Decoding Sanlam’s cosy deal with Patrice Motsepe

Sanlam takes corporate governance very seriously.

We know this because lead independent director Sipho Nkosi said so four times in less than 12 minutes when he chaired the mid-December shareholders’ meeting called to vote on Sanlam’s latest multibillion-rand deal with Patrice Motsepe’s Ubuntu-Botho group.

(It’s important to point out at this early stage that the Ubuntu-Botho CEO is current Sanlam chair Johan van Zyl, who was Sanlam CEO for 12 years to 2015. And that the deputy chair of Sanlam is Motsepe.)

Nkosi told shareholders that the insurance giant’s value-creating track record is "supported by the highest standards of corporate governance, ethical business practices and transparency".

He also assured them that Sanlam appreciates the importance of upholding the "highest standards of governance" when overseeing transactions, "in particular those involving related parties".

And, it has to be said, the two-pronged deal with Ubuntu-Botho is about nothing if not related parties.

But as things stand, it might be down to the competition authorities to ensure there is an appropriately vigorous interrogation of these related-party dealings.

The competition authorities are not concerned with shareholder interests, but will want to ensure the transaction is on the right side of the competition law.

Essentially, Ubuntu-Botho, which has its own financial services operations, will end up as the dominant shareholder in Sanlam with an 18% stake — a dominance it secured not through the payment of a premium but through a 10% transformation-related discount secured in two deals over 14 years. In addition, the latest transaction will result in Ubuntu-Botho subsidiary African Rainbow Capital Financial Services (ARC FS) emerging with a 25% stake and joint control of the sixth-largest fund manager in the country, Sanlam Investment Management (SIM).

Though ARC FS may only acquire a 25% stake in SIM, the transaction circular sent to shareholders provides details of "rights and minority protections" that come with the stake. Certain matters will require the approval of ARC FS, shareholders are told.

"These matters include, without limitation, the appointment and removal of senior key employees, any change to the strategy of Sanlam Investment Holdings (SIH) and the adoption of, or any material amendment to, the annual budget and business plan of SIH."

As it happens these rights fall squarely within section 12(2) of the Competition Act, which describes when a person is deemed to have control of a firm. Control of SIM thus moves from sole to joint and requires the approval of the competition authorities.

Then there’s the undertaking by ARC FS "not to invest in any material, strategic businesses which compete with SIH after the effective date of the transaction".

An undertaking that will also be of interest to the competition authorities.

Asked if they had filed the transaction with the competition authorities, Heinie Werth, Sanlam Group’s financial director, replied: "The transaction is a work in progress and we are awaiting final December 2018 audited financial information, whereafter the further regulatory approvals required will include notification to and approval from the competition authorities."

It may be that Nkosi’s statements on the importance of governance helped allay any Sanlam shareholder concerns. Of the 61% of shares voted at the December meeting (Ubuntu-Botho could not vote its pre-deal 14% stake), about 97% voted in support of the transactions.

Or it could be that the voting results reflect the institutional shareholder tradition of backing deals presented by powerful players.

They certainly reveal little sign of support for the concerns expressed by a few brave shareholders that the sale of an additional 4.9% of Sanlam to Ubuntu-Botho gives the Motsepe-controlled BEE vehicle effective control over Sanlam — at a discount. Nor any concern that the R2bn loan to Ubuntu-Botho, which will be used by ARC FS to buy the 25% stake in SIM, gives ARC FS joint control of SIM.

Johny Lambridis, head of equities at Prudential, was evidently not swayed by Nkosi’s governance protestations.

He stuck with his earlier decision to vote against the deal. In a letter to Sanlam’s independent board, Lambridis had made clear Prudential is "very supportive of enhancing black economic empowerment" but says it cannot support BEE deals done "at the expense of good governance".

Lambridis said this week he remains concerned about the close relationship between Sanlam and Ubuntu-Botho.

Former Sanlam CFO and current shareholder Flip Rademeyer was also not convinced by Nkosi and fears there is no structure in place to protect Sanlam’s minority shareholders from similar deals with Ubuntu-Botho in the future. As with Lambridis, Rademeyer acknowledges the need for transformation but says it must be done within an environment that protects the interests of Sanlam’s non-Ubuntu-Botho shareholders.

Certainly, the establishment of an "independent directors’ committee" in 2017 — when Van Zyl was appointed chair — has done little to address their concerns.

Van Zyl was CEO of Sanlam from 2003 to 2015, when he retired in line with the group’s policy and headed off to Ubuntu-Botho, where he became head of its investment holdings.

He was subsequently appointed joint CEO of ARC FS — a business which competes, albeit on a small scale, with some of Sanlam’s operations.

The reason the "independent directors’ committee" has failed to comfort the more alert shareholders is that it comprises directors few outsiders would consider "independent". Nkosi is not only a long-term shareholder and director of Ubuntu-Botho, he has also been on the Sanlam board for 13 years.

And though only on the Sanlam board since 2015, Karabo Nondumo is also an Ubuntu-Botho shareholder. Anton Botha, who has been on the board for 13 years, might also fail to make it into many people’s definition of independent.

Perhaps most remarkable is that Chris Swanepoel, who was appointed Sanlam’s chief actuary way back in 1990, is also described as independent.

The competition situation becomes even more complicated in light of recent developments at Alexander Forbes, where ARC FS has a 10% stake in the unlisted SA business, convertible to a 10% stake in the listed entity in 2020, and an additional 8.9% stake in the listed entity.

Though ARC FS has only one appointee on the Alexander Forbes board, there are some indications its influence might stretch beyond that. Shortly after former CEO Andrew Darfoor was axed in September 2018, Van Zyl told journalists that ARC FS had communicated to the Alexander Forbes board "some dissatisfaction with the financial performance and strategic direction of the company".

And then — what a surprise — Dawie de Villiers, head of Sanlam Employee Benefits, a former colleague of Van Zyl’s, was appointed to replace Darfoor on November 1.

What wasn’t surprising was that within days there was market speculation that Alexander Forbes would be carved up between Sanlam, ARC FS and Mercer, which has a 34.9% stake in the pension fund administrator.

Van Zyl dismisses any suggestion that ARC FS has any influence on the board.

"ARC FS is not in a position to exercise any control whatsoever over Alexander Forbes Holdings. It neither has the board presentation nor the voting power to achieve this."

Van Zyl says while ARC FS, together with other major and minor shareholders, does have views on the strategy and how Alexander Forbes Holdings should be managed, these views are communicated to the board of directors, which is in charge of governance and all decision-making.

He acknowledged ARC FS did express dissatisfaction with some aspects of the Alexander Forbes strategy to both the board and management.

"We understand, however, that we were not the only shareholder that did not fully support the strategy."

Shareholders, apart from Prudential and Rademeyer, seem not to care, but now might be the time for the competition authorities to take a detailed look at Ubuntu-Botho’s plans to build a financial services business.