VICTOR KGOMOESWANA: Does Barloworld deal provide lesson in shareholder activism?

Could the recent decision by Barloworld shareholders to reject a takeover bid by a consortium led by group CEO Dominic Sewela be a sign of things to come in corporate governance, or was it but one isolated case?

On February 28 JSE-listed industrial equipment and services company Barloworld issued a statement via Sens advising that “the resolution tabled at the general meeting to approve the scheme was not passed by the requisite majority of votes of Barloworld ordinary shareholders present and entitled to vote thereon”.

This was bad news for Newco, the “offeror”, whose intention had been to acquire all ordinary shares of Barloworld “other than those held by the excluded shareholders” for R120 a share — plus R3.10 a share in dividends. Newco is made up of Entsha Proprietary and Gulf Falcon Holding, the latter being a wholly owned subsidiary of Saudi-based Zahid Group.

Founded in 1943 by the late Sheikh Mohamed Mahmoud Zahid, the group currently has operations housed in 30 companies, across 14 sectors in 23 countries, and was listed by Forbes at 27 in the Top 100 Arab Family Businesses rankings.

The Zahid Group-led consortium wanted to acquire Barloworld, which was founded in 1902 by Maj Ernest (Billy) Barlow to sell wool products and later engineering equipment. Both the Zahid Group and Barloworld have since grown tremendously into respectable companies. So why did the deal fall through, especially with the offer reportedly representing a healthy premium to Barloworld’s fair value?

Why did fewer than 37% of Barloworld’s shareholders vote for the proposed transaction at the meeting held on February 26? One can only go by what is in the public domain. For one, 21.97% shareholder the Public Investment Corporation (PIC) voted against the transaction. The PIC has not commented on the transaction’s merits, though it did also vote against the board members that were up for re-election at the Barloworld AGM on February 21.

What has also been in the public domain is the composition of the offeror consortium and the inclusion of Sewela, in what many commentators and governance experts would consider a conflict of interest. It is hard to sell a transaction to shareholders when their asset is not performing well financially and there is a conflict of interest — even if such a conflict was declared.

When the intended transaction came to light late last year, Barloworld would have been preparing its financials for the year to end-September. These financials importantly include a 7% decline in revenue, a 12.6% drop in operating profit, and a 7% decrease in earnings before interest, taxation, depreciation and amortisation (ebitda).

When the PIC votes against anything it is hard for many institutional shareholders to take a different stance. Who wants to go against Africa’s largest asset manager? It would not be smart for anyone to poke a bear with assets worth nearly R3-trillion under its management! Many resolutions have had to be reconsidered once the PIC expressed reservations about them, even before coming to the AGM.

The PIC does not have to verbalise its concerns. It can be like that elder at a family meeting, sitting quietly in a corner, who is quite capable of altering the course of any debate by simply coughing or bristling in their seat.

Once the PIC speaks or votes against a deal, it is almost always considered dead in the water. In July 2023 Telkom spurned an unsolicited offer led by its former CEO, Sipho Maseko. The PIC is a shareholder in Telkom.

Both Sewela and Maseko are brilliant businessmen. It is a no-brainer that any investor keen on any asset they have an intimate knowledge of would think twice about overlooking them as key players in their takeover strategy. However, with today’s increasing focus on environmental, social & governance (ESG) issues, the deal was always going to be a hard sell to shareholders featuring the PIC.

It is increasingly important for business decisions to be more than just about the financial bottom line but about ESG responsibility as well. In a society that is plagued by social ills, including corruption, crime and a general deterioration in ethics, shareholders are likely to lead by example when they use their votes to stop what looks unethical or questionable to them in any other way.

The Barloworld case is an illustration of how a financially attractive deal can falter because of nonfinancial considerations. If the R123 per share had been the only variable, the deal could have gone through without a glitch. The decision by the PIC to use its vote to force a re-examination of the transaction should encourage other activist shareholders to do the same.

Understandably, from Newco’s point of view the failure of the February 26 meeting to approve the offer is frustrating. This is why the consortium is still optimistic and is committed to continuing its conversation with any shareholder of weight to persuade them otherwise.

Maseko’s consortium did the same in July 2023. Time will tell whether the standby offer, which has not been triggered by this rejection, will be accepted by Barloworld ordinary shareholders holding at least 90% of all Barloworld ordinary shares.

Take the personalities out of this, and one sees that the world has moved on. As disillusioned as one can be about the soaring levels of corruption in society, active citizenship — just like shareholder activism — remains a key ingredient of ethical regeneration in corporate organisations.

As for the PIC, decisions such as this are a sign that Africa’s largest asset manager still has the currency to influence the decisions of corporate entities and counter the risk of impropriety, real or imagined, thus restoring public faith in the prevalence of good over bad.

The Barloworld transaction might eventually go through (or not). Newco deserves to have its offer accepted if it ticks all the boxes, but its rejection challenges us to think again, which, more often than not, is enough.

• Kgomoeswana  is head of marketing for the University of Limpopo and author of ‘Africa is Open for Business’.