Jitter over Shoprite deal

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Shortly before Christmas, the two companies announced plans to merge their African operations to create a continent-wide "retail champion" consisting of brands such as Checkers, Pep, Ackermans, Russells, Incredible Connection and Tekkie Town.

To some extent it wasn't unexpected, as Wiese had always spoken of such a deal as a "natural development".

Though details of the deal are still being "negotiated", it's most likely both companies will do a complicated share swap to create "the retail champion of Africa", with Steinhoff likely to end up with about 56% of Shoprite.

But the risk is that smaller shareholders may get the raw end of the deal, while Wiese, who sits on both sides of the fence, could score. As it is, he owns 23% of Steinhoff and 46% of Shoprite's voting shares – so he could tailor a deal to suit himself if he's allowed to vote his shares.

So, the second big question becomes: what will be the rate of exchange of Steinhoff shares for Shoprite shares. In other words, how will Shoprite's stock be valued?

If Wiese is allowed to vote his Shoprite shares in favour of the deal, then the deal is essentially in the bag – whatever exchange value is decided upon. Even an "unfair" offer to Shoprite's smaller shareholders will probably succeed. On the other hand, if the takeover regulation panel rules that Wiese is a "concert party" and shouldn't vote, then the game is very much on, and the offer would presumably have to be far "fairer" and more "reasonable".

These dynamics have spooked minority shareholders in both companies who are less than jubilant about a tie-up.

Since news of a deal first broke on 14 December, Shoprite's stock has shed 10.4% (7.1% on the day of the announcement), while Steinhoff has fallen 9.4%.

In a report dissecting the deal, JPMorgan says Wiese's R77bn investment in Steinhoff is worth more than four times his investment in Shoprite. So potentially any deal structured to favour Steinhoff could benefit him and hurt Shoprite minorities.

JPMorgan says this deal will boost Shoprite's growth profile, but adds that "on a short-term basis, likely investor disappointment about not having a premium cash takeout option and uncertainty about the exchange ratio makes us cautious".

Part of the reason why the exchange ratio is so crucial is because the market rates Shoprite much higher than Steinhoff, with its p:e of 19.2 exceeding Steinhoff's 15 by some distance.

This isn't the first time Wiese has faced stiff opposition to a buyout offer for Shoprite. Ten years ago, he and Brait launched a bid to buy Shoprite for R26/share, which they later increased to R28/share. But investors resisted so fiercely that Wiese was forced to scrap the deal.

Today, things are more complicated – and there's a third big question to be asked: what are the chances of an unhappy Shoprite shareholder launching an action in terms of sections 163 or 164 of the Companies Act?

This legislation wasn't around a decade ago, and it provides far greater protection for minority investors. It also means that if Wiese wasn't able to push through his bargain-basement offer for Shoprite in 2007, there's even less chance he'll get away with it now.

To those not overly familiar with the sophistry of corporate finance deals, it seems a no-brainer that Wiese, who is assumed to be driving a deal that tidies up his global investments, should not be able to vote.

But much hinges on the legal definition of "concert party".

One analyst reckons that because the transaction is between Shoprite and Steinhoff, and they don't hold stakes in each other, they could be deemed "nonconcert" parties. And, crucially, because Wiese doesn't own more than 35% of Steinhoff (the technical level for "control"), he might not even be seen as a "related party".

In this scenario, the merger would need approval from only 50% of Shoprite shareholders. With Wiese speaking for 46% of the votes and the Public Investment Corp (PIC) having already agreed to vote its 12.6% in favour of the deal, it would succeed easily.

(The PIC, which also backed the Brait buyout, is reportedly "excited" about the prospect of creating an African retail champion.)

Intuitively, that seems patently unfair. One corporate lawyer told the Financial Mail that this should be seen as a "section 115 fundamental transaction", which would not only require 75% shareholder approval, but Wiese would also be blocked from voting as a "concert party".

For now, until the final deal is unveiled in the deal circular, this is speculation. But it is informed by Wiese's reputation for being a hard-as-nails negotiator who doesn't like paying top dollar.

So why have investors not yet seen the circular? After all, this immense and complex deal has been on the cards for a long time.

Perhaps Wiese's chastening failure to bag Shoprite in 2007 haunts him, and has given him pause. Critically, that earlier deal had the backing of Shoprite CEO Whitey Basson, and would have resulted in Shoprite being delisted.

Back then, there was a similar debate about Wiese being allowed to vote.

After the deal collapsed, Wiese said in an interview: "I have been listed and I've been unlisted. Believe me, unlisted is better. You don't have people who have never fought their way out of a paper bag telling you what to do."

While Wiese is presumably busy tying down support from institutional investors, he surely knows that, this time around, each one of Shoprite's individual shareholders represents a potential challenge to his ambitious plans.

Unlike in 2007, any dissatisfied shareholder with access to modest funds and some courage can launch a section 163 action (which seeks relief from oppressive or prejudicial conduct). If he or she just wants a "fair" price to sell, the shareholder can also launch an action under section 164 of the Companies Act.

Critically, Shoprite shareholders don't have to look too far for a precedent.

Last year Albie Cilliers made corporate history when the high court supported his section 163 claim that the Sovereign Foods board had unfairly disregarded his interests.

Cilliers and his legal adviser, Adam Pike, made more history with a section 164 challenge in the KWV sale. Then he launched another section 164 challenge against Gooderson Leisure's plans to buy out shareholders at what Cilliers deems to be an unfair price.

So the pioneering work has been done for minority shareholders.

At the centre of any legal challenge will be the "fair and reasonable" opinion, usually provided by a corporate finance expert, which companies must provide for big deals as a guide to whether shareholders are getting a fair shake.

In the 2007 offer, Absa said Wiese's R26/share offer was "fair and reasonable", even as Shoprite's stock climbed above R30/share.

While these "fair and reasonable" opinions generate serious fees for the providers, they are often challenged – perhaps because of the litany of underlying assumptions. So their persuasive effect has dimmed as investors take the more cynical approach that "he who pays the piper calls the tune".

In the case of poultry operator Sovereign, the board managed to get "fair and reasonable" opinions for a number of vastly different valuations – all in the space of a year.

Cilliers, for one, was able to shoot plenty of holes in the "fair and reasonable" opinion used by KWV's controlling shareholder, Niveus Holdings. He'll most probably do the same with Gooderson.

So how would it work with Shoprite, if minorities decide to challenge Wiese?

Most likely, the shareholder would make an application to court under section 163 seeking relief from the "oppressive" terms of the transaction. And, even if that were to fail, it would delay the deal – an unpleasant expense for Wiese and his team.

There are other potential minefields too for the Upington-born lawyer turned retail wunderkind

For a start, there's the possibility that the newly invigorated companies & intellectual property commission may take up the cudgels on behalf of minority shareholders, as it now has the power to investigate "alleged contraventions" of the Companies Act".

So, if Wiese is to prevail this time, in contrast to his bid a decade ago, it's likely to be a hard-fought victory.

Source: Financial Mail