Edcon Bid: “Shareholder Value”?

9 February, 2007 at 5:20 pm | Posted in Companies | Leave a comment

Just what complete and utter idiots does the investment banking community think the rest of us are?

I nearly choked over the second cup of my morning coffee on Friday when I read that “The rationale for the (Edcon private equity buy-out) offer is to provide shareholders of Edcon with the opportunity to realise significant value for their investment”.

Come off it, chaps – and any chapesses who may be involved. We all know that the object of private equity buyouts is to make loadsa’ money for the participants: any value realised for existing shareholders is not the “rationale” but the price that has to be paid.

And what an array these participants are! No fewer than a baker’s dozen of names appears at the foot of the Edcon announcement: attorneys, advisers, debt arrangers and so on.

This may well be a record, at least for SA, for although the same number of logos appeared at the foot of the formal announcement of shareholders’ approval of the Consol buyout earlier this week, on that occasion there was some duplication, and I think only 10 individual firms appeared.

Executive directors

Still, there’s certainly one group of shareholders that will realise significant value: the executive directors, as it’s standard practice that any share options they hold may be exercised in the event of a takeover or other delisting.

You have to hunt a little through the company’s website to find this information, and even then you have to do some arithmetic to arrive at the overall figures. But the exercise is worth it.

The 2006 annual report details the options held at the accounting date by six executive directors, and it would take further research to discover whether there have since been any exercises of existing or grants of new options.

But on that basis, E&OE, I reckon that S R Binnie (FD) has 1,42m options at an average price of R17.50, A Boshoff (CE of the discount division) 3,28m at R15.87, M R Bower (CE for group services) 2,56m at R20.03, U Ferndale (human resources) 2,5m at R16.60, S M (Steve) Ross (CEO) 5m at R26.27 and J L Spotts (CE of department stores) 2,88m at R18.35.

In many cases, too, the bulk of these were awarded comparatively recently, so it’ll be a quick payoff.

At a takeout price of R46, the gross profits are of the order of Binnie R40,5m, Boshoff R98,9m, Bower R63,9m, Ferndale R73,5m, Ross R98,7m and Spotts R79,5m. Significant value, indeed, totaling about R455m – before tax.

That’s not all

And it doesn’t end there.

So far, there’s been no Shoprite-like cry for minorities to be able to participate in the new vehicle, and the point must be made that the shareholder profile is such that there’s no individual major shareholder who can be accused of feathering their own nest.

Again at the date of the annual report, while there’s the concentration of ownership that one might expect, there are no fewer than 387 holders of 100 000 shares or more each, who together own 91,5% of the equity.

Only seven own more than 5% each, three of whom are asset managers; the biggest single holder is (surprise, surprise) the PIC, with 10,1%.

Some more equal than others

However, showing again that some shareholders are more equal than others, Binnie, Bower, Ferndale and Ross – and possibly other members of management, the announcement is ambiguous on this point.

It also seems unfair that the people who run the divisions that actually earn the profits should be excluded – have agreed to take up shares in the new operating company “on terms to be agreed at a later juncture”.

So not only will this lucky quartet cash in an immediate R276,6m, they will have the opportunity for a second bite at the cherry later on.

Now I’m not one of those critics who carp every time some handsome executive pay package is announced. I do believe that scarce skills must be rewarded, though I accept that the gap between boardroom and other emoluments in SA has widened too far and that figures like these can only fuel the criticism.

But one of the reasons for this is that competition for especially scarce black managerial skills has pushed up the rewards such people can expect, and this has had a ratcheting-up effect on members of other race groups who have equal skills and don’t see why they shouldn’t be as well rewarded.

As so often happens, the law of unintended consequences has struck.

But that’s a debate to be gone into at more length another time.

For the moment, my purpose is simply to expose the barefaced hypocrisy that claims that the main purpose of private equity buyouts is to realise value for existing shareholders.

(By Michael Coulsen, Fin24)

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