TAKING BULLS BY THE HORNS

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

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