Rum­ble over Mot­sepe deal

In­vestors raise con­cerns over a new em­pow­er­ment agree­ment be­tween San­lam and a con­sor­tium led by Patrice Mot­sepe

Financial Mail - - FOX FM - Rob Rose [email protected] Patrice Mot­sepe

Re­sis­tance ap­pears to be build­ing to San­lam’s pro­posed em­pow­er­ment deal with Patrice Mot­sepe's Ubuntu-botho group, ahead of the vote on De­cem­ber 12.

This week, as­set man­ager Pru­den­tial sent a two-page let­ter to the life in­sur­ance giant’s board, say­ing it would be vot­ing against the deal be­cause of “gov­er­nance con­cerns”.

In the let­ter, Johny Lam­bridis, Pru­den­tial’s head of eq­ui­ties, urges San­lam to re­con­sider the deal, as the “gov­er­nance, rep­u­ta­tional and busi­ness risks to San­lam are sim­ply too sig­nif­i­cant”.

While Pru­den­tial says its stake in San­lam is “in­signif­i­cant” the FM has spo­ken to other in­vestors who seem to have sim­i­lar reser­va­tions.

It’s an un­usu­ally strong re­buke for a com­pany that has not only de­liv­ered a 380% rise in its stock over the past decade, but which also cre­ated ar­guably SA’S most suc­cess­ful em­pow­er­ment deal yet through Ubuntu-botho’s 2004 pur- chase of 10% of San­lam. That deal ex­pired in 2014, de­liv­er­ing R14bn in value to Mot­sepe’s con­sor­tium.

But it is San­lam’s new BEE deal that has Pru­den­tial hot un­der the col­lar. The com­plex plan has a num­ber of legs: first, San­lam will “lend” R4.3bn to Ubuntu-botho and a num­ber of other em­pow­er­ment en­ti­ties, which they will use to buy 4.9% of the life in­surer at a 10% dis­count to its share price. This will lift San­lam’s di­rect black own­er­ship from 14% to about 19%.

Sec­ond, San­lam will also lend R2bn to Ubuntu-botho, which it will use to buy stakes in other San­lam com­pa­nies, and busi­nesses that can “cre­ate value for San­lam”.

But Lam­bridis says Pru­den­tial sees “sig­nif­i­cant po­ten­tial con­flicts of in­ter­est” in the pro­posed deal.

“We be­lieve th­ese con­flicts and the re­lated-party trans­ac­tions do not have the safe­guards we would ex­pect from a com­pany of San­lam’s stature and pre­vi­ously strong gov­er­nance record,” he writes.

The dan­ger of re­lated-party deals like this is that be­cause key in­di­vid­u­als at San­lam sit on both sides of the deal, smaller share­hold­ers may not be get­ting full value for the stake they’re sell­ing.

As Pru­den­tial points out, San­lam chair Jo­han van Zyl is also CEO of Ubuntu-botho, and CO-CEO of Mot­sepe’s com­pany, African Rain­bow Cap­i­tal (ARC). And Mot­sepe him­self is San­lam deputy chair.

Aware of this con­flict of in­ter­est, San­lam set up an “in­de­pen­dent com­mit­tee” 18 months ago con­sist­ing of all its nonex­ec­u­tive di­rec­tors “who are in­de­pen­dent of San­lam and Ubuntu-botho” to con­sider whether the BEE deal is “fair” to San­lam share­hold­ers. The com­mit­tee is headed by Sipho Nkosi, whom San­lam bills as its “lead in­de­pen­dent di­rec­tor”. That com­mit­tee, backed by Deloitte, con­cluded that the deal was “fair”.

Yet Lam­bridis points out that Nkosi is a share­holder in Ubun­tubotho and “is clearly as con­flicted as Van Zyl and Mot­sepe in de­ter­min­ing the fair­ness of any trans­ac­tion”. Nkosi should quit as San­lam’s lead in­de­pen­dent di­rec­tor, Lam­bridis ar­gues.

In fact, Pru­den­tial ar­gues that “very few” of San­lam’s in­de­pen­dent com­mit­tee are ac­tu­ally truly in­de­pen­dent. Be­sides Nkosi,

Karabo Non­dumo is also a share­holder of Ubuntu-botho, while An­ton Botha has been on San­lam’s board for more than a decade, so shouldn’t be deemed in­de­pen­dent. “The in­her­ent con­flicts of in­ter­est and po­ten­tial im­pact on th­ese in­di­vid­u­als ex­er­cis­ing their judg­ment ob­jec­tively are ob­vi­ous,” it says.

But Nkosi told the FM that those di­rec­tors are in­deed “in­de­pen­dent” and crit­ics are “mak­ing an is­sue” out of noth­ing. “In gen­eral, what is con­sid­ered a ma­te­rial [stake] is any­thing more than 5%. Those share­hold­ers you men­tion, in­clud­ing my­self, [hold] a max­i­mum of 7,000 shares out of a pos­si­ble 2-mil­lion shares. It is im­ma­te­rial,” he says.

Dig­ging up un­usual, in­ter­est­ing tid­bits in and around the busi­ness scene

Nkosi says the share­hold­ers he has spo­ken to “ac­cept the fact that I’m an in­de­pen­dent di­rec­tor”.

This week, San­lam is­sued a let­ter “clar­i­fy­ing” el­e­ments of the deal.

This came af­ter In­sti­tu­tional Share­holder Ser­vices (ISS), which ad­vises in­vestors how to vote on trans­ac­tions, re­leased a re­port rec­om­mend­ing in­vestors vote against the sec­ond leg of the deal — the R2bn loan to Ubuntu-botho.

“It is not clear how this will ben­e­fit BEE part­ners apart from Ubuntu-botho,” ISS wrote. It added that San­lam “has not pro­vided suf­fi­cient in­for­ma­tion for share­hold­ers to judge the ef­fi­cacy and ap­pro­pri­ate­ness of the pro­posed fa­cil­ity”.

How­ever, San­lam then “en­gaged” with ISS, which changed its rec­om­men­da­tion to sup­port­ing the deal. ISS said this was “in light of ad­di­tional dis­clo­sure”.

Nkosi says the Re­serve Bank raised the is­sue of the con­flict of in­ter­est some time ago, given Van Zyl’s dual role. “They rec­om­mended we put in place cer­tain mea­sures so that we have suf­fi­cient con­trols to ad­dress th­ese things. Those mea­sures are now in place.”

But other share­hold­ers have also raised ques­tions.

Flip Rade­meyer, who was San­lam’s act­ing CEO un­til 2003, says he also “has a few con­cerns” about the deal — in­clud­ing San­lam’s ap­par­ent haste to con­clude the deal be­fore Christ­mas.

“The cir­cu­lar is ex­tremely dif­fi­cult to read in its full con­text. There needs to be full dis­clo­sure up­front, and this cir­cu­lar does not pro­vide that level of trans­parency,” he says.

But San­lam CEO Ian Kirk says he has not heard of any ma­jor dis­con­tent. “We did two road­shows, and at the one I did in SA, I asked ev­ery share­holder and an­a­lyst who at­tended if they sup­ported the deal, and they said they did.”

Nkosi says this deal has been ex­haus­tively scru­ti­nised. “It’s not been an easy thing, be­cause we needed to en­sure we got to the right em­pow­er­ment lev­els while sat­is­fy­ing share­hold­ers. You can’t do a deal that short-changes mi­nor­ity share­hold­ers,” he says.

Which is ex­actly what Pru­den­tial be­lieves is hap­pen­ing.

Martin Rhodes

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