Last week, Shoprite Holdings announced to the market that CEO Pieter Engelbrecht had taken a leveraged bet on the company’s share price. Engelbrecht purchased R20 million of exchange-traded contracts for difference (eCFDs) using his own money (via an entity he controls, Transfund Investments).
The CFDs were purchased on April 18 (R1.956 million) and April 24 (R18.291 million), at average prices of R177.83 and R175.88 respectively. eCFDs are traded and listed on the JSE and enable investors to effectively trade on the price movement of the underlying share. Given this leverage, CFDs involve significant risk. They can be very profitable, but you could also lose more money than you started with. Engelbrecht’s initial margin requirement (excluding commission) would’ve been approximately R3 million.
The positions have barely been above water since they were opened.
His is a long position, meaning that he is betting the company’s share price will rise over time.
Share price drop, and a R1m hit in a single day?
An investment bank downgrade to ‘Reduce’ from ‘Hold’ is said to have caused a 6% drop in the share price of the retailer last week. Shoprite closed at R168.35 on Wednesday. With a decline of this magnitude, Engelbrecht would’ve had to meet margin calls on the day. Business Insider South Africa says Engelbrecht “probably had to pay almost R1 million in a single day as a margin call”, citing trading platform Sharenet’s CEO JC Louw. It is not certain when these CFDs expire, although Business Insider says Louw believes it is March 2020.
Engelbrecht is able to sell the eCFDs at any time.
But why did Shoprite’s CEO take such a leveraged bet on the company’s share price?
He surely considered the signal that this sends to the market (or else why make it in the first place)?
Motivation and influence
He may think this move is one of confidence. But that confidence is, itself, misplaced.
An alternate interpretation is that a move like this smacks of short-termism and excessive profiting. (If his bet pays off, of course.)
Some have suggested influence – even if indirectly – from Shoprite founder Christo Wiese, given his links to the company. Wiese famously bought single stock futures contracts in 2015, eventually closing his position in December of that year. At that point, the 3.5 million shares were worth R479 million.
Generally, though, the leveraged schemes at Wiese-linked companies are far more complex (and more opaque) than a vanilla CFD product traded on the exchange.
This isn’t the first time an executive has taken a leveraged position on their company’s share price.
In the late 2000s, then Invicta CEO Arnold Goldstone made a huge bet on the company, buying R30.5 million in single-stock futures (SSFs). A few years later, Wiese bought some shares from Goldstone, and also bought SSFs in Invicta.
Bets that didn’t pay off
In 2008, Vox Telecom directors Doug Reed and Jacques du Toit saw their holdings in the company wiped out in the well-documented collapse of derivatives broker Dealstream. The two, and other executives, held their stakes via leveraged single-stock futures and contracts for difference positions. These evaporated when RMB placed Dealstream in default.
Engelbrecht’s bet is obviously not comparable, but the question needs to be asked, and asked again: Why do it in the first place?
He received remuneration totalling R20.364 million last year (and R25.835 million the year prior). And he has unvested share incentives from 2017 valued at R7.964 million. Hitting stretch targets would already have seen him earn as much as R33 million last year.
Does he need more incentivising? If so, that’s something for the board and the remuneration committee to consider.
Why not just buy shares?
Why didn’t Engelbrecht just buy R20 million of Shoprite stock? Or even R3 million, if that’s all the spare cash he has lying around. A move like that would send a far better signal to the market, especially for the long-term.
The best executives are those who aren’t worried about their company’s share price. Taking a leveraged position means Engelbrecht is betting on just that and will be watching it unnecessarily.
Engelbrecht ought to be entirely focused on operations, especially after the group endured the toughest financial year that he could recall in 2017/2018, only to shock the market six months later (in January) with its “worst” interim results by a long shot.
If he takes care of the business, his incentives will take care of themselves – as will the share price.
Hilton Tarrant works at YFM. He can still be contacted at firstname.lastname@example.org.