Taste Holdings leaving a sour taste?
Governance concern comes to light amid the food franchiser’s lacklustre performance
As investors (and journalists) took their working caps off and hit the beach, aspiring fast-food company Taste Holdings sneaked out a Sens announcement five days before Christmas that contained a glaring conflict of interest.
It was a poor end to a horrid year for Taste, in which its share price plunged 33%, wiping R370m off its market value. Its big bets on its expensive foreign franchises — coffee mega-brand Starbucks and US pizza giant Domino’s — have yet to translate into big profits.
So, in December Taste said it had decided to buy 15 Domino’s pizza franchise stores across northern and central SA from its CEO, Carlo Gonzaga, who held this interest through his company, Aloysius Trading, for R6m.
The rationale for the move was a “perceived conflict of interest”, given that Taste would effectively have been competing with Gonzaga’s Aloysius. Previously, Taste only owned franchises; now it’s owning the actual stores. Selling the stake to Taste, it said, “served to remove the perceived conflict of interest” while boosting the number of Domino’s outlets it owned.
However, the problem is that Taste’s shareholders will be paying R6m for 15 stores with a negative net asset value of R10.25m and which made a loss of R8m in the company’s past financial year.
Still, Taste chairman Grant Pattison told the Financial Mail that Taste’s JSE sponsor, Merchantec, decided the deal was fair, and wrote a “fairness opinion” to that effect for shareholders.
But this has left some uncomfortable, given that few seemed to know Gonzaga had retained an outside interest in some of the pizza chain’s franchises. To some extent, Gonzaga’s interest in the Domino’s stores is a result of Taste’s history. In 2000, Gonzaga and his father started Scooters Pizza as a franchise operation; he retained an interest in some of the franchises through Aloysius. Scooters then listed on the JSE as the renamed Taste Holdings in 2006. But in 2014, when Taste announced it had signed a 30-year “master franchise” deal with Domino’s, the Scooters stores were rebranded as Domino’s.
“The fact that they [Taste] slipped the information out in the dead quiet Christmas period is a scandal,” says Vunani Securities analyst Anthony Clark.
Clark, who says Gonzaga’s ownership in the Domino’s outlets was kept “very quiet”, has an “avoid” rating on the share. Equally, Noah Capital Markets — the only other firm with a listed recommendation — has advised investors to sell. However, Taste did disclose in its annual report that Gonzaga had an interest in “15 Taste food franchising outlets”, in partnership with Jay Currie, a Taste director for 12 years who resigned in March 2016.
Records from the companies & intellectual property commission show that Currie has been a director of Aloysius since October 2013.
Pattison told the Financial Mail that the board bought out Aloysius specifically because certain shareholders had raised concerns about that company.
“Those shareholders suggested to me that there was a perceived conflict of interest in the previously disclosed fact — approved by the board — that Mr Gonzaga, as CEO, owned a share in one of the Scooters (now Domino’s) franchisee companies,” he says.
Pattison says the board managed this conflict of interest by appointing Wessel van der Merwe, an independent director and member of Taste’s audit committee, to monitor and approve all decisions made by management regarding Aloysius. After the shareholders raised their concerns with Pattison, Van der Merwe was asked to approach Aloysius’s owners and negotiate a deal. Taste’s board got legal advice, got the fairness opinion, and tabled the offer. (Gonzaga was excluded from discussions about the deal, Pattison says.) But the fundamental question is whether Taste is overpaying — especially in a year when its share price softened and its headline earnings plunged from R36.1m to R4.7m. Pattison says not. He says the valuation involved converting Aloysius’s debt to equity, and then valuing the debt-free company, which resulted in a “near-zero” valuation.
This means Gonzaga was essentially paid back for the loans he extended to Aloysius, while Taste’s valuation meant that he and his fellow shareholders had to a take a 50% haircut on their loans.
Pattison adds that the deal “deferred payment terms to the vendors that are favourable to [Taste]”.
Either way, shareholders won’t get to have a say on the deal, as it is considered too small for a vote. The effective date of the deal was also December 21 — a day after the announcement was made. But for critics like Clark, this deal just adds to the concerns of the past year. In a research note released late in December, he said: “If I were a Taste shareholder not on holiday, I’d be asking some pretty serious questions on this deal of so-called governance.” He adds that Taste is buying these loss-making stores having already admitted that “Domino’s is underperforming, and corporate-owned stores make lower margins”. Certainly, those investors who backed Taste when its stock hit a high of R4.80 in July 2015 will be smarting, with the stock now at R1.90 (it hit R1.73 in late January). While its revenue has grown, on average, by 47%/year over the past decade, the trick is turning that into profit while paying licensing fees to the likes of Starbucks and Domino’s.
The problem is that Taste’s shareholders will be paying R6m for 15 stores with a negative net asset value of R10.25m and which made a loss of R8m in the company’s past financial year
It appears that one of the investors selling part of their Taste stock is founding shareholder Chickenland — controlled by the Brozin family, which also happens to be the founder of global chicken chain Nando’s.
Data from Bloomberg shows that Chickenland offloaded 6m shares in the past few weeks, one-fifth of its overall 30m shares and equal to 1.5% of Taste. A spokesman for the Brozin family declined to comment when asked about the sale.
For Gonzaga, the task for 2017 is clear: begin converting those much-hyped deals into bottom-line value.