In what seems to be a pretty poor advert for the "free market", Brait, owner of Virgin Active and Premier Foods, has decided to bail out a handful of its top brass at an almighty cost to shareholders of R1.1bn. It’s a disturbing turn of events, though not entirely unpredictable since the investment firm, in which Christo Wiese is the largest shareholder, has been under serious strain in recent years. Mostly, this is because it bought a lemon in 2015: the UK high street women’s fashion specialist New Look.
It was a horrific deal. Brait valued New Look at R34bn in March 2016, but within two years it had written down the fashion chain to exactly zero.
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The upshot? An 84% fall in Brait’s share price, reducing its market capitalisation from R84bn to just R12bn today.
Now, that’s just business. In any investment company, you hope to have more deals that work out like your wildest dreams (think Tencent), rather than your worst nightmare (New Look or David Jones, for example).
The problem for Brait is that because of the share price haemorrhage, the "incentive scheme" it put in place in 2011 for its "investment team" (made up of nine people initially) ended up deep in the red.
A circular in 2011 said the "investment team" would pay R1.5bn for 18% of Brait at R16.50 a share, which would be housed in a company called Fleet. The deal would be funded by a R1.2bn loan from RMB, while the executives put up R300m of their own money. Brait then provided an indemnity to the banks, guaranteeing the R1.2bn debt.
In May 2011, 99.4% of shareholders approved this deal.
Why should you make immense amounts at the expense of shareholders for zero risk?
As luck would have it, some of Brait’s investment team (perhaps those who never liked the New Look deal) cashed out when Brait’s share price topped R140 in 2015. But four of the initial group, including CEO John Gnodde, stayed to the bitter end. By not selling, they ended up big losers.
Some would say, well, that’s capitalism: you can’t have immense reward without great risk.
Evidently, that’s not a view shared by Brait’s board. Last week, it decided to repay the loan to the banks, write off what its executives owed, and buy back the Brait shares in Fleet. The cost of all this? R2bn.
Chris Seabrooke, Brait’s audit committee chair, tells the FM that this a isn’t case of the company bailing out the executives. "The difference here is that the executives lost all the money [that they put down]. They worked for nine years and got nothing," he says.
Nobody is a winner here, he adds. "Are we happy with the outcome? Definitely not. Are the guys happy with the outcome? Those who didn’t sell, definitely not. And do we need to put a new incentive scheme in place? Yes, we do."
But one former Brait employee doesn’t agree, arguing that this behaviour gives the private sector a bad name. "They put in place an incentive scheme — it didn’t work out. Sure, that’s not great for [the executives], but that’s tough. They’re big boys. Why should they be bailed out now?" he asks.
That’s one element of the debate. The other criticism is that Brait didn’t put the bailout to shareholders. As another former Brait employee put it: "They should have levelled with shareholders, and said: ‘Look, our scheme is underwater, but would you approve cancelling it and bearing the losses?’"
But Seabrooke counters that there was no need to put this to a shareholder vote. "The point is, the original scheme was put to a shareholder vote in 2011, and had a natural expiry date in December 2020. All we did was bring this forward by 18 months." Anyway, he says, shareholders can hardly now veto an indemnity that Brait provided eight years ago.
Seabrooke says Brait is now putting a new incentive scheme together. But as the former employee warns: "I hope we’re not going to wake up and find new options have been given to management, as if nothing happened, and it’s not even put to a shareholder vote either."
The golden thread, of course, is that this is another company part-owned by Wiese, bailing out its executives for an "incentive scheme" that went south. The Brait scheme, in fact, is a mirror of what happened at Pepkor, where executives got shares in Steinhoff, which then collapsed. Pepkor bailed the executives out to the tune of R500m.
Theo Botha, the shareholder activist who has clashed repeatedly with Steinhoff, says: "I don’t think shareholders would have voted to approve the Brait scheme in 2011 if they knew the company was going to bail them out like this."
Botha points to the 2011 circular in which Brait’s board concluded that: "Based on the above assessment of the risks and the risk associated with an adverse Brait share price movement together with a potential decrease in the dividend distribution … the risks to the company … are at a level that is reasonable and acceptable."
Botha compares this to the case of Naspers. There, former CEO Koos Bekker opted not to take a salary, but take shares instead. If Naspers’s stock had collapsed, Bekker would have lost out. But as it happened, the shares rocketed, turning Bekker into a multibillionaire. It means that even after selling 70% of his Naspers shares in 2015, Bekker’s current 4.6-million shares in the media company are worth R13bn today.
That may not be a perfect model, but Botha says that’s closer to the philosophy of the free market. "Why should you make immense amounts at the expense of shareholders for zero risk, like we saw at Brait?" he asks. "Especially when Brait told us the risks were reasonable and acceptable."
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