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GPI Management Comment On Reasons Advanced By Certain Shareholders For Reconstitution Of The GPI Board
GRAND PARADE INVESTMENTS LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 1997/003548/06)
Share code: GPL
ISIN: ZAE000119814
(“GPI” or “the Company”)
GPI MANAGEMENT COMMENT ON REASONS ADVANCED BY CERTAIN
SHAREHOLDERS FOR RECONSTITUTION OF THE GPI BOARD
INTRODUCTION
The GPI special general shareholder’s meeting originally held on 31 October 2018 was
adjourned and will now resume at 18h30, today, Wednesday, 5 December 2018 at the Samaj
Centre, Balu Parker Boulevard, Athlone, Cape Town. Several shareholders present at the
original meeting indicated that they did not have sufficient information relating to the reasons
for the meeting and the proposed resolutions, to be able to vote thereon. In addition, the non-
executive directors, being the directors subject to the removal resolutions ("Concerned
Directors"), indicated that they were not furnished with reasons by the proposers of the
resolutions ("Proposers") for their proposed removal, as required by recent case law.
Subsequent to the adjournment, and on 9 November 2018, the Proposers addressed a letter
to the Concerned Directors, which letter contained their stated reasons for their proposed
removal. The letter was also sent to the JSE, the company secretary of GPI and its sponsor,
and has been published on SENS.
In terms of section 71 of the Companies Act, a director is entitled to make representations in
instances where his or her removal from office has been proposed. The manner of making
and disseminating those representations is the prerogative of the Concerned Directors. The
Concerned Directors have advised the Company that they intend to make their
representations at the adjourned special general meeting.
Given that the reasons advanced by the Proposers relate to a large extent to the Company,
its strategy and affairs, the executive directors of the Company, being those directors who are
not affected by the proposed resolutions ("Management"), consider it appropriate to provide
some comment on the reasons advanced.
MANAGEMENT COMMENT
GPI is a unique company with a distinctive background. It was initiated as a community-based
broad-based black economic empowerment (“B-BEEE”) company, and was built up from
grass-roots level. Although the Company has since been listed on the JSE and is open to all
investors, it remains true to its roots as a community-based B-BBEE company. This means,
inter alia, that smaller community-based shareholders are as important as and have an equal
voice to larger institutional shareholders, and that the strategy and decisions of the Company
are still informed by one of its founding principles, namely to create long-term value and
investment returns for its shareholders.
Shareholder concerns about GPI governance:
1. Extended director tenures and related party transactions lead to concerns around board
independence.
Management's Comment:
The Concerned Directors have all been elected to office by shareholders time and again
with overwhelming shareholder support, some of them as recently as at the last annual
general meeting of the Company. Many of them come from the original community
constituencies which formed the original investor base of the Company and which are still
investors in the Company, and they are exponents of the ethos and principles of the
Company. It is concerning to Management that these Proposers, who collectively
represent only 12% of the shareholding of the Company, are calling for the change of the
entire non-executive board.
The Concerned Directors have in our view played a pivotal role in driving the Company’s
strategy as an investment business and have been part of building the inherent value that
the Proposers refer to in their letter. Furthermore, the Concerned Directors have been
party to the development of, and have overseen the implementation of, the current strategy
of the Company, which has seen it diversifying into the food and manufacturing sectors,
so as to be less dependent on the gaming industry. The strategy also encompasses
controlling and operating assets as opposed to being minority shareholders in assets. This
is a long-term strategy, the implementation of which is well under way, and the fruits of
which will in due course be shared by patient long-term investors. Whilst embarking on
this transformation, the Company has continued to reward its shareholders with consistent
dividends. GPI is not an asset management company that seeks short term arbitrage but
rather an investment company with the ethos of creating long term shareholder value.
Related party transactions are not uncommon or illegal, provided that they are adequately
disclosed and implemented in terms of the relevant and applicable legislation (including
the JSE Listings Requirements, if applicable). All related party transactions mentioned by
the Proposers were adequately disclosed and implemented in terms of the relevant and
applicable legislation (including the JSE Listings Requirements, if applicable). In addition,
the relevant related party transactions were disclosed in the relevant Integrated Annual
Report of the Company, which report has been approved by the board of directors and
published annually in line with the JSE Listings Requirements. Furthermore, no adverse
findings have been levelled against GPI's compliance in this regard. The allegations of the
Proposers are in Management's view not justified. The related party transactions
complained of were all pursued in execution of the Company's chosen strategy.
2. The poor alignment of remuneration structure
Management's Comment:
GPI publishes its remuneration policy and implementation report annually in the Integrated
Annual Report in line with the corporate governance provisions set out in King IV. This
report is tabled for a non-binding vote annually at the AGM. In Management's view, the
policy has been formulated in line with industry best practice. Shareholders have
previously questioned this policy and a conference call was scheduled to address
concerns. Following the call, a letter was sent by the chairperson of the remuneration
committee to all those concerned addressing the issues raised during the call. In
Management's view, this illustrates the willingness of the Company to engage with the
shareholders on remuneration issues and concerns, and a broad move to replace the
entire non-executive team is inconsistent with our philosophy on collaboration and
cooperation between the board and the shareholders.
3. The current board’s skills and experience is not aligned to the Company’s strategic intent.
Management's Comment:
The Concerned Directors are highly qualified and respected members of the community
and have served as directors of the Company loyally and, in our view, competently for
many years, and in some instances since the inception of the Company. Due to their long-
standing involvement with the Company, the Concerned Directors are intricately familiar
with the affairs of the Company and its subsidiaries. Each of them has a unique skill,
experience and perspective, and contributes to the Company in a unique and very valuable
way.
GPI's strategy is not limited to the foods and quick service restaurant (“QSR”) sector. It
remains invested in other sectors. The Concerned Directors have not been operationally
involved in the QSR sector but in our view they have the broad range of skills required to
drive the overall strategy of the business.
It is noted that not all the Proposers nominees have skills or experience within the QSR
industry, and that none have experience in the gaming industry
4. A spate of divisional departures indicates leadership challenges
Management's Comment:
There are no leadership challenges within the Company. Recent executive departures are
related to personal reasons and family commitments. In Management's view, these
departures are being distorted by the Proposers to align with a narrative that the Proposers
have attempted to construct regarding the Company's leadership.
Shareholder concerns about GPI capital allocation decisions and poor financial performance
1. Significant investments in the food division of the Company are loss-making
Management's Comment:
Burger King South Africa launched in 2013 and five years later the business is estimated
by Management to be worth approximately R1 billion. In 2014, GPI was trading at an all-
time high of R7.50 per share, driven by the excitement that Burger King had to offer. Our
long-term plan was to drive the expansion of Burger King through corporate-owned stores,
and we now feel very confident that the asset is mature and in a sweet spot based on the
positive same-store sales growth in a depressed economy, positive EBITDA levels and
the massive potential for growth in South Africa. We have adopted a value-based strategy
which has prioritised capital allocation to high value potential assets, such as, Burger King
and the Grand Foods Meat Plant. We have also reduced the capital allocation to identified
poor performing assets such as Dunkin’ Donuts and Baskin Robbins, and have given the
market a commitment to exit these brands in future should their performance not improve.
It is important to highlight some of the successes of GPI’s investment strategy and capital
allocation. For example, Sun Slots, which GPI started and operated, was later exited at a
valuation of over R1 billion.
2. The Spur purchase and sales decisions highlight poor capital allocation
Management's Comment:
The Spur acquisition has always formed part of our strategy to diversify GPI’s investment
portfolio beyond the gaming and leisure industry and to become a serious contender in
the food sector. GPI has been very clear in communicating this strategy ever since the
initial Spur B-BEEE transaction was done in 2014.
The relationship with Spur has created the opportunity for GPI to access strategic
synergies between the two companies, for example around GPI's meat processing and
catering equipment manufacturing capacity.
In addition, the strategic decision to enter Spur was to also be invested in the business of
being a franchisor, rather than a franchisee that pays royalties to foreign companies.
We are the largest shareholder in the Spur Group, and we firmly believe that it is one of
the best food businesses in the country. Despite the current, low trading environment,
which is currently the case with most other businesses in the foods sector, we are
confident that this investment will unlock long-term future value for our shareholders.
3. Weak financial performance results in lower dividends for shareholders
Management's Comment:
The investment and roll-out of Burger King in South Africa was always a long term strategy
with profitability predicted only six years after its launch. In the short term the headline
earnings per share (HEPS) would see a drop, but Burger King has managed to generate
positive EBITDA over the last financial year and in our view has massive opportunities for
growth over the next five years.
GPI has consistently paid dividends every year. When assessing dividends paid we cannot
compare ordinary dividends to special dividends as it portrays a distorted view. Special
dividends are only paid after extraordinary events that create additional liquidity, and
therefore the Proposers' submissions regarding the decrease in dividends is in our view
unjustified as ordinary dividends have remained consistent.
4. Change is needed to restore confidence and unlock value for all shareholders
Management's Comment:
Shareholder activism must be welcomed, but change does not always achieve the desired
results and there are many examples where it has spurned growth and led to a destruction
in value. Management is concerned that the proposed reconstitution of the board will be
negative for the Company and the implementation of the current strategy of the Company,
which Management is confident will continue to create value for shareholders.
Cape Town
5 December 2018
Sponsor
PSG Capital
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