Tag: deal

Eskom’s latest scandal: R100m for office chairs

State power utility Eskom wants Treasury to approve a R24-million contract to purchase 9 217 office chairs, the Sunday Times reported.

The request for thousands of “operator and visitor chairs” follows an even bigger contract for office and soft chairs was signed in 2013 for R72.7 million.

According to the paper, Treasury conducted an inspection of Eskom’s offices, and found that only 500 chairs were required, and not the requested 9,200.

Eskom said its request for the R24 million expansion to the current office furniture contract was due to an “urgent need for replacement chairs while initiating a tender process”, however, a Treasury source told the Sunday Times: “The application just looked wrong and we suspected collusion between Eskom and the service provider.”

Debt and corruption scandals at Eskom make the utility the biggest risk to South Africa’s economy and the government needs to replace its management, Goldman Sachs Group said recently.

Eskom plans to raise almost R340 billion ($26 billion) in the next five years, while meeting R413 billion of interest and debt repayments, which amount to 8% of South Africa’s gross domestic product.

The utility is caught up in allegations of corruption related to contracts it signed with companies linked to the Gupta family, who are friends of president Jacob Zuma. It’s also without a permanent chief executive officer and has suspended its finance director. Zuma and the Guptas deny any wrongdoing.

Source: BusinessTech

Hush-hush Shoprite deal stuns investors

Back in 2011, when critics got into a flap about the R595m that former Shoprite CEO Whitey Basson made when he exercised a chunk of the share options he’d received as part of his remuneration package, chairman Christo Wiese told the Financial Mail: “I would pay R1bn in the middle of the night for another Whitey.”

At Shoprite’s AGM in late October 2016 Wiese again jumped to the defence of Basson’s remuneration package. This time he told testy investors, who’d questioned the R100m (including a cash bonus of R50m) paid to Basson in 2016, “I would have been happy to pay him much more”.

Shoprite’s recent shocking Sens announcement about Basson’s Put option is proof that Wiese was not exaggerating. Far from it. It seems Wiese actually understated the generosity he (on behalf of his shareholders) was prepared to heap upon Basson, who retired from the group in December. The Sens announcement released last Friday revealed the existence of a remarkable and hitherto unheard-of employment agreement that obliged Shoprite to repurchase any shares put to it by Basson.

A few days earlier, on May 2, Basson notified Shoprite that he was exercising the put option at the middle market price of R211. It turns out this was a five-year high for the share.
If shareholders approve the transaction, Shoprite will have to repurchase 8.7m of Basson’s shares at this price, which means handing over R1.8bn to the man who is largely responsible for building the group into the largest food retailer in Africa. Wiese’s comment about being happy to pay Basson so much more will come back to haunt shareholders as they face an eye-popping R144m/year in additional interest costs to fund his generous gesture.

Some analysts have expressed concern that Basson’s decision to sell all but 400,000 of his Shoprite shares is an indication that he believes the group is now ex-growth. Others say it’s an appropriate move for someone who must walk away and let a new executive team put their stamp on the business.

At this stage, despite Wiese’s 45% voting bloc, it’s not a dead certainty the transaction will get the necessary 75% shareholder approval. It’s difficult to see why shareholders, particularly the Government Employees Pension Fund with a 16.3% holding, would vote in support. It’s not as though Basson will ever do another full day’s work for the group. A R144m/year interest bill is a hefty thank you and not the sort of gesture hard-nosed investors are inclined to make.

If it is blocked, it is unclear what happens to Basson’s right in terms of the employment agreement. Presumably he could pursue the matter through the courts.

It wouldn’t be the first time this year Wiese failed to get his way with a controversial deal. In February a plan to combine Shoprite with Steinhoff’s African brands was called off when key shareholders were unable to reach agreement on the share-exchange ratio to be applied.
While there’s little debate about the contribution Basson made to Shoprite during his 37 years in the driving seat, there is huge debate over the nature and origins of this little-known employment agreement. It’s a debate that will grow in the weeks between now and when the shareholders get a chance to vote on it.

Jean Pierre Verster of Fairtree Capital says the issue is not about how much value a CEO creates: “This put obligation leads to a misalignment of interests between the company and its executives.”

Verster says inevitably, if it is in the interests of the executive to sell the shares, it will not be in the company’s interest to buy them. “R211 isn’t extremely expensive but it is close to full value, which means it’s in [Basson’s] interest to sell — but would the company be buying if it weren’t obliged to?”

Perhaps even more disturbing is that no-one outside the company seems to have been aware of the employment agreement giving Basson the extremely lucrative put option. There was certainly no sign of it back in 2011 when Basson sold the approximate 10m shares in the high-profile R595m deal.

The company says the agreement was concluded in December 2003 but analysts have been unable to find any trace of it, either as a note to subsequent remuneration reports or as a contingent liability. Analyst Syd Vianello said he was unaware of any such agreement anywhere in the past 15-20 years.

Amazingly, given the money and the parties involved, shareholders might never have been any the wiser were it not for the JSE’s listings requirements. The JSE’s Andre Visser says because it is a specific repurchase and involves a related party, shareholders have to give approval.

In addition, because the repurchase price is at a premium to the average price at which the share traded in the previous 30 business days, Shoprite must obtain a fairness opinion.

Shareholders will be provided with this opinion, full details of the repurchase and the date of the meeting “in due course”, says the company. This means shareholders will have plenty of time to mull over the latest controversial agreement involving SA’s wealthiest businessman — and to wonder how many other similar employment agreements are waiting to be detonated.

By Anne Crotty for Financial Mail

Shoprite, Steinhoff deal called off

South Africa’s Steinhoff’s and grocery retailer Shoprite have called off a potential deal to create an African retail giant.

In a joint statement, the two firms said “the fact that the relevant parties could not reach an agreement in respect of the Share Exchange resulted in the negotiations being terminated.”

As a result both companies saw a notable increase in their respective stock prices with Steinhoff’s shares in Johannesburg rising more than 7% since the announcement, while Shoprite’s stock jumped more than 6%.

The deal was the idea of retail magnate Christo Wiese, who owns 16% of Shoprite and 23% of Steinhoff, and would have given Steinhoff a major interest in the R110-billion Shoprite.

According to the Global Powers of Retailing list published in Janaury 2017, Steinhoff International, a manufacturer and retailer of mostly furniture and household goods, is currently the biggest retailer in the country and 72nd in the world.

Shoprite Holdings is the second biggest retail brand in the country, ranked 110th.

Source: www.businesstech.co.za

International Paper Co., the largest maker of corrugated cardboard packaging, is betting big on disposable nappies.

The Memphis-based company says Monday it agreed to pay about $2,2-billion to Weyerhaeuser Co. for assets that will double its production of so-called fluff pulp, used in hygiene products.

Demand for the absorbent raw material manufactured from softwood is growing at a faster pace than that for cardboard or paper, helped by booming sales of adult-incontinence products and increased spending on personal-care items by the expanding middle classes in developing nations. The deal will make International Paper the leader in the global fluff-pulp market, putting it ahead of Koch Industries Inc.’s Georgia-Pacific, according to BMO Capital Markets analyst Mark Wilde.

“The market is a good market,” International Paper CEO Mark Sutton says. “It’s growing globally. It’s all about consumer products that make people’s lives better.”

International Paper, the world’s largest paper company, says the all-cash deal is expected to close in the fourth quarter and generate annual cost savings of about $175-million by the end of 2018.

Regulatory scrutiny
The Weyerhaeuser assets have a total annual production capacity of almost 1,9-million metric tonnes and employ about 1 900 workers in the US, Canada and Poland. The transaction will give International Paper five mills and two converting factories that produce fluff pulp, softwood pulp and specialty pulp.

International Paper expects to realize a $300-million tax benefit from the transaction. Net of that saving, the company says it’s paying 5.4 times the target’s 2015 earnings before interest, taxes, depreciation and amortization. That’s less than the multiple paid in six comparable deals over the past five years, according to data compiled by Bloomberg.

The deal is International Paper’s largest since its $4,27-billion acquisition of rival corrugated-packaging manufacturer Temple-Inland Inc. in 2011.
International Paper shares were little changed Monday, rising 0,4% to $43.46 in New York. The deal may draw some regulatory scrutiny and investors are likely to be concerned about the amount of new fluff production capacity hitting “a growing, but relatively modest-sized market over the next three to four years” Wilde, who rates International Paper “market perform”, says.

Possible divestments
To close the acquisition, International Paper may be willing to sell as many as two of the mills if required by regulators, Sutton says on the call. The new capacity being added to the market “is targeted at different levels of products,” he says. “I think we’ll be able to operate very, very well within that environment.”

Federal Way, Washington-based Weyerhaeuser says in a separate statement that the sale completes the first phase of its review of its cellulose-fibres business. The company is still reviewing the future of its liquid-packaging board facility and its newsprint and publishing-papers venture.

Weyerhaeuser expects to use some of the estimated $1,6-billion of after-tax proceeds from the pulp deal to repay term loans related to its $2,5-billion share-buyback programme. Its stock rose 0,5% to $32.28.

By Megan Durisin and Simon Casey for www.bloomberg.com

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