No pre­mium in the pyra­mid

Last op­er­a­tional re­sults were poor

Finweek English Edition - - COVER STORY -

CAN THE SHARE­HOLD­ING struc­ture of a com­pany af­fect op­er­a­tional per­for­mance? That’s dif­fi­cult to de­ter­mine and in most cases it would prob­a­bly not. But Pick n Pay’s ar­ti­fi­cial con­trol through a pyra­mid struc­ture is be­ing called to ac­count, with share­hold­ers claim­ing it’s af­fect­ing op­er­at­ing per­for­mance. “Share­hold­ers are concerned about Pick n Pay’s poor op­er­a­tional per­for­mance. They be­lieve deconstructing the pyra­mid would make the group more com­pet­i­tive. There’s also a con­cern that if per­for­mance re­mains poor, Pick n Pay could be taken over,” says Chris Lo­gan, a di­rec­tor at Op­por­tune In­vest­ments.

Just as owner con­trol through a pyra­mid can be used to ward off a hos­tile preda­tor, the best pro­tec­tion is good op­er­a­tional per­for­mance. That should trans­late to an ap­pre­ci­at­ing share price – the best pro­tec­tion of all.

Pick n Pay’s most re­cent fi­nan­cial re­sults (for its first half to end-Au­gust 2010) weren’t very in­spir­ing and are even worse when com­pared with com­peti­tors in the re­tail food in­dus­try. Turnover grew by a cred­i­ble 6% to R25,3bn but profit mar­gins came un­der pres­sure, re­sult­ing in head­line earn­ings per share drop­ping by 12%. The group put the re­sults down to the com­pet­i­tive en­vi­ron­ment and re­luc­tance of over-in­debted con­sumers to spend too much. Crit­ics said Pick n Pay had spent too much de­vel­op­ing and re­design­ing stores, an in­vest­ment that’s yet to yield re­sults.

It’s quite typ­i­cal for the share price of hold­ing com­pa­nies to trade at a dis­count to op­er­at­ing com­pa­nies. In the case of

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