Rights issue pays off big for Discovery directors

Company’s top big spenders borrow millions to produce instant returns

NOT all senior executives think they should off-load chunks of their generous share awards to “diversify their portfolios”, if some heavy spending by Discovery’s top brass is any indication.

This week, Discovery CEO Adrian Gore backed his commitment to the company that he founded by borrowing cash to make a R389-million investment in the insurance giant.

Gore and other Discovery directors forked out altogether R682-million to follow their rights in the company’s R5-billion rights issue that was finalised this week.

Proving that those who can afford to gamble big stand to win big, Gore was showing a profit of R186-million on his investment within a week. He and his colleagues forked out R90 a share, and Discovery’s share price hit R133 this week. In Gore’s case, the difference of R43 a share for each of the extra 4.3 million shares he bought shows that he is well in the money.

The other big spenders were Barry Swartzberg, a co-founder of the company, who paid R199million to follow his rights and Herschel Mayers, who spent R65-million taking up his rights.

By the end of the week Swartzberg was showing a profit of R95-million on his investment and Mayers R31-million.

Analysts at Vestact reckon that after their mega purchases, Gore will hold 50.3 million Discovery shares worth R6.7-bil- lion, while Swartzberg has 25.7 million shares worth R3.4billion. Not a bad return for the two actuaries, Gore and Swartzberg, who founded the company in 1992, shortly after leaving Liberty Life.

They persuaded FirstRand’s leading triumvirate, Laurie Dippenaar, GT Ferreira and Paul Harris, to invest R10-million in the idea in exchange for a 64% stake in the business, which then listed in 1997 at about R6.90 a share.

Today, Discovery’s stock is worth nearly 20 times that, and the company administers the largest medical-aid scheme in the country, Discovery Health, which has 2.6-million members.

The R5-billion it raised from the rights issue (which was oversubscribed) will get it extra ammunition to bolster its Prudential insurance joint venture in the UK, enable it to pay R1.35billion to FirstRand to hike its stake in the profitable DiscoveryCard business to 74.9%, and pursue other unnamed “opportunities”.

An extra bonus for the directors is that because it was a rights issue they did not have to pay brokerage fees and also did not have to worry that their purchases would push up the price unnecessarily.

Among the nonexecutive directors, Vincent Mphai, who was a senior executive at SABMiller until his retirement last year, stood out by spending R10.7-million to follow his rights. Mphai is one of Discovery’s main black economic empowerment partners.

Richard Farber, Discovery’s chief financial officer, said that three executive directors followed their rights fully. Now, the directors hold 14.5% of the company.

Not all the directors demonstrated as much enthusiasm as Gore, but some did not get the opportunity.

Two of Discovery’s executive directors, Steven Epstein and Alan Pollard, are American and are prohibited by US rules from following their rights if no

The difficulty with a rights issue is you do not know how it will play out

prospectus has been registered with the Securities and Exchange Commission. But they did not lose out entirely: Pollard picked up R5.2-million from selling his rights and Epstein a more modest R62 108.

Kenny Rabson was on the commitment border; he sold R1.8-million worth of his rights so that he could take up some of his entitlement without resorting to loans. But the big seller was John Robertson, who got R15-million from the sale of all of his rights. Farber explained that Robertson was nearing retirement age.

Given the recent strengthening in the Discovery share price, was the R90 rights issue price unnecessarily conservative and bound to generate easy profits for any shareholders, including executives, who followed their rights?

No, says Farber, who explains the pricing was decided by the board and investment banks.

“The difficulty going into a rights issue is that you do not know how it is going to play out — often rights issues are seen as a sign of weakness. There was also a lot of concern about the international situation, there was a lot of risk,” he said.

The directors also probably will not be under pressure to sell any of their newly acquired shares to repay the bank loans they took to make the purchases, as the dividend payments should cover most of those costs.