Dis-Chem founders, execs untangle themselves from group warehouse leases

Three properties sold to the group in deals totalling R217m.
The ownership of the pharmacy chain’s distribution centres by related parties has drawn criticism. Image: Supplied

Dis-Chem founders Ivan and Lynnette Saltzman, along with other directors and executives, have sold three warehouses to the pharmacy group in transactions totalling R217 million. The group (and related entities) currently pays R3.7 million per month in rent for this space, equating to R47 million annually. It is expected that competition approval for the transactions will be received by March 1.

Aside from the Saltzmans, son Saul Saltzman, director Stan Goetsch, Brian Epstein, KS Sterling and CJ Williams are all owners of stakes in these properties.

The ownership of these distribution centres by related parties has drawn some criticism since the listing of the group in 2016.

In 2018, it included additional disclosure on the ownership structure of these in an investor update.

Further questions were raised in April 2020 when the group somewhat controversially withheld rent due to the hard lockdown. While it continued trading as an essential service, the group contended that “non-essential goods contribute significantly to our normal turnover and essential goods are traditionally much lower profit items”. It argued that it had paid “a fair and significant portion of the base rental together with suggesting a turnover-based rental”.

Valid questions were asked at the time whether all landlords would be treated equally, especially considering related parties owned these distribution centres.

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All the group would say is that it was “looking for relief on the non-essential part of the business”.

“This applies to all space leased across the group and is a principle pertaining to all leases regardless of the nature of the lease,” it said.

Complicated ownership structure

The four distribution centres – in Midrand, Cape Town, Delmas and KwaZulu-Natal (New Germany) – are owned by a complicated structure of trusts and companies owned by the Saltzmans and other directors, former directors and prescribed officers. All leases are between Dis-Chem and related parties, and are on market terms.

Originally, the KZN warehouse was owned by Josneo (Pty) Ltd while the Delmas warehouse is owned jointly with Minlou (owned by group subsidiary CJ Distribution’s director Chris Williams). It disclosed details of the leases of the Midrand, KZN and Cape Town properties in the investor update 2018, by which time ownership of KZN and CT had been restructured to Adventure Commercial Holdings (for KZN and CT).

Ivlyn (Pty) Ltd, an investment vehicle owned by the Saltzmans, owns 76% of Adventure Commercial Holdings. The holdings via Adventure Commercial Holdings appear to have since been restructured into an entity called ‘Commercial Properties’, from which Dis-Chem is buying the properties.

The Midrand property is jointly owned by The Bental Group and Dis-Chem Adventures Trust, the latter being 78% owned by Ivlyn (Pty) Ltd.

Admission

In 2020, it stated in its integrated report that the group was “also driving the process of selling its distribution centres”. This was the first admission that the related-party nature of the leases for a core part of its business had been a concern.

The KZN and CT properties were both under a five-year lease (as per the group’s 2018 disclosure). The former opened in October 2016 and the latter in August 2017. This means the leases have about halfway to run. The annual escalation, as disclosed, is 7%, with a term of 10 years. The “renewal clause period” is five years.

The Midrand lease, not part of this transaction, runs for 30 years at an annual escalation of 8%.

Dis-Chem says the reason for doing this transaction is to allow it to “own three of its five distribution centres and achieve a reduction in rental expenses incurred outside the group”.

“The ownership of the assets ensures that the group holds the necessary strategic assets for long term growth.”

Listen to Simon Brown’s interview with Kruger International director Mia Kruger on Dis-Chem, in this MoneywebNOW podcast (or read the transcript here):

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How is a 30y lease with 8% annual increase “market-related”? The tenant will have bought the property multiple times by the end of the lease. Imagine what the company will pay for a property with such a rich lease.

After the thuggery of failing to pay their landlords but continuing to pay themselves rent, on top of being found guilty of price gouging PPE, we as a family stopped supporting Dischem. We switched to a local family owned pharmacy that has been in town for decades. They know us, they are community oriented, medicines are anyway prescribed prices : don’t know why we ever went to a damned mall for Dischem in any event.

They are fixing the self-dealing issue. Should we forgive? Is it all ok if somebody stops stealing from you?

Yep … from the get go the whole structuring of the listing was not very attractive.

It will be interesting to see whether the price on the 30y 8% escalation buy-out reflects the theoretical lease (that the directors signed with themselves on the property they owned and are now selling to themselves subject to their own approval) or whether they valued the underlying lease considered against what actual rates are.

On track record of these individuals I can predict how this pans out. Steinhoff 3.1

End of comments.

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