A poor package deal
There’s still no clarity on how much Nampak will be able to raise from the market in fresh cash
Nampak’s AGM last week failed to throw any new light on its rights offer tussle or even hint that any further progress has been made on urgent degearing efforts. But make no mistake, shareholders remain seriously miffed.
For a start, shareholders voted down special resolution No 1: the approval of nonexecutive directors’ remuneration. The voting tally showed
44% of shareholders voted against the pay packets for the nonexecutives a strong statement by investors that might have suffered too long under the current regime. The development could also easily be interpreted as a pronouncement on
Nampak’s determination and ability to raise up to R1.5bn in fresh cash.
What’s more, shareholders shot down the nonbinding advisory vote on the remuneration policy of the group as well as the implementation report of the group’s remuneration policy. Clearly shareholders can only take so many lean years.
At the AGM, shareholder activist Chris Logan who has been rattling Nampak’s cage for several years asked whether it was appropriate for executives to be paid bonuses based to a large extent on earnings before interest, tax, depreciation and amortisation (ebitda) targets when shareholders incurred a bottom-line loss and were being asked to recapitalise the group.
The major gripe is that Nampak’s ebitda does not reflect costly adjustments made in terms of complicated foreign exchange arrangements in certain African countries.
Nampak chair Peter Surgey wasn’t ruffled: “The bonuses are paid out in terms of the approved remuneration policy. Ebitda is a key measure and the policy was applied accordingly and was approved by shareholders at the previous AGM.”
Industrialist Volker Schütte took issue with the chair’s response. “I find your response in respect of paying a bonus to management when the company and the shareholders are losing money highly unsatisfactory. Just shrugging your shoulders and your answer indicate that the wellbeing of the company is of no concern to management.”
Surgey disagreed. “We have a contract with executives. The remuneration policy is agreed to by shareholders, and the company is then bound to honour this failing which there is an unfair labour practice. It’s not a case of shrugging shoulders. We are well aware of the position we are in, and the executive team is working hard to get out of that position.”
That hard work, of course, depends on Nampak getting the money to appease its bankers. It has already backed down on proposals to raise R2bn in a rights offer, suggesting earlier this month that R1.5bn in new capital might be sufficient. As CEO Erik Smuts put it recently: “Shareholders are in favour of a reduction of the rights offer lenders are digging in their heels.”
Shareholders argue that Nampak has enough operating leverage and asset sale opportunities to need to raise only between R500m and R750m. Next month’s reconvened extraordinary gener
al meeting should be much clearer on the quantum of the rights offer, and hopefully also on reports of traction in the turnaround plan.
One shareholder at the AGM recommended that instead of selling Nampak to the banks for R2bn, the group should be broken up and sold off. “Sell the beverage canning business to [US packaging giant] Ball Corp,” was his suggestion.
Surgey retorted that “if Ball Corp wanted to buy Nampak they would have come calling a long time ago”.
Smuts said talks about possible asset sales were ongoing, but offered no new detail on progress. Inevitably there was an accusation from a shareholder that “you seem to be out of ideas on how to turn the company around”.
Yet Surgey stressed there had been talks with potential buyers of Nampak’s assets, but that nothing had come to fruition.
But there are other levers that Nampak could pull to diminish the size of its proposed rights offer and protect shareholder value.
One lever could be price increases to brewing giants AB InBev and Heineken, which are both seeing vibrant sales in Southern Africa.
Brendon Hubbard, a portfolio manager at ClucasGray, believes one of the nettles that Nampak management need to grasp is the loss-making DivFood division, which is largely involved in making cans for the food industry.
In the 2022 financial year, DivFood and the South African plastics segment generated revenues of R4.9bn, but ebitda and trading profit were R37m and R86m in the red. Hubbard points out that net working capital was R900m for the past financial year, which seems far too much for what could cynically be described as a philanthropic venture.
A decision on DivFood could placate nervous shareholders with indications that the sale of noncore assets in East Africa and Nigeria might not be imminent.
But in its recent trading update, DivFood was tagged as a business with “strong revenues, but a poor level of current trading profit and reasonable prospects of becoming profitable”.
DivFood is deemed in a turnaround phase, with trading results showing a small trading profit in the first quarter of the 2023 financial year.
In addition, Nampak believes a reduction in dollar tinplate pricing for new orders should bring much-needed cost relief to brand owners once the tinplate finds its way into products being supplied to customers. “Though imported tinplate forms part of a supply chain with very long lead times, the commodity price reduction is expected to reduce the net working capital investment in DivFood over the coming months.”
While it may still seem that prospects for a meaningful sale price for DivFood would be slim, it might be worth remembering that a major client is fishing group Oceana. Oceana’s fish canning segment, Lucky Star, would probably be up the creek if DivFood closed down perhaps even having to import cans.
So, the question is whether Oceana perhaps wary of potential disruptions to its production chain might look at buying DivFood? Conveniently, Oceana and Nampak share a nonexecutive director, Lesego Sennelo. In this regard it’s worth remembering Nampak also sold its glass packaging business to a major client, AB InBev, in 2019 for R1.5bn.