Gone in eight-minutes: Sactwu back in HCI pound seat

The pivotal shareholders’ vote, designed to ease the cash crunch facing the Southern African Clothing and Textile Workers Union (Sactwu), lasted all of eight minutes. 

At 10am precisely, the meeting of Hosken Consolidated Investments (HCI) kicked off, and by 10.08am, it was done. 

The upshot: control of the company, which has large stakes in eMedia, Tsogo Sun, Southern Sun and energy businesses, is now firmly back in the hands of its long-standing CEO, Johnny Copelyn, and Sactwu. 

Copelyn, a former trade unionist, founded the group in 1997, with Sactwu’s union members as the main beneficiaries. The problem was, HCI’s twice yearly dividends didn’t satisfy the union’s cash needs, so it began slowly selling its shares in the market – not ideal for a company that needs Sactwu’s BEE credentials for its various business licences. 

Copelyn proposed this deal as the solution. 

In a nutshell, HCI will sell three properties to Sactwu – including Gallagher Estate – which will allow it to get monthly rent payments. Through a complicated structure, Sactwu will also effectively control 25.3% of HCI afterwards, too.

Speaking after the meeting, Copelyn said this was the best possible scenario. “We think retaining Sactwu as a 25% BEE strategic partner in HCI is an important thing to try to secure.”

Not everyone was so sanguine, however.

The meeting might have finished in a flash, but 33% of HCI’s shareholders still opposed one of the three resolutions at the meeting – not enough to block the deal, but indicating discontent. 

Fundamental to winning deals

For shareholders, this lifts a cloud of uncertainty that had hovered over the company since Sactwu began selling down its stake. This seems to be reflected in the share price, which is now at about R160 a share – considerably stronger than the R131 at which it traded back in July, when this plan was first announced.

Investors are evidently pleased that Sactwu’s commitment to HCI, and the company’s BEE status, are no longer in question. And this is vital, as many of its arms – including Tsogo Sun, Southern Sun, HCI Resources, Impact Oil and Gas, and Africa Energy Corp – require state licences, for which a BEE profile is invaluable. 

And it’s not just existing licences; given the group’s growth projections and the government’s unrelenting stance, BEE will be essential well into the future. 

As HCI put it in the shareholder circular: “The board is unanimous in its opinion that the relationship between HCI and Sactwu is fundamental to HCI’s ability to hold a number of [these] assets in the medium to long term, and the investee companies’ ability to continue to benefit from such credentials.”

Overplaying the BEE card

Aktiv Investment Management’s Adrian Zetler believes HCI is overplaying the BEE card, and argues the Sactwu relationship is being used to protect an underperforming management team. 

Zetler says there has been large value destruction at HCI over the years – the share price is 8% lower than three years ago, for instance – and its stock trades at a mighty discount to its net asset value (NAV) of R303 a share. 

There’s also the matter of dividends or, according to Zetler, the lack of them. Generous dividends paid by some HCI subsidiaries have been sucked up to fund debt and invest in the group’s assets in the resource sector.

Zetler says that in the absence of the tie-up with Sactwu, HCI would be susceptible to market forces and open to a hostile takeover that would inevitably, given the discount, be followed by an unbundling of its investments. 

This, he adds, would generate far greater returns for HCI shareholders (including Sactwu) than sticking with the current strategy.

Having your cake and eating it

Copelyn, predictably, disagrees, saying Aktiv wants to have its cake and eat it. He acknowledges the discount to NAV, but says this is typical for an investment holding company.

“The truth is the shareholders represented by Aktiv [Investment] Management bought into the company knowing it is a holding company and that it will always trade at a discount to its underlying value,” Copelyn tells Currency. 

“They took advantage of that discount when they entered. Now, a couple of years later, they simultaneously want all the income it earns to be [paid out in dividends]; all debt to be paid off; all loss-making growth assets – like the oil, gas, palladium and hydrogen assets – to be funded; and all holding costs to disappear.”

Copelyn accepts that the discount to the underlying value of “exceptionally good assets” has widened significantly due to recent share sales – not only by Sactwu but also by investors represented by Aktiv.

He points to the results of the shareholders’ meeting, which showed that most investors agree with his strategy. 

Governance concerns

Again, Zetler doesn’t see it like that. 

Speaking of the “significant vote” against the resolution, he tells Currency that it’s “clear that a majority of minority shareholders actually voted against the main ordinary resolution”.

The outcome, he says, is contentious. Had that resolution been structured as a “special resolution” requiring 75% approval, rather than an “ordinary resolution” which only requires 50%, it wouldn’t have passed.

Entrenching control through this deal, Zetler says, is a material governance concern. “Going forward, minorities should be pushing for greater independent board representation to ensure their interests are properly protected,” he says.

This sets the stage for another shareholder tussle. So far, Copelyn has prevailed over a myriad such spats, including with HCI’s co-founder Marcel Golding. Can he do so again?

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