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By Marc Hasenfuss  Source: FinancialMail

Disgruntled investors have been lining up well-qualified candidates to possibly take over from long-serving directors

Disgruntled minority shareholders at Cape Town-based empowerment company Grand Parade Investments (GPI) are intent on beefing up lean returns by shaking up the board of directors. But GPI’s long-serving directors seem affronted that their servings are so underappreciated.

This should make for an intriguing general meeting at the end of this month — perhaps recalling the excitement of 2007, when an unlisted GPI was desperately fending off Shaun Rai’s Cape Empowerment Trust.

At the time of going to press, GPI was trading at a discount of more than 70% to an intrinsic NAV underpinned mainly by the SA master franchise for fast-food icon Burger King, as well as significant minority holdings in top casino property GrandWest, alternative gaming business Sun Slots and restaurant conglomerate Spur Corporation.

Such a large discount — given that investment trusts traditionally offer discounts between 15% and 25% — would usually point to strategic stagnation or iffy assets.

Neither really applies to GPI. But investors could postulate that the gaping discount speaks to poor capital allocation over the past six years, when a decision was taken by GPI to lighten its core gaming holdings and mobilise proceeds to change the group from an investment company into an operating company with a focus on food assets.

The GPI share price is also around 70% down from a late 2014 peak of 715c. The dividend, one of GPI’s enduring attributes, was also slashed in the past financial year.

Perhaps more critically, the record will show that since 2013 GPI has spent around R750m on rolling out the Burger King brand (which now numbers close to 90 stores), the net result being an unappetising accumulated headline loss of R220m. Notwithstanding the lack of profitable traction at Burger King, GPI made further forays into the food sector with smaller investments in coffee and confectionery brand Dunkin’ (formerly Dunkin’ Donuts) and ice cream business Baskin-Robbins.

On top of that, investments in Mac Brothers (a catering supply firm), a meat plant and a bakery have not yet shown any promising supply-chain benefits. The meat plant and Mac Brothers were acquired from a company aligned to a key GPI executive, and the deal valuations may well be sternly interrogated considering the subsequent performance of these assets.

A rough calculation shows that GPI has pumped around R1bn of capital into the various food businesses. If the cumulative losses are tallied up for the past two financial years then this number is considerably larger than GPI’s market cap of R1.1bn.

But perhaps the most startling example of poor capital allocation was a decision to bolster an initial 10% empowerment stake in Spur by acquiring further shares on the open market.

In late 2016 GPI expressed a willingness to snap up another almost R800m worth of Spur shares from Coronation Fund Managers at a heady R40 a share (a 25% premium to the then market price).

Luckily for GPI the Coronation arrangement fell through when shareholders resisted the deal. But GPI kept nibbling away at Spur shares; at last count it owned close to 18% of the company (but early signs of a strategic alliance between the companies have weakened).

The problem for GPI is that the ruling price of Spur shares is now below the average cost of the open-market purchases — which makes GPI’s recent utterances that the Spur stake was up for sale all the more bewildering.

Still, GPI’s board believes the strategy should not be tampered with and that current directors should continue to be trusted with overseeing the implementation of this strategy.

In a recent SENS statement, GPI urged shareholders to vote against proposed changes to the board, suggesting that a shake-up could compromise its status as a community-based broad-based BEE company. To quote GPI: “This means, inter alia, that smaller community-based shareholders are as important as and have an equal voice to larger institutional shareholders, and that the strategy and decisions of the company are still informed by one of its founding principles, namely to create long-term value and investment returns for its shareholders.”

GPI added that the incumbent (and long-serving) directors come from the community constituencies which formed the original investor base and were still investors in the company. In the board’s view, if directors are removed and new ones installed, “a small but vociferous group of shareholder representatives — some of whom are not even shareholders themselves and whose incentives are not necessarily aligned with those of the broad base of long-term shareholders — will in effect have obtained control of the board and will be able to implement whatever their agenda may be”.

GPI warned that the “agenda” may include altering the strategy and making changes to the executive team. Considering GPI’s relative underperformance over the past few years, some tinkering at strategic and executive level might be long overdue.

The disgruntled minority shareholders — which hold a collective 12% stake and include Kagiso Asset Management, Denker Capital, Excelsia Capital, Westbrooke Alternative Asset Management and Rozendal Partners — have made certain their proposed board nominees are executives experienced in consumer industries or well-regarded strategy experts.

Ronel van Dijk was CFO of Spur, while Mark Bowman is a former top executive at SABMiller. Seapei Mafoyane is a respected corporate strategist with executive experience at SAB, Standard Bank and Discovery. Cora Fernandez is a former CEO of Sanlam Investments and Sanlam Private Equity.

Frankly, it will not be easy to paint these board nominees as “corporate raiders” or “usurpers” when it is abundantly clear that their respective skill sets and independent insights could, at this delicate juncture, only benefit long-suffering GPI shareholders.

The board shake-up follows “several” attempts by the disgruntled minority shareholders to engage with GPI executive chair and major shareholder Hassen Adams around the rapid departure of several key executives, poor results and corporate governance concerns.

In a statement, the disgruntled shareholders argued that extended director tenures were causing concerns around board independence.

They argued that good corporate governance standards require that a board have a majority of independent nonexecutive directors. The GPI board currently has five nonexecutive directors, two of which have been there for 21 years. The disgruntled shareholders maintain that the extended tenures of GPI’s nonexecutives resulted in a lack of independence, especially when the existence of an executive chair in the form of Adams put an even greater demand for independence on the remaining board members.

Then there is the prickly issue of executive remuneration. Total bonuses paid to executive directors topped R15m in the 2017 financial year, when GPI posted headline losses and the dividends paid to shareholders halved.

Arguably the critical issue is the contention that the board’s skills and experience are not aligned to the company’s strategic intent.

The disgruntled shareholders hold that GPI’s shift into the quick-service restaurant (QSR) industry and the reduced exposure to its gaming assets required a board with relevant industry skills, knowledge and experience.

They are concerned “that the current board does not have the necessary skills and experience to support GPI’s plans to grow in the QSR industry. This is vital to the long-term success of GPI given that the board sets the company strategy and is responsible for holding management to account on the execution of this strategy.”

If other shareholders see the logic in this it will be difficult not to support the proposed new directors, most notably the experienced and highly capable Bowman and Van Dijk.

Of course, GPI’s determination to see off possible invaders of its boardroom will not be helped by Burger King’s inability to deliver on original profit targets. While Burger King managed to reach the stipulated 80 store openings by end-June (precluding a serious penalty from Burger King Europe), the brand is nowhere near profitable yet.

There are some bright spots, though. GPI’s year to end-June results showed average monthly restaurant revenues increasing 5.3% from R911,000 on the back of positive restaurant comparative sales of 3.45% (2017: 1.82%) and a proportional increase in revenue from new drive-through sites.

Burger King’s total revenue for the year was up 22% to R756m with 15.6-million customers served. But the bottom line was smacked by higher-than-anticipated food-cost increases, the VAT increase and the implementation of the health promotion levy (the sugar tax) during the second half of the financial year.

Burger King’s restaurant earnings before interest, tax, depreciation & amortisation (ebitda) margin crumbled from 9% to a skinny 6.6%, which precluded shareholders really relishing the doubling of ebitda to R22m. The brand’s net loss reduced from R29m in 2017 to just under R27m.

Adams’s optimism may consequently sound a little hollow: “Today, Burger King is positioned to become one of the biggest QSR brands in Southern Africa, with rapid rollout of new stores in anticipation of the economy coming out of this recessionary period soon.”

One of the disgruntled shareholders, Jared Winer of Westbrooke, concurs that GPI offers significant value. “However, the capital allocation must be addressed now and management incentives must be aligned with shareholders’ interests.”

The general meeting will be fascinating in terms of issues around GPI’s underperformance and corporate governance being aired on the record. Statistically speaking it is hard to fault the logic behind the proposed changes to the board structure.

Adams, though, is a wily businessman and could spin an enticing yarn about future values of Burger King. There have been whisperings that the brand could even be sold back at a profit to the parent company in exchange for a significant minority stake in an enlarged Burger King Africa.

The FM reckons the general meeting will boil down to whether long-standing GPI shareholders can still find a valid reason to back the current board after the disgruntled shareholders have detailed the ongoing value erosion.

Quite possibly one or two large individual shareholders — like 10% shareholder the Chandos Trust, which is aligned to former banker GT Ferreira — may swing the vote. Whatever the outcome, the meeting is going to be a real humdinger for the growing band of shareholder activists in SA.

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