The Public Investment Corporation (PIC) had concerns about governance at Steinhoff International, which is why the state asset manager increased its investment in the entity that imploded in December 2017.
This was revealed on Tuesday at the Mpati commission of inquiry into allegations of impropriety at the PIC.
In 2016 the PIC extended a R9.35 billion loan to a special purpose vehicle Lancaster 101 to buy a 2.75% empowerment stake in the then mighty global retailer. The deal was brought to the PIC by former unionist Jayendra Naidoo whose consortium owns 25% of Lancaster, while the PIC holds 50% and the remaining 25% is meant to be allocated to a broad-based black economic empowerment (B-BBEE) group.
The opportunity proposed by Naidoo allowed the PIC to appoint a black representative on the Steinhoff board and came with special voting rights, which is the solution the PIC, which held 6.5% shares in Steinhoff at the time, was looking for in order to “influence better governance” in the company.
Jayendra Naidoo and the one-man BEE structure
There have been questions around why the PIC would fund a transaction that was structured as a BEE deal but appeared to have only one BEE beneficiary in Naidoo. The BEE structure of Lancaster was meant to be broadened over time but it is unclear how far this process has gone.
Naidoo was chosen to represent Lancaster on the Steinhoff board and, to a large extent, carry the mandate of the PIC.
On Tuesday, former PIC CEO Dan Matjila defended the PIC’s decision to invest in Steinhoff, saying that while it could have bought the shares on the open market and not through Naidoo, that would not have come with the special privileges of board representation.
Listing the governance challenges, Matjila said the PIC had tried to block the move by Steinhoff to place its primary listing on the Frankfurt Stock Exchange. It had also voted against non-executive directors who had served prolonged terms on the board, calling their independence into question.
Steinhoff was the “darling” of other institutional investors and every time the PIC tried to voice its grievances with governance through the voting process in annual general meetings, it was outnumbered.
“We had concerns about governance and we couldn’t find a way of being heard, and when we got these shares, that gave us an opportunity to be heard – through Mr Naidoo; we thought we could use that,” said Matjila.
He added that the rights gave the PIC an opportunity to at least appoint someone on the board even though “they may not be perfect”.
Assistant commissioner Gill Marcus sought clarity on this, asking why, after identifying governance concerns, would the PIC buy shares to influence governance as opposed to seeking returns on the investment.
“Governance is extremely important in the performance of companies,” responded Matjila. “The return generation of any company is normally due to an appropriate board that is able to drive wealth creation and manage the risks of the board properly.”
Matjila said that Steinhoff was a top stock on the Johannesburg Stock Exchange, the fifth-largest at the time. As such, the PIC did not need to go to its client, the Government Employees Pension Fund, to ask it to change its mandate to either reduce its exposure in Steinhoff or stop investing in the company.
“The only way to do it was to find ways of influencing governance on the board,” said Matjila.
Project Blue Buck
The Lancaster 101 deal was restructured in 2017 to allow the PIC to buy a stake in Steinhoff Africa Retail, now known as Pepkor.
In order to do this, Lancaster 102, a wholly-owned subsidiary of Lancaster 101, was created.
Citibank was approached to raise funding to buy the 8.8% Pepkor shares, and Lancaster 101 ceded its ratio collars – which provided security to the bank against a share price drop in the earlier purchase – in exchange for a R6 billion loan plus reducing its shareholding in Steinhoff.
A few months down the line, Steinhoff’s shares plummeted in the wake of the infamous accounting scandal, wiping out over R200 billion in shareholder value.
Matjila could not provide the commission with an exact figure of the PIC’s exposure to Steinhoff or the subsequent losses, however, he said when the share price collapsed only a third of the Lancaster 101 and 102 portfolio was affected compared to the 90% drop in Steinhoff.
“The losses incurred through the PIC’s investment in Steinhoff were significant and deeply regrettable and I take full responsibility for them,” said Matjila.
However, he said people should not ask “Why was the PIC duped by Steinhoff?” but rather “Who wasn’t duped by Steinhoff?”.