HCI, Tsogo Sun’s controlling shareholder, has defended a R200-million interest-free loan to its top five executives, saying it is an effective way to secure their long-term commitment to the company.

HCI executive chairman Johnny Copelyn said that ensuring the top executives had a “meaningful” stake in the company should be welcomed by shareholders as it would be to their benefit.

Marcel von Aulock, CEO of Tsogo Sun and the largest beneficiary of the loan, said it was unfortunate that the structure of the incentive scheme had been misunderstood. “It will be cash positive for the group because I and my four colleagues will be giving up future cash allocations under the existing phantom share scheme.”

Von Aulock said the proposal was very well received by local and international shareholders, who had taken up SABMiller’s Tsogo Sun shares in last week’s bookbuild exercise.

Details of the controversial loan overshadowed the bookbuild exercise that followed SABMiller’s announcement that it was selling its 435 million Tsogo Sun shares, equivalent to 41% of the value of the company. On Friday, Tsogo Sun announced that 294 million shares had been placed with local and international shareholders at R25.75 a share.

Once the placing has been finalised, the second leg of the transaction will see Tsogo Sun repurchase 133.6 million of SABMiller’s shares at R20.96 a share, for a total of R2.8-billion. The repurchased shares will be cancelled in a move that will see HCI’s current 41% stake in Tsogo Sun increase to 47%.

The controversial loan will be used to buy about 7.6 million Tsogo Sun shares.

The granting of the loan, which will require that the five executives give up their entitlement to the company’s phantom share scheme, will have to be approved by the shareholders at a meeting on August 5. In terms of the existing phantom share scheme, the executives are allocated a cash payment based on the share-price appreciation. Tsogo Sun executives are not awarded shares.

Copelyn said the supported purchase of the shares was entirely an HCI initiative. Both Copelyn and Von Aulock said the loan would have to be repaid if the executives sold their shares or left the group.

Bert Chanetsa, deputy executive officer investment solutions at the Financial Services Board, said it was unfortunate that the impression had been created that selected directors got shares paid for by the company while ordinary shareholders had to secure their own funds to purchase shares.

Chanetsa said the decision did not serve the market and the public at large, “neither does it paint a picture of Tsogo Sun being concerned about the growing discontent about pay differentials in South Africa”.

Commenting on the results of the bookbuild exercise, Von Aulock said it had “worked very well” and was two times oversubscribed. He said that 35% of the applications for shares had come from international investors.

Von Aulock said details on which institutions were allocated shares were not known as the banks were still finalising allocation. “It is likely to favour local institutions who are considered to be more stable long-term investors.”

The R2.8-billion repurchase by Tsogo Sun would contribute to a debt burden expected to peak at R11.5-billion at the end of this year.

The R2.2-billion Grand West transaction and planned investments in existing operations across the group were included in the R11.5-billion.

Source: BDLive – Ann Crotty