TAK­ING BULLS BY THE HORNS

Sam Sit­hole's new ac­tivist ven­ture has stepped in to halt egre­gious man­age­ment en­rich­ment at labour bro­ker Ad­corp

Financial Mail - - EDITOR’S NOTE BY ROB ROSE - @ro­brose_za [email protected]

It’s some­what ironic that the gen­e­sis of Sam Sit­hole’s new foray into ac­tivist in­vest­ing lies in his ill-fated stand­off with Leon Kirki­nis at African Bank In­vest­ments (Abil), SA’S most dra­matic cor­po­rate col­lapse in re­cent times.

As part of his re­port into the bank’s col­lapse, ad­vo­cate John My­burgh sin­gled out Sit­hole, a for­mer au­di­tor at Deloitte, as one of the few peo­ple on Abil’s board to emerge with any credit.

The story is that Sit­hole chaired Abil’s au­dit com­mit­tee from 2011, but had be­come in­creas­ingly un­com­fort­able with CEO Kirki­nis’s lais­sez-faire view of how much cash to set aside to cover for bad debt.

He clashed with Kirki­nis, telling him not to strike an “overly op­ti­mistic tone” with in­vestors. Kirki­nis ig­nored him. So Sit­hole quit in 2013, 14 months be­fore the bank crashed, send­ing a blis­ter­ing let­ter to Kirki­nis. “By deny­ing, or not be­ing aware of the true con­di­tion of the busi­ness, man­age­ment post­poned ur­gent cor­rec­tive steps that could have been taken to ad­dress the sit­u­a­tion,” he said.

To­day, two years later, Sit­hole says it was a les­son in how much value can be de­stroyed when ev­ery­one is too scared to act against er­rant man­age­ment.

“In a funny way, African Bank pre­pared me for what I do now. It was frus­trat­ing at the time, but our model now would have been per­fect to ad­dress it. Most as­set man­agers don’t want to get their hands dirty. But we’re not scared to say that your strat­egy is wrong, or that you need new man­age­ment,” he says.

That’s pretty much the game plan of Value Cap­i­tal Part­ners, the new com­pany he has started with for­mer Brait CEO Antony Ball. So far, they have stakes in three Jse-listed com­pa­nies.

Last De­cem­ber, they bought 15% of stut­ter­ing tech firm Al­tron for R400m. Within weeks, chair­man Bill Ven­ter, who had founded the com­pany 52 years be­fore, and his son, CEO Robbie Ven­ter, had re­signed.

Then, two weeks ago, Value Cap­i­tal Part­ners flexed its 14.5% of labour bro­ker Ad­corp, lead­ing to the “im­me­di­ate” de­par­ture of CEO Richard Pike and COO Nelis Swart. The other com­pany it owns is African Phoenix.

The aim, says Sit­hole, is to take strug­gling (but solid) com­pa­nies and wres­tle them back into shape. It’s along the lines of the Us$16bn San Fran­cisco-based Value­act Cap­i­tal, which in­vested in Mi­crosoft in 2013, shortly be­fore CEO Steve Ballmer quit.

“Es­sen­tially, we be­lieve that within a three- to fiveyear time pe­riod, the ac­tions we take should see the share price triple, at the least,” he says.

At Al­tron, Value Cap­i­tal Part­ners dis­man­tled the con­trol struc­ture. The re­sult: since it in­vested, Al­tron’s stock has dou­bled from R6.84 to R12.50.

Fix­ing Ad­corp may be harder. True, it’s a com­pany that found it­self in the mid­dle of the labour-broking whirl­wind, but it also man­aged to mess up all by it­self thanks to some odd ac­qui­si­tions of du­bi­ous value.

Yet, while its share price tanked 57% over the past three years, Pike and Swart took home R108.4m be­tween them — in­clud­ing heaps of bonuses and

R61m by cash­ing in share op­tions.

Ad­corp’s re­mu­ner­a­tion was “out of whack”, says Sit­hole. “Share­hold­ers don’t mind if man­age­ment makes money when they do, but when a busi­ness is go­ing back­wards and the top brass is still pick­ing up big che­ques, some­thing has to give.”

Value Cap­i­tal’s plan: fix the bal­ance sheet, trim debt, sort out the R2.7bn debtors book, cut bloated head­of­fice costs and pri­ori­tise ser­vic­ing clients.

It may not be SA’S first ac­tivist fund, but it’s an idea whose time has ev­i­dently ar­rived. Al­lan Gray’s in­ter­ven­tion at Group Five is a case in point.

In­trigu­ingly, Sit­hole doesn’t favour a pub­lic spat, as hap­pened at Group Five. “We like to do things be­hind the scenes, rather than ar­rive and act like rock stars,” he says.

It’s a de­bat­able strat­egy, given that a wider share­holder body, not to men­tion the pub­lic, cer­tainly ben­e­fits from pub­lic ven­ti­la­tion of gov­er­nance prob­lems at a com­pany. None­the­less, any firm that had the heft to con­vince the for­mi­da­ble Bill Ven­ter to re­sign must be do­ing some­thing right.

There are sim­i­lar sto­ries likely to play out over the next few months. Says Sit­hole: “Ide­ally, we’re look­ing for eight to 10 in­vest­ments. But we do a lot of work — it can take up to six months to get con­vic­tion on the call be­fore we act.”

Some overly cosy CEOS who’ve got used to oper­at­ing with­out ac­count­abil­ity must be hop­ing that Sit­hole and Ball don’t come knock­ing.

Most as­set man­agers don’t want to get their hands dirty. But we’re not scared to say your strat­egy is wrong Sam Sit­hole

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