New oversight is just the job, insists Adcorp
Richard Pike, CEO of Adcorp, says activist shareholder Value Capital Partners will give the struggling labour recruitment and management company the sense of direction it has lacked.
Once a darling of the JSE, Adcorp has been badly punished by labour law changes that torpedoed demand for outsourced staff - its bread and butter. Adcorp's share price collapsed from a high of R45 to around R11, and its market value shrank 35%. It laid off 1000 of its staff, began selling noncore assets and looked to international markets.
Adcorp's institutional shareholders, which include Allan Gray and Coronation, have diluted their shareholdings to facilitate Value Capital Partners' entry as a strategic partner with a 12.59% stake.
"They will apply the best of private equity principles but in a limited space, which is a very interesting model," says Pike.
Private equity firms are generally ruthless when it comes to selling off assets and laying off staff, but Pike says Adcorp is already some way down this road and he doesn't expect Value Capital Partners to accelerate the process unduly.
"They don't have a dictatorial style," he says.
But with two seats on a board of 12 and the backing of Adcorp's institutional shareholders, the investment partnership firm will have a lot of influence.
"But they've made it quite clear that management will run the business, not them," says Pike. "They'll be advisers, not doers."
Presumably, they'll expect management to act on their advice?
"That's the domain of an active investor," he says.
Far from putting him under more pressure, he thinks having an active shareholder will make his job easier.
"It's quite hard dealing with a dispersed and nonhomogeneous group of shareholders when you're in a listed environment."
He says having an activist shareholder aboard will give the company more focus.
"In a listed environment shareholders are quite passive. Where you've got an engaged shareholder like VCP, you've got a proper sounding board. You know you're on the right track."
He says as far as he knows his position is secure. "They've indicated they want the team to stay together."
Pike, 55, became CEO in 2001.
Isn't it time for someone with a new vision?
He believes this need was answered with the introduction of a new strategy a year ago to bring Adcorp closer to its clients to help them navigate "very choppy labour waters".
New legislation has made the labour environment formidably complicated, he says.
"A lot of employers are not compliant and they need hand-holding for that."
And they're going to need "serious hand-holding" when the national minimum wage comes in in May, he adds.
He says it is paradoxical that while the government has tried so hard to destroy labour brokers, its policies are making their services more indispensable than ever.
"Where you get more complexity, the better it is for our business. The more complexity out there, the stronger is the case to outsource to people who specialise in that."
He says trade unions drove the hostility to labour brokers, which they blamed for declining membership and, critically, membership fees. Contract workers are generally not unionised.
Pike says he believes they're fighting a losing battle because the international trend is towards contract labour and away from unionisation.
Not at South African universities such as the University of the Witwatersrand, however, which has converted its contract workers into permanent employees. The university felt that as contract workers they were exploited and paid slave wages.
"There's no doubt there are exploitative practices," says Pike. He says a large part of the problem has been the government's failure to enforce the legislation that is there to protect workers.
"The laws are there, but they're not enforced. So the government brought out new laws, and they're also not enforced. And now they've brought out a national minimum wage, which I hope is enforced.
"In theory a minimum wage should put paid to the argument that outsourcing leads to slave wages. If it is enforced. The problem is not outsourcing, it's lack of enforcement."
Although Adcorp has begun selling its noncore assets to reduce debt, Pike concedes it left it a bit late.
"Our gearing was too high, and this was shown up when South Africa had its credit downgrade, and liquidity and debt markets tightened up.
"We were caught a bit unawares by our level of gearing. We didn't see that coming."
He admits overheads got a bit out of control, but says an analyst's accusation that he was building an empire, not a business, is an oversimplification.
"We lost volume with the new labour laws. So suddenly you've got this engine room to service a particular level of business, your business retracts and then you're stuck with that overhead."
He denies that Adcorp is exiting the country, saying 70% of its business is still South African.
He argues it is "diversifying", not exiting, but the fact is that only five years ago 95% of its business came from South Africa. He doesn't deny the trend, only the rate at which it is happening.
"I don't see it going 70-30 the other way (that is, 70% offshore, 30% local) in two years. It might take us five to seven years."
But that's the direction?
"We want to focus on emerging markets. In places like Africa and Australia, we're a player of some significance."
It is going to be increasingly involved in skills training in Mozambique's nascent gas industry. Pike says they want to get more involved in the development of technical skills in South Africa.
"We've seen a definite uptick in the demand for the training of welders and artisans. There's a huge backlog and quite a backlash against the importing of those skills."
On the challenges of running a company here: "As a CEO you need to be a bit of a cheerleader. In South Africa this has become very difficult. There's a surprise behind every door. You've just got to know what you're doing and put your head down. It's that kind of market at the moment."
His scenario planners are telling him "it could get worse before it gets better".