Rumble over Motsepe deal
Investors raise concerns over a new empowerment agreement between Sanlam and a consortium led by 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.
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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.