Money for jam

Pos­si­ble merger might re­veal ex­ces­sive share op­tions

Finweek English Edition - - Companies & markets - SHAUN HAR­RIS

SHARE­HOLD­ERS IN JD GROUP have not re­acted warmly to the of­fer from Stein­hoff In­ter­na­tional. The gen­eral feel­ing is that the price of­fered by the 3,6 Stein­hoff shares for one JD Group share is pitched too low. How­ever, if the deal does go ahead it might un­ravel share op­tions granted to Stein­hoff direc­tors that should con­cern Stein­hoff share­hold­ers. In terms of a 2003 new share scheme, the rights to 9,63m shares were al­lo­cated to four direc­tors in what – in the kind­est words – can only be called a to­ken 0,5c/share.

That in­stantly made the direc­tors quite se­ri­ous pa­per mil­lion­aires: Stein­hoff ’s price was R6,79c/share at the time, mak­ing the al­lo­ca­tion worth R65,3m. But that was then. At last week’s price of around R23,89/share the to­tal value of the op­tions was worth more than R230m. And a third of the rights have been ex­er­cis­able since the be­gin­ning of De­cem­ber last year.

How­ever, Stein­hoff di­rec­tor Piet Fer­reira says the share op­tion scheme was in fact larger, in­volv­ing the rights on around 37m shares be­ing granted to nearly 160 par­tic­i­pants of the group in­ter­na­tion­ally. Fer­reira con­firms the nom­i­nal price is 0,5c/share.

He can’t say who the four direc­tors who re­ceived the bulk of the al­lo­ca­tion are. How­ever, as it would have been based on re­mu­ner­a­tion we’d as­sume it must be the four ex­ec­u­tive direc­tors.

The new share scheme was voted for by share­hold­ers at Stein­hoff ’s AGM in De­cem­ber 2003, which pre­sum­ably would have in­cluded rep­re­sen­ta­tives of ma­jor in­sti­tu­tional share­hold­ers at the time. Those were Old Mu­tual (15,1% of Stein­hoff), RMB (12,1%), In­vestec (5,9%) and Stan­lib (5,8%).

Apart from those ma­jor in­sti­tu­tional share­hold­ers sup­port­ing the scheme, that’s all fine. Only it hasn’t been very openly dis­closed by Stein­hoff – at best, dis­clo­sure has been vague.

The Stein­hoff share op­tion scheme was used by Ter­ence Craig, chief in­vest­ment of­fi­cer at Frater As­set Man­age­ment, in a re­cent pre­sen­ta­tion at the Mo­men­tum In­vest­ment Sum­mit on “Ethics and man­ag­ing money”. Look­ing at is­sues con­cern­ing direc­tors’ re­mu­ner­a­tion and cor­po­rate gov­er­nance, Craig also re­ferred to Gen­cor and Sho­prite.

Frater is known for its long-term in­vest­ment fo­cus and, ac­cord­ingly, is crit­i­cal of in­cen­tives that en­cour­age short-term per­for­mance tar­gets.

But apart from the Stein­hoff share scheme seem­ing to serve as an ex­am­ple of ex­ces­sive po­ten­tial re­mu­ner­a­tion not nec­es­sar­ily aligned to share­holder in­ter­ests, it’s be­come top­i­cal now that there’s a pos­si­ble share-based takeover of JD Group.

Many share­hold­ers might be sur­prised to learn about the gen­er­ous 2003 scheme; Stein­hoff cer­tainly hasn’t broad­cast the de­tails.

How­ever, it seems that smaller amounts of Stein­hoff shares are still be­ing awarded to direc­tors un­der the 2003 scheme. Re­cent Sens notes con­cern­ing direc­tors’ deal­ings do re­fer to “the new in­cen­tive scheme, ap­proved on 1 De­cem­ber 2003” as rights are granted to direc­tors un­der the 2006 al­lo­ca­tion.

The Sens notes also list the nom­i­nal value of the shares as 0,5c, but that’s about all the de­tails that are avail­able.

Shaun Bruyns, port­fo­lio man­ager at RMB As­set Man­age­ment (with 12,7% of the shares, now the largest in­sti­tu­tional in­vestor in Stein­hoff), is per­haps not sur­pris­ingly sup­port­ing the of­fer for JD Group, as he says the as­set man­ager views the ra­tio as “fairish”. Bruyns also feels the cur­rent share price is be­low fair value, which he puts above R30/share.

Bruyns is aware of the share op­tion scheme and says it needs to be looked at, as he un­der­stands there were other con­di­tions at­tached.

Fer­reira says there are con­di­tions, the main ones re­lat­ing to the ap­praisal of com­pany per­for­mance be­fore any op­tions could be vested. “The first was based on share price per­for­mance – namely, that Stein­hoff ’s share price had to out­per­form the Indi 25 (in­dex of the 25 largest in­dus­trial com­pa­nies on the JSE) over a three-year pe­riod end­ing 30 June 2006.”

Sim­i­larly, Fer­reira says Stein­hoff ’s com­pound growth in head­line earn­ings per share had to ex­ceed the av­er­age for the 25 com­pa­nies mak­ing up the Indi 25 over the same pe­riod.

“Ad­di­tional con­di­tions were at­tached to share op­tions granted to direc­tors of sub­sidiaries at the op­er­at­ing level.”

With Stein­hoff ’s strong share price ap­pre­ci­a­tion and growth in earn­ings, the two main

con­di­tions have been met. And for a highly rated com­pany such as Stein­hoff those con­di­tions were not that de­mand­ing.

Fer­reira adds that if re­main­ing cri­te­ria are not met, the scheme gets car­ried over to the fol­low­ing year, the near­est be­ing 30 June 2007. “We be­lieve this adds share­holder value – the scheme is aligned with the in­ter­ests of share­hold­ers.”

On that ba­sis, per­haps. But an in­vestor with a long-term view like Frater As­set Man­age­ment would no doubt ar­gue dif­fer­ently, say­ing the scheme and the con­di­tions at­tached were set­ting short-term tar­gets for man­age­ment.

But what will hap­pen to the share op­tions if a merger with JD Group goes ahead? Ba­si­cally, noth­ing, says Fer­reira. They will re­main in­tact with ad­di­tional hur­dles to be met.

Per­for­mance hur­dles might add to the pos­si­ble value of the share scheme for in­vestors. But it’s a bit of a stretch: it still looks like ex­ces­sive re­mu­ner­a­tion that should have share­hold­ers more than a lit­tle twitchy.

What hap­pens to the 0,5c/share op­tions now? Markus Jooste, Stein­hoff CEO

STEIN­HOFF IN­TER­NA­TIONAL... TAKES A BIT OF A DIP

Source: I-Net Bridge

JD GROUP... SHARE­HOLD­ERS DIS­AP­POINTED

Source: I-Net Bridge

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