Net1 brings in the big guns
We asked Net1 CEO Herman Kotze whether the firm, with its new equity partner, activist shareholder Value Capital Partners, is hoping to secure more public sector work again
The news that Jabu Mabuza, former Eskom chair, was joining payments firm Net1 was met with some degree of suspicion: was this the company’s way of rehabilitating itself in the public eye? Net1, after all, owns Cash Paymaster Services (CPS), the payment systems firm at the heart of the SA Social Security Agency (Sassa) grants scandal. We asked Net1 CEO Herman Kotze whether the firm, with its new equity partner, activist shareholder Value Capital Partners (VCP), is hoping to secure more public sector work again.
HK: I know that is a question that the cynics will ask. Obviously this process was done with full consideration of what people would think or say, but in the end the key was to find … a group of new directors that could come in to refresh the board. In Jabu’s case we think that he has the credentials in dealing with turnaround situations. Certainly from that point of view he has a very impressive track record; he’s not scared of dealing with matters that need to be dealt with. So there was absolutely no political angle to his appointment. We certainly do not plan to restart any major government business in any material way. We had the Sassa contract, and as problematic as it was from a legal and a political point of view, from a technology point of view it was a great showcase for us. Over the past 20 years we have assembled a number of assets that all form a very important part of the national payments system. We now have an ATM network; we have EasyPay; we have our relationship with Grindrod Bank and Finbond. Our target market remains the lower LSM level, but certainly not from the perspective of some of those people being social grant recipients.
Would Mabuza not be useful, given his government connections?
HK: If you look at the remaining legal issues between ourselves and Sassa, those are all in front of the courts now.
CPS has also gone into business rescue. We have put those issues behind us and so there’s a very limited role for Jabu to play because we are simply not targeting that sphere now.
You’ve got these relationships with Grindrod and Finbond: might Net1 want to buy either bank and is VCP the catalyst to doing a deal?
HK: Obviously when you talk to Anthony or Sam [Anthony Ball, chair of VCP, and Sam Sithole, CEO], they have their own approach and that is to take a significant minority stake in public companies … I don’t think their style is to necessarily catalyse these sorts of takeover situations. It’s no secret that we believe we should move to a closer strategic relationship with our banking partners. To be a significant contributor or player in the SA payments space you have to have a very good relationship with a bank or be a bank.
You talk about how capital allocation might change now that VCP has bought in. Does that mean Net1 is looking to take a different direction?
HK: Well, this strategic review is a process that started last year and the first outcome of the plan was the disposal of noncore assets, which we did. We were going to acquire a controlling stake in Bank Frick, but given how the world has changed and how quickly, and the need to conserve capital almost at any cost, we had no other choice but to make sure that we consider the allocation of capital very carefully going forward.
In SA, will radically subdued economic activity have a deadly effect on Net1?
HK: I think the overall impact on us is probably a positive one because people are increasingly embracing digital channels. So regardless of the fact that economic activity is slowing down and you have a lot of people who are going to lose their jobs, people still have to buy certain essential goods and services and Net1 is right in the middle of that payments universe … During this time a lot of people have realised how convenient it is to utilise e-commerce, and the same analogy applies to payments.
You do have a lending business too — are you bracing for bad debts?
HK: On our book, we have very strict upfront credit criteria that we have always applied, so the quality of our book, I believe, is good and well provisioned for. So we don’t expect an adverse financial impact. I think the challenge is going to be to handle the flood of applications that will come.
Your shares hardly trade on the JSE; you have a Nasdaq listing and a big US investor base, so what’s the benefit of retaining an SA listing?
HK: The SA listing was really a result of the exchange control regulations put in place when we did the original Nasdaq listing in 2004. Over the years our SA shareholder base has declined substantially, though with VCP coming on board our SA shareholder base is probably around the 30% level now. With VCP, and our plans to expand here, having a local listing is still relevant.