Johnny Copelyn, the union and the activist investor

Perhaps the easiest way to think of this story is as a corporate renewal of vows. Almost 30 years after first hooking up, HCI and its key shareholder, the Southern African Clothing and Textile Workers’ Union (Sactwu), are set to pledge their commitment to each other, once again. 

It’s a necessary move if they want to ensure the continued survival of one of the more effective value-creating trade-union-backed BEE relationships to grace the JSE in the past 30 years. 

Whether it will stave off the activist investors who are deeply unhappy with the discount between the group’s share price and its net asset value, however, remains to be seen. 

HCI shares, at R131.80, have sunk 24% over the past year; over 10 years the share price is flat. Worse, the stock trades nowhere near its ostensible net asset value of R303 a share.

No wonder there’s been talk of potential for a hostile bid that, if successful, would likely end up with the group being carved into pieces. Yet that’s an outcome that HCI CEO Johnny Copelyn describes to Currency as “nothing other than value destructive”. 

Dividend hungry

And then there’s Sactwu. It has developed some hefty cash-consuming requirements that cannot be met by HCI’s skimpy dividends. The rich dividends being declared by some of the HCI subsidiaries – Tsogo Sun and Southern Sun in particular – have got stuck at the centre, ostensibly needed to fund debt and invest in growing businesses, like HCI’s monster oil and gas play in Mossel Bay.   

According to an article on Aktiv Investment Management’s Substack, Sactwu would have had R643m dividend payments if it had received all the dividends declared by HCI’s subsidiaries over the past four years. Instead, all it got was R64m – partly thanks to Covid, when the Tsogo Sun and Southern Sun taps dried up. 

To make up the cash shortfall, Sactwu has been selling chunks of its HCI shares back to HCI. By July the union was sitting with a 23.8% stake in HCI. It was still the single largest shareholder but this was less than half the 48% it had started with back in the mid-90s, when it had helped to provide the seed capital and, more importantly, the BEE profile to launch HCI. 

A reasonably imaginative two-pronged deal announced in early July would have cut this to 18.4%. In prong one, a subsidiary of HCI (Squirewood) would buy back 1.1-million HCI shares from Sactwu for R144m cash. In prong two HCI would sell a R550m chunk of its properties to Sactwu in exchange for 4.2-million HCI shares.  

The second prong was intended to provide Sactwu with a property portfolio that would generate enough monthly income to fund the union’s cash needs. And the combined share sales would have left Sactwu with approximately 18.4% of HCI. 

But then, in late September, instead of the expected shareholder circular, HCI announced a new and, because this is Copelyn after all, more complicated deal.   

The structure that emerges from HCI’s latest multi-pronged transaction seems to meet two critical objectives. It secures HCI’s BEE status. And, depending on the details of Squirewood’s revised memorandum of incorporation, it’s likely to be difficult, even impossible, for Sactwu to sell off any more HCI shares without HCI’s approval. (This is perhaps not an unreasonable level of “oversight” given Sactwu’s unfortunate dalliance with Sekunjalo’s Iqbal Survé, which cost it R300m.) 

Neutralising Sactwu’s ability to sell HCI shares removes a perceived overhang of shares, which Copelyn says explains part of the hefty discount to HCI’s net asset value. Perhaps more critically, it removes the possibility of Sactwu selling a large chunk of shares to one of the parties currently circling HCI with a view to unbundling. 

The most likely such party is Aktiv Investment Management, which has issued a number of damning reports on the perceived value destruction at HCI and Copelyn’s refusal to heed shareholders’ demands to do something to narrow the discount. Aktiv’s Adrian Zetler is in no doubt: “This is a terrible deal for Sactwu,” he tells Currency. Zetler believes over the years Copelyn has enriched himself at Sactwu’s expense. 

He argues that the latest proposed transaction consolidates Copelyn’s control (assuming he has decisive influence over Sactwu) at the expense of transparency, fairness and shareholder value. “Sactwu’s members are left with a weaker, less transparent asset and diminished upside,” he says.  

No chance of a hostile bid

Having a more secure control structure means less pressure on Copelyn to sort out the discount. And no chance of a hostile bid. 

The distilled essence of the latest proposal is that after some imaginative corporate manoeuvring, Sactwu’s 25.3% direct stake in HCI will end up in the HCI subsidiary Squirewood. Much more important is that Sactwu will end up owning 54.5% of Squirewood. So Sactwu’s previous direct holding in HCI will become an indirect holding. 

Squirewood gets all these HCI shares – 21.7-million to be precise – as a result of three deals with Sactwu. It gets 4.2-million HCI shares in exchange for R549.7m worth of properties. It’ll pay R144m cash to Sactwu for an additional 1.1-million HCI shares. And, in the newest prong of the deal, Sactwu is granting Squirewood an option to buy 16-million HCI shares and in exchange will get the 54.5% stake in Squirewood.  

Zetler reckons the property assets will fall well short of Sactwu’s monthly cash needs. Not so, says Copelyn. “The properties they are acquiring yield a little over 10% cash on the purchase price.” And there are still the HCI dividends. “It meets their requirements,” he tells Currency. 

From HCI’s, or rather Copelyn’s, perspective the proposed new structure has the added considerable advantage that any HCI shares purchased from Sactwu by Squirewood do not have to be cancelled and retain their full voting rights. That’s because HCI only owns 45.5% of Squirewood. 

This is an important issue. As Copelyn tells Currency, there were 127-million issued shares in HCI 10 years ago. Because of all the shares repurchased (they then have to be cancelled) there are now only 80-million. 

For BEE measurement purposes Sactwu’s controlling 54.5% of Squirewood, which holds 25.3% of HCI, means it remains an ideal BEE shareholder. And one that now appears more secure.  

The end-September Sens announcement said much to remind investors of the importance of the relationship. “Sactwu’s shareholding in HCI has not only allowed HCI to acquire and hold a number of lucrative licensed businesses over a lengthy period, generating significant returns for its shareholders, but its B-BBEE ownership credentials have also benefited those businesses and entities (listed and unlisted) for which HCI is the holding company or a material shareholder of,” it said. 

It lists off Tsogo Sun, Southern Sun, HCI Resources Proprietary and HCI’s various oil and platinum investments, including Impact Oil & Gas and Africa Energy Corp. 

Overplaying the BEE card

But Zetler contends Copelyn is overplaying the BEE card. “HCI already enjoys enduring empowerment benefits from Sactwu’s nearly three decades as a shareholder,” he says.  

Understandably, Sactwu does not want to get dragged into a public spat between Copelyn and Aktiv, but given the benefits that have accrued to the union over the decades, it would be reasonable to assume a sense of gratitude. Not to say that the union isn’t aware of the crucial role it plays in HCI’s life. 

“HCI exists with its present assets primarily because of the involvement of our trade union and its leadership, both past and present. We have not asked for favours from others and have contributed our leadership and opportunities to HCI, which has been our investment vehicle for close to three decades,” Sactwu’s national operations and policy support officer Andre Kriel tells Currency. 

As for the need for a steady and strong flow of cash, Kriel explains: “We have commitments which are important to us, including providing bursaries for the children of our members to attend university; providing jobs for as many members facing retrenchments and factory closures as we can carry; providing retirement benefits to our members; providing funeral support benefits to our members … and many other social obligations.” 

The union had hoped its commitments could be funded by dividends but this wasn’t possible and so it had to sell shares. “We have now reached agreement with HCI to acquire from it assets which will produce far more cash and to restructure our holding in a stable manner that will allow us to continue to play the positive key role in HCI that we have always played in the past,” says Kriel. 

Could this be a “happily-ever-after” renewal of vows? More pertinently, a “happily-ever-after” for whom? 

_{Top image: Johnny Copelyn (emediaholdings.co.za) and Andre Kriel (Facebook).}