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Steinhoff Africa, Brait put investors on hook for manager loans

Jun 21 2018 20:15
Janice Kew, Bloomberg

Here’s a surefire way to infuriate your shareholders.

In 2011, two companies linked to South African billionaire Christo Wiese offered top managers an option to buy shares in the businesses they were running. Plenty of companies do that, but not necessarily with this additional sweetener: The executives in question received bank loans to buy the stock - loans that were guaranteed by the company in the event they couldn’t be repaid.

Clothing retailer Pepkor Holdings, now part of Steinhoff Africa Retail [JSE:SRR], and investment company Brait SE [JSE:BAT] clearly saw the perk as a straightforward way of keeping top brass focused on their jobs. What they didn’t bargain for is their mutual downturn in fortunes, erasing the benefit for managers of having the shares, and now both companies risk having to shell out to settle their managers’ bad debts.

“At the time we looked at various schemes and arrangements for management incentives and those were the best schemes we could come up with,” said Wiese, a 76-year old retail and property tycoon, who was the owner of Pepkor at the time and holds about 35% of Brait. “And it did of course work very well as these schemes always do when things are going well.”

Wiese says best practice was followed when the plans were devised.

Careless investors

“I doubt whether many institutional investors knew about these transactions, because they didn’t look closely,” said Asief Mohamed, chief investment officer at Cape Town-based Aeon Investment Management. “At the very least, it appears that these investors have not applied their minds and looked at the implications when these schemes were concocted.”

Last month STAR, as Steinhoff Africa is known, told investors it put aside R440m to pay back the loans of 44 Pepkor managers, many of whom bought stakes in the then-closely held company. Those shares were converted into Steinhoff International Holdings stock when Steinhoff bought Pepkor from Wiese for $5.7 billion in 2015.

The guarantee on the old Pepkor stake was then bumped over to STAR when the Africa operation was spun off into a newly listed unit in September.

Worthless shares

Steinhoff shares have now famously crashed, losing 97% of their value since the owner of the Conforama, Poundland and Mattress Firm reported a hole in its accounts in December. So, even though it’s now separated from Steinhoff - and has a clean set of financials - STAR is the guarantor on the loans for its managers’ now near-worthless shares.

“It’s unfair that shareholders have to pick up the downside risk for management,” Mohamed said. “This skews incentives and encourages these cowboy-like reckless investments where they leverage up further.”

In a strikingly similar plan to Steinhoff’s, Brait backed a R1.2bn outlay to about 16 senior staff for the purchase of shares. In this case the managers at least put an additional R300m of their own money into the pot. Yet like Steinhoff, albeit for entirely different reasons, the value of Brait’s investments - and its share price - have nosedived.

On advice from auditors Deloitte, Brait has earmarked R641m of funds to repay the loan due in 2020. However, if Brait recovers before then, it may not have to make up the shortfall.

“Management is also in this, in their personal capacity, so it’s quite an incentive,” Chris Seabrooke, the chairman of Brait’s South African unit said by phone.

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