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Over the past 12 months Christo Wiese – Shoprite chairman and biggest shareholder – bought just more than 2,5m ordinary shares in the company. Most of those buys were in the form of single stock futures (SSFs) on Safex. Wiese needs those shares and another approximately 5m over the next 24 months to protect his interest in Shoprite against a somewhat misplaced hedge transaction he entered into in October 2009 with, presumably, Investec and/or Deutsche Bank. The so-called zero cost collar of October 2009 is fully explained in the separate report.
Finweek pointed out in November 2009 that that transaction – in which Wiese was prepared to sell some of his shares in Shoprite for as little as 8100c each on 31 August 2012 – was in fact a motion of no-confidence in Shoprite’s prospects. By October 2009 the shares were trading at 6300c each and the price recently went up to more than R100/share.
The consensus view of analysts is that by August this year – when the first of the draws under the zero cost collar occur at 8100c – Shoprite’s price could perhaps already have climbed to somewhere between R130 and R150/share.
In terms of that favourable scenario, Wiese’s total loss – or let’s say, smaller profit – on the zero cost collar hedging transaction will be of the order of R300m. That “loss” is the difference between what the shares must be sold for in terms of the hedging transaction and the ruling prices of the ordinary shares in 2012/2013.
Over the next two years – between now and when the final draw in terms of the zero cost collar can take place on 22 February 2013 – Wiese will probably have to buy another approximately 5m ordinary shares on the JSE and preferably in the form of SSFs. The net result will be a substantial negative cash flow for Wiese and, in fact, a doubling of the risk he originally wanted to hedge with the zero cost collar transaction.
The egg dance and the management of the risk arising from the hedging transaction – which was actually meant to reduce that risk – looks as follows: Wiese and his risk manager (if he uses that sort of expert) are probably accepting by now there’s an almost 100% likelihood the counterparty in the zero cost collar will exercise his option of taking up 2,5m ordinary shares in Shoprite at an average price of 8300c each on 31 August next year. Wiese has apparently already bought those shares over the past year, mostly as SSFs, at prices that will at least break even or even earn him a small profit for phase one of the hedging transaction (see table of transactions).
By buying the shares mainly on Safex rather than by means of ordinary cash buys on the JSE, Wiese presumably saved around R150m in cash over the past year, but nevertheless indirectly paid interest on it due to the price mechanism of the SSF. In brief, he borrowed the money from the sellers of the SSFs.
Between now and 7 December next year – when the counterparty in the original zero cost collar hedging transaction is entitled to buy another 2,5m Shoprite shares at an average price of 8400c – it won’t be so easy to hedge as in the first option, which can be exercised in February next year at a price of 8300c. For a start, it looks extremely unlikely it will be possible to obtain 2,5m Shoprite shares at less than 8400c each over the next approximately 18 months.
The consensus views of analysts, as collected by McGregor BFA (see box), indicate a company whose profit could rise considerably over the next few years.
Don’t be surprised if Wiese struggles to get hold of the 2,5m shares at less than R125/share over the next 18 months.
Investors and speculators don’t have any sympathy and if they know about a big buyer in the market who can be put under some pressure, it’s easy to push the price up.
It’s not impossible the second put option under the zero cost collar could cost Wiese around R100m, or even more, because he’ll have to sell shares at 8400c while the ruling market price could be as much as R125/share.
The same unpleasant situation lies ahead for draw or option three, which can be exercised in February 2013. For that transaction the average price of 8500c is also for 2,5m shares. However, February 2013 is only two months away from the expiry date of the previous option in December next year and Wiese won’t be able to wait to buy those 2,5m shares.
For the purposes of risk management, option two for 2,5m shares (which can be exercised on 7 December next year) and option three (also for 2,5m shares, due date 22 February 2013) can be taken as one. Briefly, that means between now and February 2013 Wiese will have to buy another approximately 5m Shoprite shares at a price preferably less than 8500c each, otherwise he’s going to run into a significant cash loss on the hedging transaction entered into just over a year ago – a deal in fact aimed at protecting his interest of around 85,6m Shoprite shares against a possible sharp fall in the price, rather than the sharp increase that in fact occurred.
But Wiese hasn’t in any way painted himself into a corner with this zero cost collar. Originally, he risked 7,5m of his interest of around 85m Shoprite shares. Wiese can therefore not be driven into a corner, as can happen in a classical bear squeeze. He has the shares and can therefore offer the 5m still outstanding under options two and three of the zero cost collar (see box for reconciliation of Wiese’s shareholding).
However, to sell shares at 8500c each in terms of a hedging transaction when the shares are trading on the market at R125 each – or even more – isn’t good for anyone’s ego, especially if he has a history of being a crafty investor.
WIESE IN PERSPECTIVE
Another side of an investment Titan
Fascinating investment urges
ALTHOUGH LESS RESOURCEFUL and hardy investors might be sweating bullets, Shoprite chairman Christo Wiese indicates he’s comfortable with the rather complicated hedging transaction detailed in Vic de Klerk’s main report. But he did urge Finweek to see the matter in perspective. So let’s try…
Wiese now holds almost 90m Shoprite shares. While our main report talks about what Wiese might lose through the transaction, perhaps we should also consider what he’d gain through his other shares if Shoprite’s price does reach R130/share. A quick back of matchbox calculation would suggest a sum of R2,5bn.
While Wiese is best known as a retail tycoon – having profited immensely from his no-frills shopping concepts perfected in Pep Stores (part of unlisted Pepkor) and Shoprite – there’s another side to his investment persona. He’s made numerous investments – usually under the guise of Titan, a nominee company that takes various forms.
Outside Shoprite and Pepkor, Wiese endured mixed fortunes in retail in the Nineties and can count efforts such as Cashbuild (now highly successful under the brilliant Pat Goldrick), Smart Centre, Tradehold (now a property company holding only a smidgen of retail) as less spectacular efforts.
But it’s the area(s) outside the steady cash churn of retail that are arguably more fascinating when it comes to Wiese’s serial investment urges. His banking ambitions during the heady mid-Nineties – which, at various times, took in Boland Bank, Orion, NBS and BoE – were well intended but didn’t pan out as planned. At roughly the same time Wiese’s big property bet on Monex – which owned the Cape’s Century City development – also fizzled.
Still, both Wiese’s banking and property investments remain in various forms. The BoE constellation is now tucked away in Nedbank – although tucked away may not be an appropriate term, seeing there’s enough evidence of ex-BoE stalwarts at executive level at Nedbank to presume the deal was actually a reverse takeover.
Retail property giant Hyprop appears to be making a fortune from the Canal Walk retail precinct at Century City – a property it bought from Nedbank for an absolute song.
While Wiese appeared lucky to walk away from property and banking with not much more than a bruised ego (and perhaps a slab of debt), the retail tycoon’s status as a mercurial investor was earlier reinforced with a most inspired deal at Ocean Diamond Mining Holdings (ODM) in 1999.
Seeing that marine diamond miner ODM was probably trading at a fraction of its production potential, Wiese built an influential stake in the business. The Remgro-controlled Trans Hex – also spying a value-laden opportunity – made a formal bid for ODM, although not exactly pitching a generous price.
Wiese, fortuitously, found himself in the role as kingmaker when Namco – an upstart mining company with more balls than brains – pitched a much higher offer for ODM. Although Trans Hex never hiked its initial offer, Wiese made a packet offloading his ODM stake to the (as it turned out) over-ambitious Namco.
While ODM set Wiese up as a player in the resources segment, the retail tycoon’s next big bet on commodities was an unmitigated disaster. Buying into the hyped fluorspar story, Wiese backed a small mining company called Sallies to the hilt. He also chipped in enthusiastically in three rights issues but eventually bailed out of the seemingly hapless Sallies at a substantial loss (although he still holds plenty high-yielding Sallies Debentures).
Still, outside commodities Wiese appears to have made some inspired investments. He bought a meaningful stake in industrial and agricultural supplies company Invicta long before this Constantia-based company emerged as one of the darling mid-cap stocks on the JSE.
Wiese also latched on to vehicle tracking business Digicore well before the mainstream market discovered this low-key company’s potential, both locally and internationally.
While the track record will show that Wiese – outside his rewarding exploits in retail – probably has more luck in industrial companies, there remains a penchant for commodity and financial services plays.
Wiese is a large shareholder in Stellenbosch-based financial services group PSG – a position he entrenched by swapping his KWV shares (another inspired bit of value picking) for PSG shares about three years ago. McGregor BFA’s shareholder analysis also shows Wiese holds a good number of shares in private equity specialists Brait.
On the commodity side, Wiese is a sizeable minority shareholder in Brian Gilbertson’s Pallinghurst Resources and has more recently been seen dabbling with some vigour in junior gold miner GoldOne International. McGregor BFA’s shareholder analysis also shows Wiese has built a position in White Water Resources, which will soon become Goliath Gold after taking on board marginal assets from GoldOne International.
Interestingly, Wiese – a bit like Johann Rupert, chairman of Remgro – has also developed a taste for technology. McGregor BFA shows Wiese holds significant amounts of shares in ConvergeNet and Vox Telecom.
Latest in the rumour mill is that Wiese holds a decent stake in Namibian marine diamond miner Afri-Can Marine Minerals Corporation, which has signalled an intention to seek a secondary listing on the JSE.
WIESE’S OPTIONS
The zero cost collar
An executive toy
YOUNG MERCHANT BANKERS usually want to make their first serious impression by proposing a large transaction to a major client, such as Christo Wiese’s Titan Share Dealers. Nothing sounds more impressive than a zero cost collar. It consists of two parts, or transactions: the one being a sale and the other a buy, with the net result of a zero cost.
The target in October 2009 was Wiese and Titan, which held 90m Shoprite shares – and those, of course, needed hedging, as Shoprite shares had climbed to 6300c. Remember that just a few years earlier Wiese wanted to buy out the minority shareholders in Shoprite at 3600c each.
In October 2009 the proposal by the young banker was simple: “Don’t forget the uncertainty of the recent financial crisis: let’s tie down some of that fat profit of yours on paper in Shoprite shares.”
The transaction for 7,5m shares – around 9% of Wiese’s total holdings –was proposed and accepted and reported on Sens and looked as follows: Buy the following put options on 7,5m shares.
Sell the following call options.
A fly on the wall at Investec – or perhaps it was Deutsche Bank – would have overheard something like the following:
“Dr Wiese, you can’t lose with this transaction. It entitles you to sell 7,5m shares at an average price of 5060c each over the next three years. That’s just a few rand less than the current price and almost double the price of three years ago. Well, you may have to sell 7,5m shares at an average price of 8400c each. But remember – that’s 30% more than the current price and, in any case, it’s double the share price of just a few months ago. Be sure to tie down part of the nice, fat profit on the Shoprite shares. And don’t forget the hedging transaction costs nothing in cash – that’s why it’s called a zero cost collar.”
That’s the gist of that conversation.
Incidentally, that’s the same argument and technique used for foreign exchange hedging, interest hedging and lots of other transactions, usually to the great benefit of the bank’s profit-and-loss account.
If the assumptions under the zero cost collar transaction go wrong – as is the case with Shoprite, where the share price has already increased to R100 – there are two options for the leading party, in this case Wiese. One, sell your shares at 8400c and then bewail your lot at having been caught out by the zero cost. Or otherwise, as Wiese seems to be doing, try to buy back the shares in time, especially in the form of the very risky SSFs, because the latter require less cash.
That doubles the risk. Let’s assume something dramatic happens before December next year and Shoprite’s share price falls sharply. Then you can sell under the zero cost collar at 5060c. But this would leave you with a big loss on the 2,5m shares you had already bought over the past 18 months to hedge yourself against the 8400c at which you’re obliged to sell the shares.
There are a few very simple lessons for everyone to learn from this transaction. The first and foremost is: keep well away from this zero cost collar creature at all times – it will bite, sooner or later.
Finweek pointed out in November 2009 that that transaction – in which Wiese was prepared to sell some of his shares in Shoprite for as little as 8100c each on 31 August 2012 – was in fact a motion of no-confidence in Shoprite’s prospects. By October 2009 the shares were trading at 6300c each and the price recently went up to more than R100/share.
The consensus view of analysts is that by August this year – when the first of the draws under the zero cost collar occur at 8100c – Shoprite’s price could perhaps already have climbed to somewhere between R130 and R150/share.
In terms of that favourable scenario, Wiese’s total loss – or let’s say, smaller profit – on the zero cost collar hedging transaction will be of the order of R300m. That “loss” is the difference between what the shares must be sold for in terms of the hedging transaction and the ruling prices of the ordinary shares in 2012/2013.
Over the next two years – between now and when the final draw in terms of the zero cost collar can take place on 22 February 2013 – Wiese will probably have to buy another approximately 5m ordinary shares on the JSE and preferably in the form of SSFs. The net result will be a substantial negative cash flow for Wiese and, in fact, a doubling of the risk he originally wanted to hedge with the zero cost collar transaction.
The egg dance and the management of the risk arising from the hedging transaction – which was actually meant to reduce that risk – looks as follows: Wiese and his risk manager (if he uses that sort of expert) are probably accepting by now there’s an almost 100% likelihood the counterparty in the zero cost collar will exercise his option of taking up 2,5m ordinary shares in Shoprite at an average price of 8300c each on 31 August next year. Wiese has apparently already bought those shares over the past year, mostly as SSFs, at prices that will at least break even or even earn him a small profit for phase one of the hedging transaction (see table of transactions).
By buying the shares mainly on Safex rather than by means of ordinary cash buys on the JSE, Wiese presumably saved around R150m in cash over the past year, but nevertheless indirectly paid interest on it due to the price mechanism of the SSF. In brief, he borrowed the money from the sellers of the SSFs.
Between now and 7 December next year – when the counterparty in the original zero cost collar hedging transaction is entitled to buy another 2,5m Shoprite shares at an average price of 8400c – it won’t be so easy to hedge as in the first option, which can be exercised in February next year at a price of 8300c. For a start, it looks extremely unlikely it will be possible to obtain 2,5m Shoprite shares at less than 8400c each over the next approximately 18 months.
The consensus views of analysts, as collected by McGregor BFA (see box), indicate a company whose profit could rise considerably over the next few years.
Don’t be surprised if Wiese struggles to get hold of the 2,5m shares at less than R125/share over the next 18 months.
Investors and speculators don’t have any sympathy and if they know about a big buyer in the market who can be put under some pressure, it’s easy to push the price up.
It’s not impossible the second put option under the zero cost collar could cost Wiese around R100m, or even more, because he’ll have to sell shares at 8400c while the ruling market price could be as much as R125/share.
The same unpleasant situation lies ahead for draw or option three, which can be exercised in February 2013. For that transaction the average price of 8500c is also for 2,5m shares. However, February 2013 is only two months away from the expiry date of the previous option in December next year and Wiese won’t be able to wait to buy those 2,5m shares.
For the purposes of risk management, option two for 2,5m shares (which can be exercised on 7 December next year) and option three (also for 2,5m shares, due date 22 February 2013) can be taken as one. Briefly, that means between now and February 2013 Wiese will have to buy another approximately 5m Shoprite shares at a price preferably less than 8500c each, otherwise he’s going to run into a significant cash loss on the hedging transaction entered into just over a year ago – a deal in fact aimed at protecting his interest of around 85,6m Shoprite shares against a possible sharp fall in the price, rather than the sharp increase that in fact occurred.
But Wiese hasn’t in any way painted himself into a corner with this zero cost collar. Originally, he risked 7,5m of his interest of around 85m Shoprite shares. Wiese can therefore not be driven into a corner, as can happen in a classical bear squeeze. He has the shares and can therefore offer the 5m still outstanding under options two and three of the zero cost collar (see box for reconciliation of Wiese’s shareholding).
However, to sell shares at 8500c each in terms of a hedging transaction when the shares are trading on the market at R125 each – or even more – isn’t good for anyone’s ego, especially if he has a history of being a crafty investor.
WIESE IN PERSPECTIVE
Another side of an investment Titan
Fascinating investment urges
ALTHOUGH LESS RESOURCEFUL and hardy investors might be sweating bullets, Shoprite chairman Christo Wiese indicates he’s comfortable with the rather complicated hedging transaction detailed in Vic de Klerk’s main report. But he did urge Finweek to see the matter in perspective. So let’s try…
Wiese now holds almost 90m Shoprite shares. While our main report talks about what Wiese might lose through the transaction, perhaps we should also consider what he’d gain through his other shares if Shoprite’s price does reach R130/share. A quick back of matchbox calculation would suggest a sum of R2,5bn.
While Wiese is best known as a retail tycoon – having profited immensely from his no-frills shopping concepts perfected in Pep Stores (part of unlisted Pepkor) and Shoprite – there’s another side to his investment persona. He’s made numerous investments – usually under the guise of Titan, a nominee company that takes various forms.
Outside Shoprite and Pepkor, Wiese endured mixed fortunes in retail in the Nineties and can count efforts such as Cashbuild (now highly successful under the brilliant Pat Goldrick), Smart Centre, Tradehold (now a property company holding only a smidgen of retail) as less spectacular efforts.
But it’s the area(s) outside the steady cash churn of retail that are arguably more fascinating when it comes to Wiese’s serial investment urges. His banking ambitions during the heady mid-Nineties – which, at various times, took in Boland Bank, Orion, NBS and BoE – were well intended but didn’t pan out as planned. At roughly the same time Wiese’s big property bet on Monex – which owned the Cape’s Century City development – also fizzled.
Still, both Wiese’s banking and property investments remain in various forms. The BoE constellation is now tucked away in Nedbank – although tucked away may not be an appropriate term, seeing there’s enough evidence of ex-BoE stalwarts at executive level at Nedbank to presume the deal was actually a reverse takeover.
Retail property giant Hyprop appears to be making a fortune from the Canal Walk retail precinct at Century City – a property it bought from Nedbank for an absolute song.
While Wiese appeared lucky to walk away from property and banking with not much more than a bruised ego (and perhaps a slab of debt), the retail tycoon’s status as a mercurial investor was earlier reinforced with a most inspired deal at Ocean Diamond Mining Holdings (ODM) in 1999.
Seeing that marine diamond miner ODM was probably trading at a fraction of its production potential, Wiese built an influential stake in the business. The Remgro-controlled Trans Hex – also spying a value-laden opportunity – made a formal bid for ODM, although not exactly pitching a generous price.
Wiese, fortuitously, found himself in the role as kingmaker when Namco – an upstart mining company with more balls than brains – pitched a much higher offer for ODM. Although Trans Hex never hiked its initial offer, Wiese made a packet offloading his ODM stake to the (as it turned out) over-ambitious Namco.
While ODM set Wiese up as a player in the resources segment, the retail tycoon’s next big bet on commodities was an unmitigated disaster. Buying into the hyped fluorspar story, Wiese backed a small mining company called Sallies to the hilt. He also chipped in enthusiastically in three rights issues but eventually bailed out of the seemingly hapless Sallies at a substantial loss (although he still holds plenty high-yielding Sallies Debentures).
Still, outside commodities Wiese appears to have made some inspired investments. He bought a meaningful stake in industrial and agricultural supplies company Invicta long before this Constantia-based company emerged as one of the darling mid-cap stocks on the JSE.
Wiese also latched on to vehicle tracking business Digicore well before the mainstream market discovered this low-key company’s potential, both locally and internationally.
While the track record will show that Wiese – outside his rewarding exploits in retail – probably has more luck in industrial companies, there remains a penchant for commodity and financial services plays.
Wiese is a large shareholder in Stellenbosch-based financial services group PSG – a position he entrenched by swapping his KWV shares (another inspired bit of value picking) for PSG shares about three years ago. McGregor BFA’s shareholder analysis also shows Wiese holds a good number of shares in private equity specialists Brait.
On the commodity side, Wiese is a sizeable minority shareholder in Brian Gilbertson’s Pallinghurst Resources and has more recently been seen dabbling with some vigour in junior gold miner GoldOne International. McGregor BFA’s shareholder analysis also shows Wiese has built a position in White Water Resources, which will soon become Goliath Gold after taking on board marginal assets from GoldOne International.
Interestingly, Wiese – a bit like Johann Rupert, chairman of Remgro – has also developed a taste for technology. McGregor BFA shows Wiese holds significant amounts of shares in ConvergeNet and Vox Telecom.
Latest in the rumour mill is that Wiese holds a decent stake in Namibian marine diamond miner Afri-Can Marine Minerals Corporation, which has signalled an intention to seek a secondary listing on the JSE.
WIESE’S OPTIONS
The zero cost collar
An executive toy
YOUNG MERCHANT BANKERS usually want to make their first serious impression by proposing a large transaction to a major client, such as Christo Wiese’s Titan Share Dealers. Nothing sounds more impressive than a zero cost collar. It consists of two parts, or transactions: the one being a sale and the other a buy, with the net result of a zero cost.
The target in October 2009 was Wiese and Titan, which held 90m Shoprite shares – and those, of course, needed hedging, as Shoprite shares had climbed to 6300c. Remember that just a few years earlier Wiese wanted to buy out the minority shareholders in Shoprite at 3600c each.
In October 2009 the proposal by the young banker was simple: “Don’t forget the uncertainty of the recent financial crisis: let’s tie down some of that fat profit of yours on paper in Shoprite shares.”
The transaction for 7,5m shares – around 9% of Wiese’s total holdings –was proposed and accepted and reported on Sens and looked as follows: Buy the following put options on 7,5m shares.
Sell the following call options.
A fly on the wall at Investec – or perhaps it was Deutsche Bank – would have overheard something like the following:
“Dr Wiese, you can’t lose with this transaction. It entitles you to sell 7,5m shares at an average price of 5060c each over the next three years. That’s just a few rand less than the current price and almost double the price of three years ago. Well, you may have to sell 7,5m shares at an average price of 8400c each. But remember – that’s 30% more than the current price and, in any case, it’s double the share price of just a few months ago. Be sure to tie down part of the nice, fat profit on the Shoprite shares. And don’t forget the hedging transaction costs nothing in cash – that’s why it’s called a zero cost collar.”
That’s the gist of that conversation.
Incidentally, that’s the same argument and technique used for foreign exchange hedging, interest hedging and lots of other transactions, usually to the great benefit of the bank’s profit-and-loss account.
If the assumptions under the zero cost collar transaction go wrong – as is the case with Shoprite, where the share price has already increased to R100 – there are two options for the leading party, in this case Wiese. One, sell your shares at 8400c and then bewail your lot at having been caught out by the zero cost. Or otherwise, as Wiese seems to be doing, try to buy back the shares in time, especially in the form of the very risky SSFs, because the latter require less cash.
That doubles the risk. Let’s assume something dramatic happens before December next year and Shoprite’s share price falls sharply. Then you can sell under the zero cost collar at 5060c. But this would leave you with a big loss on the 2,5m shares you had already bought over the past 18 months to hedge yourself against the 8400c at which you’re obliged to sell the shares.
There are a few very simple lessons for everyone to learn from this transaction. The first and foremost is: keep well away from this zero cost collar creature at all times – it will bite, sooner or later.
