Playing chicken with shareholders

• South Africa
• Activist shareholder, Anchor Capital, Delisting, Governance, RCL, Shareholder activism
• November 16, 2020

Shareholder activists are interesting people. They use small stakes in companies to try and leverage meaningful changes, through the provisions of the Companies Act and sometimes the JSE Listings Requirements.

Common focus areas include:

• ESG metrics (like the environmental pressure put on Sasol recently)
• Questions over management performance (like Rainbow Chicken)
• Disposals of assets at low prices (like Zeder’s disposal of Quantum Foods back in July)

Leading shareholder activists in South Africa include the likes of Theo Botha and Albie Cilliers.

In just the past few days, two companies have raised the ire of shareholders. One has made an opportunistic buyout offer and the other simply has poor corporate governance (which is worse than a “cheeky” offer as Anthony Clark described it).

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Anchor Group – an opportunistic leveraged buyout and delisting

Delistings from the JSE are nothing new. In fact, it’s a worrying trend that is getting more and more attention among financial commentators and analysts. Although Anchor Group’s proposed delisting is a trendy move, it’s also an opportunistic one.

When asset management firm Anchor Group listed in 2014, it raised R60m at R2 per share in a private placement. At the time, the company had R5.3bn assets under management (AUM). Shortly after listing, the share price skyrocketed to over R4 as the market went mad for the story.

Now, the firm is proposing a delisting from the JSE at a time when it has achieved R65bn AUM. You might assume that such incredible growth in AUM has been matched by growth in the share price, but you would be mistaken. The delisting offer is only R4.25 per share.

Anchor Group’s official delisting proposal notes that “investors who participated in Anchor’s listing have earned a compound 24% per annum return since listing date (including dividends)” – true only for those who got in at R2 per share.

To be fair, in interviews at the time, CEO Peter Armitage cautioned the market that it had overcooked his share price and that they felt R2 was fair value. If you buy at R4 when management tells you the thing is worth R2, then my sympathy is limited.

Those who bought at R4 have very little to get excited about, with the delisting offer being made at R4.25 per share. It’s much, much worse for anyone who bought in November 2015, when the share price traded at a ridiculous R18.50 per share.

Hindsight is always perfect but that was a daft valuation of note.

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This R4.25 offer is only at an 11% premium to the 30-Day Volume Weighted Average Price (VWAP), which is a lowball offer to be honest. Buyout offers usually carry a premium above 20%. This is why the market is irritated – the buyout offer is opportunistic and takes advantage of market conditions at the expense of shareholders.

The 30-Day VWAP is an average share price over the past 30 days before the offer is made, with days of higher volumes of trade carrying a higher weighting in calculating the average.

This buyout is structured as a share buyback and delisting, with shareholders allowed to retain shares in the entity if they so choose. Tread very carefully with that – if the company never returns to the market or doesn’t receive a 100% buyout offer, the chances of receiving value for those shares are low.

RMB will be pumping up to R250m debt into Anchor Group to facilitate the deal. Not only would a shareholder retain shares in an unlisted entity, but it would do so in an unlisted entity carrying a pile of debt. It seems like a recipe for trouble in uncertain times.

Basically, Anchor Group has given up on the JSE. The controlling shareholders don’t see the value in remaining listed. Instead, they can take advantage of low interest rates and a stubbornly low share price to buy out those shareholders who want to exit.

The shareholder vote on the transaction will take place in December.

RCL – playing chicken with shareholders

RCL was previously known as Rainbow Chickens but is trying to become more than a chicken company. Shareholders may argue that “chicken” is a fair description for the willingness of directors to answer tough questions.

RCL has been poor for shareholders to say the least. A disappointing share price performance is one thing but concerns around governance are quite another. Once the governance concerns start and the institutional shareholders start to walk away, you can safely relegate that company’s share price to the dustbin.

Attendees were only allowed to submit typed questions at the AGM and could not ask questions during the meeting.

Remgro owns 77% of RCL and CEO Jannie Durand is the chair of the RCL board. When pushed on why CEO Miles Dally is still there after 17 years despite the underperformance of the share price, Durand was not willing to answer the question.

When pushed on remuneration policy details, RCL’s remuneration committee head was not prepared to give them.

If you pushed me on whether I would invest in RCL, it’s a really easy answer: no.

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