Money for jam
Possible merger might reveal excessive share options
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