The Spar share price has held up surprisingly well since a recent trading update unleashed more bad news on the market. Presumably investors are comforted by the belief that the largely new leadership team knows what has to be done, and how to do it.
It would be difficult to imagine a board that has worked harder or under greater pressure than Spar’s over the past 10 months. And while the trading update suggests shareholders will have a long wait before they see the benefits of all this hard work, if ever, it’s difficult not to assume things would have been considerably worse had the board not been overhauled and dealt with the challenges.
So, it really was only fair that Spar shareholders finally approved the payment of fees to its nonexecutive directors.
Analysis from Fractal Value Advisors’ David Holland indicates the fees could be justified on the basis of just one of the decisions the board has made this year: the call to sell its interests in its loss-making Polish business. Holland tells the FM that though Spar will record a hefty loss on the disposal, “that loss is not as horrific as continuing with a poor investment”.
The Polish investment looked like a classic example of the ‘sunk cost fallacy’
— David Holland
That decision did not influence voting at a special general meeting (SGM) early last month; the disposal decision was announced three weeks later.
It’s quite a change from the mood at the AGM back in February, when 28% of Spar shareholders voted against the resolution needed to authorise payment of nonexecutive directors’ fees. It was a special resolution, and so fell short of the 75% required support. Shareholders were presumably protesting against the troubling corporate governance issues that had dominated the media in the previous three months.
This hardly seemed fair, given the substantial boardroom changes that had already been implemented by early February, chief of which was the change of chair and CEO.
The extremely unusual development was resolved at the SGM. Surprisingly, given all the cleaning up that’s been achieved, 14% of shareholders again voted against the remuneration resolutions that were put to them. What that figure would have looked like if the meeting had been held after the release of the trading update is a matter of conjecture.
But as Holland points out, news of the Polish sale did produce an 11% spike in the share price. Most of that increase has been sustained, despite muted expectations for the group’s 2023 results.
As Holland explains, the Polish investment looked like a classic example of the “sunk cost fallacy”, which is when management is reluctant to make optimal decisions because of resources already committed. “The same [share price hike] happened when Tiger Brands exited the disastrous Dangote Flour Mills and Woolies finally said adios to David Jones,” he says.
But selling the Polish business can’t have been an easy decision. For starters, there’s the €110m debt Spar South Africa had guaranteed for the Polish operation. This will be reduced by whatever funds are realised on the sale, but given that it was bought out of liquidation in 2019, that might not amount to much.
Sasfin’s Alec Abraham says the disposal decision wasn’t an inevitable one. At the time of its acquisition, management said it was hoping to consolidate the fragmented Polish market, much as it had done in South Africa in the 1970s and 1980s.
“They were looking for fragmented markets that they could consolidate as they had done so successfully in South Africa,” Abraham tells the FM. He says it did look like an exciting opportunity, given Poland’s growth prospects. But purchasing a business out of liquidation is often problematic and, says Abraham, then there was Covid.
More recently, management realised that growing the business slowly was not an option. Abraham says it was a matter of making a substantial acquisition or exiting. “It was a case of go big or go home, and both involved costs.”
Mounting pressure in South Africa, including the disastrous rollout of a SAP system which has knocked R1.4bn off financial 2023 sales and a significantly overhauled board, provided the conditions for a dispassionate decision.
And there may be more. Though not mentioned in the trading update, during a pre-close call later that day questions were raised about the future of Spar’s Swiss business.
It’s not making losses but it’s barely in the black. In the first half it contributed just R46m, and it seems not to have much of a long-term growth story. Given all the challenges back home, it may not be worth the management time.
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