An­thony Clark

on Sov­er­eign’s cyn­i­cal BEE ploy

Financial Mail - Investors Monthly - - Front Page - AN­THONY CLARK

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.

Pic­ture: iSTOCK

There are tough times ahead for the poul­try sec­tor

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