When you visit the Viceroy website, you may notice a quote attributed to Lesetja Kganyago: "They are a hit squad."
Viceroy is generally credited with driving the collapse of Steinhoff. History shows us that the cracks were there before Viceroy’s famous report was released on December 5 2017; Steinhoff had lost a quarter of its value in the five weeks prior.
Earlier that year, the Portsea Asset Management hedge fund had released a report on Steinhoff that highlighted many of the same issues that Viceroy did. In a report released in July 2018, commissioned by Business Leadership SA (BLSA), Intellidex found Viceroy’s report on Steinhoff was "substantially plagiarised" from Portsea’s work.
The Intellidex report sought to discredit Viceroy’s work and has probably played a role in the decision by the Financial Sector Conduct Authority (FSCA) to fine Viceroy R50m for its Capitec report, released just two months after its Steinhoff report.
Viceroy has accused Intellidex of being paid by Capitec for its research on Viceroy. Intellidex chair Stuart Theobald has strongly denied the claims, saying that though many large SA corporates are members of BLSA, Intellidex acted independently and was paid by BLSA directly.
There would be nothing wrong if Capitec had paid for a report discrediting Viceroy. The issue would be if there had been undisclosed influence over the report. This is the bone of contention between Viceroy and Intellidex, and Theobald has been emphatic in his defence (including threats of legal action).
I want to make my position clear: there is nothing wrong with short selling. It is a key mechanism of price discovery and there is no logical reason why long-only funds should be favoured in the market over short sellers. As in religions, there are cultists at either end of the spectrum.
Long-only activist investors are lauded by the market for their role in unlocking value. A recent example is York Timber, with A2 Investment Partners quickly building a significant stake and then demanding a board seat.
The decision to fine Viceroy will put the spotlight on Capitec once more (and) will thrust critical documents into the public eye
There is nothing wrong with long activism and there are numerous takeover law rules that govern this practice, such as the need to disclose every 5% milestone when building a stake, or the need to make a mandatory offer to other shareholders when moving through a 35% shareholding.
There is nothing wrong with activist short selling either, though I do believe there must be a heightened level of responsibility on the short side compared to the long side. There is less regulation on the short side and the burden of proof is surely more significant when using emotive language that can quickly spread panic. "We believe there is value to be unlocked" or even "we believe the market is heavily undervaluing this company" is incredibly different to "Capitec — A wolf in sheep’s clothing", which was the title of Viceroy’s report.
The market hung on every word and the street-pole headlines were ablaze with allegations against Capitec. The share price fell around 22% in just three days, before taking seven months to recover to pre-Viceroy levels. Even Cathie Wood’s most absurdly bullish statements on Tesla don’t find their way onto street poles.
I recall reading the Capitec report. My investment banking colleagues and I held a similar view at the time: it felt weaker than the work on Steinhoff. It seemed more emotive, driven by a disapproval of high-yield lending as much as anything else. Was this Viceroy founder Fraser Perring’s background as a social worker coming through into his work?
I also remember a phone call that week from a family member far removed from the financial markets. He had a sizeable deposit with Capitec and wanted to know if he should withdraw the money. A run on any bank is no joke and the burden of proof when targeting a systemic organisation is perhaps the highest of all.
Balanced view
In the pursuit of a balanced view, we should remember that German regulator BaFin staunchly defended Wirecard during a scandal in which Perring was bang on the money. It took a few years for the truth to come out.
The FSCA’s decision to fine Viceroy will put the spotlight on Capitec once more. Viceroy will seek to defend its claims in court, which will thrust critical documents into the public eye.
Huge reputations are at stake. If Viceroy cannot prove its claims, the Capitec report would have been a costly mistake that would set legal precedent in short selling. If there is truth to the claims, our regulators will be wiping egg off their faces for a long time.
On a price to book ratio of over 7, Capitec is priced for perfection.
Any sign of trouble in court could make the 22% drop in 2018 look like child’s play.
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