign’s cynical BEE ploy
POULTRY counter Sovereign Foods Investments has been in a flap over a slew of negative news about its performance pay issue and its contentious BEE ownership structure.
Activist shareholders are far from pleased.
Feathers were initially ruffled when it was discovered that in mid 2015, Sovereign management had awarded itself juicy performance bonuses, far beyond what seemed fair and reasonable. Just to make it that even more sour, management had tinkered with the metrics for awarding those bonuses without telling shareholders.
And it wasn’t just small money either.
The company is a tenth of the size of poultry market leader Astral Foods, but you’d swear that Sovereign’s Uitenhage management team was running Tyson Foods, the US’s largest chicken company, not a backwater operation in the depths of the Eastern Cape.
To try to appease the activists, Sovereign CEO Chris Coombes reshuffled the team. Long-standing chairman Charles Davis stepped down, to be replaced by Tom Pritchard, and Sovereign issued a new remuneration and performance structure and BEE plan.
And yet, when Sovereign put out its circular setting out how the BEE initiative would work, it became clear that the initiative was nothing more than a cynical act. The way it worked was that Sovereign’s white executive management would end up with 12% of the BEE deal, while two black former Sovereign nonexecutives were given sweetheart deals.
To many, it looked like nothing more than a ploy to give the board “negative control” rather than a true effort at empowering the business.
You could understand why: Sovereign’s top management are tiny shareholders and would be understandably fearful that the company may be a takeover target. There have been tilts at the company in the past, and rumours have gained pace that Astral Foods was eyeing the firm.
In this context, the BEE scheme looked much like a poison pill, placing 28% of Sovereign’s equity in the hands of this “internal” group, which could then thwart any offer for the company.
Under the terms of the BEE deal, Sovereign would buy back shares in the business from selected larger shareholders at 850c/share — a fair premium to Sovereign’s share price, but below its 1,000c net asset value.
Angry minorities cried foul, and garnered a sufficient block of shares on or before the scheme cut-off date of December 31 2015 to challenge the initiative, making use of the Companies Act.
Basically, by exercising their appraisal rights the minority and dissenting shareholders demanded their shares also be bought back at the same 850c offered to selected large institutions.
On top of this, if more than 5% of appraisal rights holders voted against the BEE deal, Sovereign had the right to call it off — something they probably didn’t want to do, given their interest in making it happen.
So, in mid January, there was a predictably stormy general meeting on the BEE issue at Sovereign’s head office in Uitenhage. It was nothing less than a farce.
I attended the meeting. After bizarre arguments over whether it could even be recorded (Sovereign’s executives, predictably, argued it shouldn’t be), the vote eventually swung in favour of the dissenting shareholders, who represented 15% of the shares.
Afterwards, with egg on their faces, Sovereign’s management undertook a re-count of votes — which swung the deal back in Sovereign’s favour, with 85.4% of the vote.
After this debacle, the Sovereign board was seen as tainted in the eyes of some shareholders — and a major competitor seems to agree
On February 10 Sovereign’s top brass came out with guns blazing against anyone who dared question their deal — activists, media and analysts alike.
Coombes’s management team said they’d renegotiated their BEE deal and would buy back fewer shares, arguing that this showed minority shareholders that they didn’t have the “hidden agenda” many thought.
Seems the chicken had outfoxed the fox.
And yet, this isn’t even the end of this particularly juicy tale.
After this whole debacle, the Sovereign board was seen as tainted in the eyes of some shareholders — and a major competitor seems to agree. This casts the board’s credibility into question.
At the time of writing, Sovereign’s share price sits at R6,90 — 27% below its level of a year back, far below its R8.50 buyout offer, and 30% below its net asset value.
Worse, there are tough times ahead for the poultry sector, as input costs are rising and consumers are battling to avoid job losses, so Sovereign may have painted itself into a corner.
This illustrates why consolidation needs to happen in the sector, with further pressure on companies coming from rising imports and jitters over the extension of SA’s role in the African Growth and Opportunities Act.
But Sovereign’s response is especially poor: trying to build a wall around itself in the Eastern Cape, with its top brass attempting to entrench their privilege via the BEE scheme isn’t the recipe for dealing with this environment.
As it stands, rumours abound that a couple of large shareholders are becoming more amenable to a buyout deal.
If the poultry sector does indeed experience a period of weak earnings and sagging share prices, there is almost no defence strong enough to protect Sovereign management from a fair and reasonable buy-out offer.
In the final analysis, their fate may be decided in the investment boardrooms of Cape Town rather than in Uitenhage.
What’s evident is that the stalking of this plump, overpaid chicken is by no means over.
A carving up looks on the cards.
There are tough times ahead for the poultry sector