Tsogo Sun set to pay millions for directors’ losses
Tsogo Sun, the hotel and gaming group that has lost about a third of its value in the past two years, is set to bail out executives who face losses on the R200m interest-free loan they were granted in 2014 to purchase shares.
The arrangement will be implemented if controlling shareholder Hosken Consolidated Investments (HCI), one of the most high-profile union investment companies, gets minority shareholder backing to spin off Tsogo Sun’s properties into the separately listed entity Hospitality Property Fund.
This is the latest evidence of pressure on executive remuneration caused by sustained weakness in the share market.
Richard Brasher, CEO of food retailer Pick n Pay, has just lost out on a potential multimillion-rand share award because the company’s share price did not reach the targeted level.
Gerald Seegers, head of human resources services at PwC, said there is no doubt equity market conditions will put pressure on executive earnings. "Long-term incentives will be around but in a different format," he said.
The five top Tsogo Sun directors were given the loan in 2014 to buy shares when SABMiller sold its near 40% stake in the casino operator to institutional shareholders at R25.75 a share.
HCI, which took up an initial 10% stake in Tsogo in 2002 as part of an empowerment deal, emerged as the single largest shareholder after the 2014 deal and it now has a controlling stake of 47%.
HCI, which is also the largest shareholder in Hospitality, will be repurchasing the shares at R25.75. They are currently trading at R21.74.
Since reaching a record high of R31.74 in August 2016, shareholders have seen almost one-third of their value disappear.
One analyst, who cannot be named, said the bailout would make it more difficult for HCI to get the necessary backing of Tsogo Sun shareholders for the Hospitality transaction.
"The R18m involved may not be significant but the principle is," said the analyst.
At the time, the loan, which has no fixed repayment date and was designed to align executive interests with those of shareholders, was slammed by unions. "It can’t be empowerment for just a few people," a National Union of Mineworkers spokesperson said at the time.
At the weekend Cosatu spokesperson Matthew Parks said HCI is one of the best-run union investment companies. "We have confidence this matter will be managed well."
Not everybody opposed the loan. One remuneration consultant who welcomed it said at the time, "these guys now have skin in the game. Executives are not usually exposed to a fall in the price of shares they are awarded as part of their executive remuneration package."
In exchange for the loan the five executives gave up their entitlement to a risk-free annual cash payment awarded in terms of the company’s phantom share scheme, which tracks the value of the shares.
Johnny Copelyn, former trade unionist and executive chair of HCI, said the prospect of a share price fall represented a strong incentive for the executives. At the weekend Copelyn said the proposed Hospitality transaction would result in Tsogo Sun being split into three separate businesses.
"While this would in itself not terminate the incentivisation scheme, it will render it ineffectual." He said it makes no sense to retain the incentive loan.
The loan was not split evenly. Former CEO Marcel von Aulock received R86m, former gaming MD and current CEO Jacques Booysen R47m, CFO Rob Huddy R27m, human resources director Vusi Dlamini R20m and legal director Graham Tyrrell R20m.
Von Aulock resigned from the group unexpectedly at the end of June 2017 and, according to the 2018 annual report, "disposed of his shares in an orderly manner" and repaid the loan in December. The estimated loss of R16m was more than covered by the R28.9m "ad hoc loss of office settlement" Von Aulock was paid in 2017.
At the annual general meeting in October, 38% of shareholders voted against Tsogo Sun’s remuneration report. A spokesperson for Allan Gray, the second-largest shareholder with a 9.7% stake, confirmed it voted against the remuneration policy and report.