But did the brewing giant sell out too cheaply?

SABMiller’s disposal of its shareholding in Tsogo Sun is now a done deal, with Tsogo shareholders giving it the green light at a General Meeting on August 5.

In a simple outline of the transaction, SABMiller is offloading its 40 % (435 million shares) interest in Tsogo Sun, held since 2002. The exit plan is through a placement to institutional shareholders (294 million shares) as well as a sale to Tsogo Sun (133 million shares in a buyback transaction, which results in cancellation of these shares). Thrown into this mix is that R200 million (8 million shares) will be placed with five select Tsogo directors, funded on generous terms by Tsogo itself.

The end result is a complete exit by SABMiller, the introduction of a range of new institutional shareholders, a materially increased shareholding by HCI (from current 41% to around 47- 48%), and some notable internally-funded executive share acquisitions.

At the General Meeting, all resolutions were comfortably passed (97% and above), and the deal that the market has been expecting for a decade, is now done and dusted. As expected, corporate governance specialist Theo Botha was at the meeting, challenging Chairman Johnny Copelyn on various aspects of the deal. Botha’s main concerns were the prices received by SABMiller, on both the placement and buyback legs of the transaction.

The institutional placement

The bulk of SABMiller’s stake in Tsogo has gone to institutional shareholders at R25.75/share, most of them local, and the usual suspects. But there has also been keen interest and take up from UK and US institutions that like the wide exposures that Tsogo offers to the gaming, hotel and entertainment markets, and its respectable size which lends itself to inclusion in various market indices. Copeland says that BEE shareholder HCI was offered some of this placement, taking up a small 0,5%.

Botha is highly concerned about pricing. “This placement was done at around R25-26/share to many institutions, when the share is trading above that level and the KPMG ‘fair and reasonable’ is around R28.” He is also not satisfied with the allocation to such a wide range of shareholders at the low price, believing that this particular share interest could have been snapped up by a single institution at a premium price for such a well-managed company.

Those large directors’ loans

A small part of the SABMiller placement has been allocated to select Tsogo directors, to be funded by a R200 million interest-free, indefinite period, unsecured, executive loan facility from Tsogo. With this favourable financing, five directors can buy Tsogo shares at the institutional placement price of around R25. However, while they have this loan facility, they cannot participate in any other future share-based payment awards and schemes.

Inevitably, this widely publicised and criticised arrangement was raised at the meeting. Copelyn says that this initiative did not come from the beneficiary directors themselves, but rather from board members representing specific shareholders. He explained the HCI aversion to constantly getting its shareholdings diluted by general option and share issues to staff, which in turn drive regular share buybacks in order to retain BEE shareholding levels. The loan facility arrangement would keep a lid on such dilutions.

However, Botha says it has the effect of moving executive share acquisitions – which are usually internally structured and awarded – outside of the usual remuneration structure. He would have preferred to have seen a more traditional form of incentivisation and alignment of director interests to those of the company, using the conventional channels of the remuneration committee and share awards by the company itself.

Botha also queried how other Tsogo senior managers might view the select R200 million facility. Copelyn explained that to extend this type of benefit down to the numerous managers sitting below board level would have been too burdensome. “We have existing schemes at that level, and our packages are generous and top-end.”

The share buyback

Again, Botha questioned the price of the shares sold by SABMiller to Tsogo in the share buyback leg of the deal. “The fair and reasonable is R28, and the institutional bookbuild is R25-R26. But Tsogo only had to pay R20.96 for its 133 million shares, which is a deep-seated discount.”

The deal terms were that the share buyback would be at the lower of 81.4% of the placement price to institutions, or R21.50/share. Botha is mystified as to how this formula was arrived at and why SABMiller would settle for such a low price.

Copelyn assured that there was nothing in the SABM/HCI shareholder agreement that compelled a sale at such a discount. “Tsogo was indeed fortunate to be offered these shares at such a compellingly attractive price, after having assisted SABMiller with its exit strategy.”

Botha estimates the opportunity cost to SABMiller could be around R1 billion and this issue would be something for SABMiller-representative directors to answer. “Ideally we should have had SABMiller at this general meeting so they could explain their reasoning on the seemingly low bookbuild price, and the heavily discounted buyback price.”

Preference share authorisation

There was also voting on the creation of 20 million preference shares, with Copelyn assuring this is an issue completely unrelated to the SAB disposal of the Tsogo interest.

Copelyn explained that these prefs would be issued as and when needed, in order to fund casino expansion. “When debt levels become burdensome and concerning, that is when we would use the prefs.” He emphasises that their substance is an “after-tax” debt concept and that they are definitely not convertible into ordinary shares. He also specifies that there are no related party deals involved, and that HCI would not be able to take up any of these prefs on favourable terms.

The resolution authorising the creation of these shares gives directors huge flexibility and wide discretion when determining their issue conditions and terms. Copelyn explains this discretion is essential, as pref terms should only be set when potential lenders come forward, and terms can be structured according to what financiers are looking for. To establish terms far in advance of issue would be restrictive and could limit capital-raising. He also explains that these prefs are no different to conventional debt raising activities in which shareholders are not normally consulted.

He acknowledges that prefs are certainly more expensive than ordinary borrowings when a company is lowly geared, and commits that the prefs would only be issued at much higher debt levels, when it makes financial sense. By getting authorisation now for the creation of these shares, the company is merely putting in place a debt facility which can be accessed when needed.

Botha criticised the poor disclosures in the corporate circular around the prefs and what they would be used for, and Copelyn appeared to concede on this point.

The Tsogo board

Botha raised a few other governance issues relating to board composition – why the change in status of Yunis Shaik from Independent Non Executive Director to simply Non Executive; and why so many HCI directors on the Tsogo Board?

Copelyn explained the Shaik change was due to this director now taking up full time employment with HCI, and hence no longer being independent; and that with the SABM and HCI shareholder agreement now falling away, there will undoubtedly be more independent appointments to the board.

Source: Moneyweb – Judy Gilmour (The writer holds shares in Tsogo Sun and SABMiller)