Rich re­wards at RMI and RMH

Share­hold­ers ready to do bat­tle over value de­struc­tion and ex­ec­u­tive share schemes were mol­li­fied at one of the two AGMS

Financial Mail - - CONTENTS - Ann Crotty [email protected]

Hours af­ter Mo­men­tum fi­nally re­versed its po­si­tion on the non­pay­ment of R2.4m life in­sur­ance to the widow of Nathan Ganas, share­hold­ers at the AGM of Rand Mer­chant In­vest­ments (RMI) were lis­ten­ing to an ex­pla­na­tion of the group’s seem­ingly much less rule­bound re­mu­ner­a­tion pol­icy. Cen­tral to that pol­icy is a “man­age­ment par­tic­i­pa­tion scheme” in­tro­duced this year that stands to gen­er­ate tens of mil­lions of risk-free rands for RMI ex­ec­u­tives.

RMI hap­pens to be the sin­gle largest share­holder in Mo­men­tum, with a 26.5% stake. The hold­ing com­pany’s other in­vest­ments in­clude 89.7% of Out­surance, 25% of Dis­cov­ery and 29.9% of Uk­based Hast­ings. It houses Rem­gro’s in­sur­ance in­vest­ments and was spun out of Rand Mer­chant Hold­ings (RMH) in 2011.

RMH, which holds 34% of Firstrand and 100% of RMH Prop­erty, in­tro­duced a sim­i­lar man­age­ment par­tic­i­pa­tion scheme dur­ing the year.

It turned out to be bad tim­ing. Both RMI and RMH are trad­ing at record dis­counts to their un­der­ly­ing NAV and some ac­tivist share­hold­ers think it’s no co­in­ci­dence. They have been en­gag­ing with the boards of the two com­pa­nies — both led by chair Jan­nie Du­rand and CEO Her­man Bos­man — for sev­eral months in a bid to ad­dress the value de­struc­tion.

Of par­tic­u­lar con­cern was the prop­erty port­fo­lio in RMH and the fear that its growth was be­ing fu­elled by the prospect of risk-free re­wards gen­er­ated by the man­age­ment par­tic­i­pa­tion scheme.

The AGMS of the two com­pa­nies, held one af­ter the other in a quiet Stel­len­bosch sub­urb, were to be the set­ting for a show­down.

In hind­sight, it might have been rash to move the AGMS this year to Stel­len­bosch from Joburg, where they have been held for years with min­i­mal share­holder en­gage­ment. Chang­ing the lo­ca­tion in a year in which con­glom­er­ates are fall­ing out of favour was just ask­ing for trou­ble. Joburg may have Theo Botha, but the Cape has Chris Lo­gan, Al­bie Cil­liers, Nick Krige and Shane Watkins.

All four headed out to Rem­gro’s of­fices in Stel­len­bosch, a stone’s throw from Stein­hoff’s head­quar­ters, for the two AGMS.

Lo­gan, of Op­por­tune In­vest­ments, started the RMI pro­ceed­ings. He wanted to know why the own­er­ship par­tic­i­pa­tion schemes were so stacked in man­age­ment’s favour. The scheme means

Bos­man is given a 2.5% stake in four of RMI’S eq­uity in­vest­ments. (He is also given stakes in RMH’S prop­erty in­vest­ments.) “The struc­ture of the schemes means mem­bers of man­age­ment get to share in the up­side but are in­dem­ni­fied from any down­side risk,” said Lo­gan; this not only negated the en­tre­pre­neur­ial spirit but “also in­tro­duces moral haz­ard”.

Du­rand coun­tered that there was much greater risk of moral haz­ard if man­age­ment bor­rowed money to in­vest, then had to be bailed out. At a later stage, out­go­ing chair GT Fer­reira seemed to sug­gest one rea­son for en­sur­ing ex­ec­u­tives at RMI and RMH were ex­posed to risk-free re­mu­ner­a­tion was to re­ward them for be­ing “in­trapreneurs” rather than en­trepreneurs.

“In­trapreneurs” have all the char­ac­ter traits of an en­tre­pre­neur ex­cept for the ego and the propen­sity to take risks. This means they are ideally suited for work in a large com­pany, said Fer­reira.

Lo­gan be­lieves the re­mu­ner­a­tion struc­ture con­trib­utes to the dis­count prob­lem and re­minded the share­hold­ers that the orig­i­nal think­ing be­hind RMI/H was to coin­vest with en­trepreneurs.

Du­rand dis­missed his sug­ges­tion that one way of un­lock­ing RMI value would be to list Out­surance. Two rea­sons for list­ing, said Du­rand, were pro­file and ac­cess to cap­i­tal mar­kets. Out­surance didn’t need ei­ther.

Watkins, of All Weather Cap­i­tal, also sug­gested the dis­count was linked to the re­mu­ner­a­tion pol­icy. “I’m con­cerned the dis­count ex­ists be­cause in­vestors are un­happy with the asym­me­try of re­wards,” he said.

While the ac­tivists achieved lit­tle at the RMI AGM, other than an

un­der­tak­ing that the board would fo­cus on re­duc­ing the dis­count, they were con­sid­er­ably more en­cour­aged by the out­come of the RMH meet­ing, the source of much greater anx­i­ety.

Of par­tic­u­lar con­cern was RMH’S seem­ingly bot­tom­less com­mit­ment to prop­erty — fu­elled by the re­mu­ner­a­tion scheme — and its 43.9% in­vest­ment in Stein­hof­faligned At­ter­bury Europe (AE). In a con­tro­ver­sial deal this year, RMH pro­vided guar­an­tees for AE to buy back €360m of pref­er­ence shares, held by Stein­hoff, for €230m. Lo­gan de­scribes it as RMH’S sig­na­ture deal. “RMH took all the risk but got less than half the re­turn. The At­ter­bury founders and RMH man­age­ment, via the par­tic­i­pa­tion scheme, made an un­told killing.”

Cil­liers trav­elled all the way from Robert­son to find out why they’d done the deal, who had ben­e­fited from the R2bn dis­count and, cru­cially, if the un­der­ly­ing prop­er­ties were as valu­able as claimed.

“The pur­chase of the pref­er­ence shares ben­e­fited all AE share­hold­ers; it was a wind­fall for the other 56% of share­hold­ers. But it would have been worth noth­ing if the val­u­a­tion of the AE prop­er­ties wasn’t re­li­able,” said Cil­liers. He said the un­cer­tainty around the deal wasn’t helped by the links to for­mer Stein­hoff CEO Markus Jooste.

“When I walked into the AGM I was ready to fight.” As it hap­pened, there was no fight­ing; in­stead, share­hold­ers were pro­vided with de­tailed in­for­ma­tion ad­dress­ing all their con­cerns and an un­der­tak­ing that prop­erty in­vest­ments would be re­stricted to just R4bn.

“I was to­tally dis­armed by the amount of in­for­ma­tion they pro­vided and their com­mit­ment to ad­dress­ing our con­cerns,” said Cil­liers. Even the al­most-im­pos­si­ble-to-please Krige ex­pressed sat­is­fac­tion at the way the meet­ing ad­dressed share­hold­ers’ con­cerns. For now.

The ‘man­age­ment par­tic­i­pa­tion scheme’ stands to gen­er­ate tens of mil­lions of risk-free rands for RMI ex­ec­u­tives

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.