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GEN - General - Grand Parade Investments Ltd
9 November 2018
Attention: Dr. Norman Victor Maharaj
Lead Independent Director
Alexander Abercrombie
Non-Executive Director
Nombeko Mlambo
Non-Executive Director
Professor Walter Geach
Non-Executive Director
Rasheed Hargey
Non- Executive Director
Statucor Proprietary Limited
Company Secretary: Grand Parade Investments Limited
Peter Hesseling
Director – Corporate and Commercial, Cliff Dekker Hofmeyr
Riaan van Heerden
PSG Capital
Grand Parade Investments (GPI): Removal of serving non-executive
directors and appointment of new non-executive directors in an
Extraordinary General Meeting
We refer to -
- GPI’s SENS announcement on 1 November 2018 regarding the
adjournment of the Extraordinary General Meeting which was held at
18h30 on Wednesday, 31 October 2018 at the Samaj Centre, Balu
Parker Boulevard, Athlone, Cape Town, and
- the correspondence received from GPI’s attorneys by email on 1
November 2018, in particular paragraph 4 of that correspondence
which reads as follows: GPI accordingly requests that you provide
written reasons for your proposed resolutions as soon as possible, and in
any event no later than next Friday, 9 November. GPI will immediately
upon receipt of your reasons forward them to the non-executive directors
to enable them to take such steps as they deem appropriate (which we
anticipate would be to formulate presentations and to request the
company to make them available to shareholders before the adjourned
meeting).
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We attached hereto the wording of an announcement providing the
information requested by GPI’s attorneys as set out above.
We demand that GPI -
- deliver a copy of this letter and the announcement to each of its non-
executive directors by close of business on 12 November 2018; and
- publish this announcement on the Stock Exchange News Service
(SENS), without any changes, by no later than the close of trading on
the JSE on 13 November 2018. Should this announcement not be
published, we will approach the JSE directly with a request to publish
the announcement.
It is also our view that –
- section 71(2)(b) of the Companies Act merely requires the presentation
to be made to the adjourned Extraordinary General Meeting, and that
this section does not require a presentation to or a consultation with
the shareholders prior to the adjourned Extraordinary General Meeting
as intimated in the correspondence received from GPI’s attorneys.
WORDING OF SENS ANNOUNCEMENT
Background
In a Stock Exchange News Service (“‘SENS”) announcement on 26
September 2018, shareholders were notified of an Extraordinary General
Meeting (EGM) to be held on 31 October 2018. The EGM was held at 18h30
on Wednesday, 31 October 2018 at the Samaj Centre, Balu Parker
Boulevard, Athlone, Cape Town. The EGM had been adjourned in order to
provide the serving non-executive directors and the shareholders with the
reasons why the shareholders who called the EGM wish the serving non-
executive directors be removed, and to allow the serving non-executive
directors an opportunity to formulate their respective presentations as
required under section 71(2)(b) of the Companies Act No 71 of 2008.
The purpose of this announcement is to provide the serving non-executive
directors and the shareholders with the reasons why the shareholders who
called the EGM wish the serving non-executive directors be removed.
GPI shareholders are seeking new directors to address governance and
capital allocation concerns.
Shareholders who in aggregate hold 12% of GPI shares called the EGM
following several failed attempts by these shareholders to constructively
engage with the GPI board about governance concerns, poor results and the
departure of several key executives. These shareholders wish all serving
non-executive directors be removed and four new non-executive directors be
elected to the GPI board to reinstate good corporate governance.
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Good governance leads to a sustainable and healthy businesses, and
GPI is no exception.
After a period of good performance which largely came from the company’s
success in the gaming sector, the share price has declined by around 70%
from 2014 levels. This has been caused by weak corporate governance, poor
capital allocation and execution on its food strategy which has resulted in
the company reporting headline losses per share of 4.59 cents and 11.18
cents in 2017 and 2018 respectively, as well as a significantly lower
dividend.
Despite the current financial underperformance and poor execution, these
shareholders believe the proposed directors have deep experience and will be
able to provide skilled and independent oversight to ensure confidence is
restored thus unlocking shareholder value in GPI for the benefit of all
shareholders.
Shareholder concerns about GPI governance
1. Extended director tenures and related party transactions lead to
concerns around board independence.
Good corporate governance standards require that a board should
comprise of a majority of independent non-executive directors. The GPI
board currently comprises of five non-executive directors, two of which
have been on the board for 21 years (Mr Abercrombie and Ms Mlambo),
while Dr Maharaj has been on the board for 10 years. The extended
tenures of GPI’s non-execs result in a lack of independence, especially
when the existence of an executive chair (Dr Adams) on the board puts
an even greater demand for independence on the remaining board
members.
The above concerns are borne out by a number of related party
transactions including R130m of capital deployed in acquiring Mac
Brothers (catering equipment) and the Grand Foods Meat Plant from
related parties which to date has provided a negative return to
shareholders and continues to operate at a loss (combined pre-tax
headline losses for these businesses were R15.7m in 2018 and R22.2m
in 2017).
2. Poor alignment of remuneration structure with shareholders’
interests.
Total bonuses paid to executive directors amounted to R15 million in the
2017 financial year and R9m in the 2018 financial year, while the group
made headline losses of R20m and R48m in 2017 and 2018 respectively
and the most recent dividend paid to shareholders more than halved
from 25 cents per share to 11.5 cents per share. Shareholders have
engaged with management and the board on the excessive remuneration
and the need to align management incentivisation with shareholders’
interests on several occasions including at the AGM in December 2017.
Despite shareholders communicating their concerns, the GPI
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remuneration committee awarded management these bonuses whilst
shareholders continue to suffer from increasing headline earnings losses,
declining dividends and a falling share price.
3. The current board’s skills and experience is not aligned to the
company’s strategic intent.
GPI’s shift into the Quick Service Restaurant (“QSR”) industry in recent
years and the reduced exposure to its gaming assets require a board with
relevant industry skills, knowledge and experience. Shareholders are
concerned that the current board does not have the necessary skills and
experience to support GPI’s plans to grow in the QSR industry. This is
vital to the long-term success of GPI given that the board sets the
company strategy and is responsible for holding management to account
on the execution of this strategy. The proposed directors have significant
experience in a broad range of applicable industries including business
strategy, capital allocation, private equity, fast moving consumer goods
and the QSR industry.
4. A spate of divisional executive departures indicates leadership
challenges.
The departure of two chief executive officers in the past 18 months – a
chief financial officer and the chief executive officer of Burger King South
Africa (BKSA) – suggests that the current governance structures are not
sufficient to attract and retain the best talent which is a crucial underpin
for GPI’s long-term success. A strong, independent and appropriately
skilled board is needed to hold management to account.
Shareholder concerns about GPI capital allocation decisions and poor
financial performance
1. Significant investments in the food division of the company are
loss-making.
It is estimated that GPI has incurred in excess of R1 billion of capital
expenditure and cumulative net losses in the foods division up to the
2018 financial year equating to around 100% of the current market
capitalisation of the company. Poor execution of this strategy has
resulted in the businesses consistently missing the targets initially
communicated by management. In spite of the poor performing and
questionable execution on the BKSA business, the company embarked
on an expansion plan in Dunkin Donuts and Baskin-Robbins with
combined pre-tax headline losses for 2017 and 2018 amounting to
R98.6m and no clear business plan on the turnaround (or exit) strategy.
It is vital that an experienced management team with a proven track
record are appointed to ensure successful execution and improved
returns on the large capital already invested.
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2. The Spur purchase and sales decisions highlight poor capital
allocation.
Further capital allocation concerns relate to GPI’s purchase of Spur
Corporation Limited (“Spur”) shares after the initial purchase (in 2014)
of 10% of Spur shares via a B-BEEE transaction. In October 2016, the
company announced it had agreed to buy up to R779m of Spur shares
from Coronation Fund Managers at R40 per share or a 25% premium to
the market price at the time. Fortunately, shareholders blocked this
transaction. However, GPI continued to buy Spur shares in the open
market and last reported to own 17.79% shares - but offering no tangible
strategic rationale for this. Spur shares now trade at R23.95 (as at 5
November 2018), which is below the average cost at which GPI acquired
them and significantly below the R40 share price at which the company
made the offer to Coronation Fund Managers. Management has publicly
stated that GPI now wishes to sell its stake in Spur. At current market
prices, this would mean selling them for below GPI’s average cost price.
3. Weak financial performance results in lower dividends for
shareholders.
The financial underperformance of the business has seen Headline
Earnings Per Share (“HEPS”) fall steadily since the rollout of BKSA
started. Adjusted HEPS averaged around 24 cents per year from 2009-
2014 and has now declined to a headline loss of 11.18 cents per share in
fiscal 2018. Equally, the last dividend paid of 11.5 cents per share is
nearly half the average annual dividend per share (including special
dividends) of 21 cents for the period 2009-2017, despite significant asset
disposals. Shareholders are concerned that dividends could continue to
fall further as more capital is allocated to the loss-making foods
business.
Change is needed to restore confidence and unlock value for all
shareholders.
The persistent share price weakness and significant share price discount of
approximately 70% to Intrinsic Net Asset Value indicates the market’s lack
of confidence in GPI. A strong and independent board, equipped with the
relevant skills and experience, is vital to restore confidence, protect the
dividend and unlock significant value for all stakeholders.
______________________________
Denker Capital (Pty) Ltd
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______________________________
Excelsia Capital (Pty) Ltd
______________________________
Kagiso Asset Management (Pty) Ltd
______________________________
Rozendal Partners (Pty) Ltd
______________________________
Westbrooke Alternative Asset
Management (Pty) Ltd
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Date: 28/11/2018 09:10:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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