MTN. Picture: BLOOMBERG/NADINE HUTTON
MTN. Picture: BLOOMBERG/NADINE HUTTON

A Grand Parade of shareholder activists in 2018

Finally, after many false starts, shareholder activism on the JSE may have come of age in 2018. While activism is commonplace in other markets — especially the US — the JSE has for the past few years had only sporadic bouts of corporate confrontation led by individuals like Theo Botha, Chris Logan and more recently the disarmingly astute Albie Cilliers.

But companies often shrug this off, especially if the activist cannot get the support of at least some major investors.

That was probably initially the case at Grand Parade Investments (GPI), an empowerment company that holds the local franchises for Burger King, Dunkin’ (Donuts) and Baskin-Robbins, as well as 17.5% of steakhouse chain Spur. GPI has been trading at a woeful discount to its intrinsic value, and looked at risk of losing its dividend appeal because of ongoing losses in its food division.

After several individual shareholders tried, and failed, to trigger the urgent response needed to restore the market’s faith, a consortium of entities rallied at the GPI board to spark change. These shareholders — Kagiso Asset Management, Denker Capital, Excelsia Capital, Westbrooke Alternative Asset Management and Rozendal Partners — represented just 12.5% of GPI.

GPI’s response was to label the activist grouping as "asset strippers" that were not acting in the best interests of the group’s community shareholders. It was not exactly the high point of Hassen Adams’s far-from-flawless tenure as executive chair. Even more disgracefully, there were attempts to paint the activists as agents of white monopoly capital.

But the vacuous rhetoric wasn’t enough to snuff out overriding shareholder concerns about wasting value.

Ultimately, the activists’ well-articulated grievances concerning governance, capital allocation and lack of quick-service-restaurant skills resonated with shareholders. In the end, the activists gathered enough support to vote two directors — former SABMiller executive Mark Bowman and former Spur CFO Ronel van Dijk — onto GPI’s board as nonexecutive directors. This also paved the way for the emergence of turnaround specialists Value Capital Partners as a shareholder with a 16% stake.

As a result, shareholder value has started to creep back, rising 30% in the month to mid-December. Of course, much more has to be done to unlock value — but arguably the bigger reward for all investors on the JSE is that the successful stab at GPI may inspire others to pick up the assegai of activism.

The bitter Taste of Domino’s

There’s no disguising the fact that in 2018 Taste Holdings fell headlong into real trouble. The company should be going great guns — it owns the SA franchises for Domino’s Pizza and caffeine merchant Starbucks.

And yet it incurred an R87.3m operating loss in its latest results for the six months to August, and it is burning though cash faster than a Gupta deployee on the Transnet board.

In fact, the fast food and jewellery retailer would have likely already gone under if the Sean Riskowitz-backed Riskowitz Value Fund (RVF) hadn’t underwritten a R398m rights issue, which Taste used to pay off its R270m debt last year.

The group’s CEO, Tyrone Moodley, who took over only in February, doesn’t expect the company to make a profit in the current financial year. Worse, even after the rights issue, he reckons it will need some new kind of refinancing at some point in the future.

Of course, it’s true that Riskowitz’s RVF provided it with a R200m loan facility — but this money wasn’t cheap: RVF charged a pricey 16% interest rate on it.

All of which means Moodley doesn’t have the cash to expand. To preserve cash, Taste even decided to hold off on rolling out new Starbucks and Domino’s restaurants.

This underlines how much trouble it is in. Starbucks and Domino’s are premium US brands that were expected to power its growth, but this doesn’t look imminent.

Minority shareholders are now on a hiding to nothing. Consider the wealth destruction: over the past few years, Taste’s share price has collapsed from a high of R4.47 in July 2015 to an almost insignificant 18c, while they have also been asked to underwrite several rights offers by R1bn.

Perhaps the only upside for shareholders is that analysts believe RVF (which already owns 66%) could buy them out. Considering the trouble Taste is in, this is starting to look more and more likely.

Until RVF decides what to do with the group, turning it around will depend on the efforts of the 32-year-old Moodley (who is, it must be said, the youngest CEO of a JSE listed company). Moodley’s only experience in retailing before this came from being a nonexecutive on Taste’s board. In other words, fasten your seatbelts.

How Nigeria hung up on MTN

Just when it seemed as though the worst was over for MTN, the group’s most important market came back to bite it. After months of trauma, the mobile operator was finally recovering from a 2016 fine in Nigeria for not disconnecting SIM cards, and had just doused regulatory fires in some of its smaller markets, when the Central Bank of Nigeria came knocking.

In late August, the bank told the company that no less than $8.1bn worth of dividends that MTN had moved from Nigeria between 2007 and 2015 had to be returned. The next day, August 30, the stock lost a fifth of its value.

Shortly after, and just for good measure, Nigeria’s attorney-general demanded that the company pay $2bn in back taxes.

Since then MTN’s shares have been capped at levels last seen a decade ago, around R85, far below the R246 of August 2014. Over the past five years, MTN’s share price has fallen 55%.

CEO Rob Shuter has spent much of his time flying to and from Lagos in an effort to broker a deal, but it hasn’t yet made a difference to the share price.

There’s much at stake. The claims from Nigeria, while laughable to some market commentators, are worth nearly the entire value of the company itself.

But if MTN manages to prove its innocence and convince authorities to drop their demands, or meaningfully reduce them, the operator could be set for a recovery in 2019. If it doesn’t, expect more pain ahead.

JPMorgan says that if the central bank’s claim is withdrawn, and no restrictions or penalties are imposed on the operator, the share would quickly climb towards R100. But the US brokerage reckons the most likely scenario is a $500m settlement for both claims — by no means an inconsequential sum.

Still, some analysts still say MTN is a "buy", which is a positive sign that there is some confidence.

Nigeria, which will hold elections in February, is trying to squeeze funds from other companies too. In mid-December, the government said it would sue Shell and Eni for $1.1bn as part of a case that dates back to 2011.

It has created a degree of trepidation that isn’t great for the West African nation. To many analysts (and MTN) the apparent hostility towards big foreign investors could deter others.

As it is, SA companies, including Woolworths and Tiger Brands, have already been burnt in Nigeria, so MTN’s woes in that market will hardly resuscitate confidence.