It has been a bit of an annus horribilis for Avusa, even though Prakash Desai’s still taking home a handsome incentive bonus. There was that ugly spat with Mvelaphanda over the UHC deal, Capitau was on, then Capitau was off, and that pesky shareholder activist just wouldn’t leave them alone. But the worst was yet to come this week as the company’s chairman and two non-executive board members resigned amid speculation that Desai would be next. By MANDY DE WAAL
Prakash Desai didn’t have too bad a year in 2011, all things considered. The group chief executive officer of Avusa got a salary of R3,339 million and an incentive bonus of R2 million as a reward for performance for the 2010 financial year. The same financial year, Avusa’s operational profit fell from R402 million (1999) to R250 million (2010), and net income was almost cleaved in half, plummeting from R23 million (1999) to R12 million (2010).
This has been grating shareholder activist Theo Botha for quite some time. “A point that I have been raising with Avusa for the past couple of years is the issue of remuneration. If you go back to 2008 and look at the operating profit before exceptional items, it comes to about R503 million. If you look at the figure now, stripping out the acquisition (of UHC), you are looking at R271 million, so you can see that there has been a downward spiral,” says Botha.
“This year Mr Desai ‘awarded’ himself a R2 million rand bonus. Bonuses are based on the previous year, so these bonuses are being paid out for the 2010 figures. If you look at the 2010 figures and compare them to the 2009 figures, you can see that the revenue went down dramatically and the headline earnings dropped by 38%,” he says.
“The financial results for 2010 show that the financial performance of every single division of Avusa, barring one, went down for the year that Mr Desai got his bonus. That given, I need to say to Mr Desai, how can you actually justify your bonus if you are not doing well when looking at the financial results?” says Botha. The shareholder activist says the answer he got at Avusa’s AGM earlier this week was very glib.
A former farmer and property broker, Botha bought his first shares close on ten years ago and became a shareholder activist after this first investment in life insurers, The Sage Group, went sour because Sage didn’t disclose offshore losses. Botha doesn’t make money off his investments as he only buys a couple of shares at a time, but he does get to go to annual general meetings and asks some very uncomfortable questions.
These include the questions he asked at Avusa’s 2011 AGM, such as: why is Desai being remunerated for what Botha feels is mediocre performance. “Desai and the remuneration committee have a different idea to what I have regarding pay and bonuses. I believe if your divisions aren’t performing, the CEO shouldn’t get a bonus at all, and most of Avusa’s divisions turned in dismal performances.”
“I really don’t know how Avusa is setting its targets, because it is obvious the targets are lower than the given financial performance. I, for the life of me, don’t know how they do it,” Botha says.
Botha is largely known as a trouble-maker, but he wasn’t the only cause of trouble at this year’s AGM. Long standing non-executive director Tom Wixley quit, citing shareholder interference. Wixley had been on the Avusa board some nine years. Also gone were Avusa chairman Dumisa Ntsebeza and Babalwa Ngonyama, who was appointed more recently. But the big surprise was market speculation that Desai himself would be forced to step down.
“Desai ‘set to quit’ Avusa as owners flex board muscle,” declared Business Day’s headline this Tuesday, saying further: “Day of turmoil at top SA media group as chairman resigns, and CEO is left in no doubt that his resignation is required.”
Business Day said Desai was due to meet acting chairman Mikki Xayiya and non-executive director Jacques Schindehutte to discuss his future. Xayiya is also chairman of Mvelaphanda, the shareholder Desai faced off because Mvela opposed the UHC deal. This has said to have stressed the relationship between the two more than quite considerably. Schindehutte is a board member brought in by Avusa’s other large shareholders, Coronation, another shareholder who haven’t exactly been thrilled with the media company’s performance.
“We abstained from all votes at the AGM except for voting for Jacques Schindehutte, and that was to send a message to the board that we weren’t happy with the status quo, and that we weren’t happy with the way the UHC acquisition had been integrated,” says Karl Leinberger, the chief investment officer at Coronation Fund Managers. “They were businesses that were very dependent on their key founders, and their founders’ relationships with key clients. The founders had left the business and the group hadn’t yet found long term candidates to replace them.”
The reason given by Business Day for Mvelaphanda’s unhappiness with the UHC deal is because it provided the lion’s share of Avusa’s profits for the 2011 financial year. “Mvelaphanda did clash earlier the Avusa board in terms of the UHC offer,” says Leinberger. “They had concerns around whether it was a legacy business and were they over-paying for a legacy business.”
But what about the issue of shareholder “meddling”, as Wixley puts it in his resignation? “I think that it is incumbent on the shareholders to communicate to boards if they are unhappy with the strategic direction of companies. If they think that value is at risk of being destroyed, I think it is their responsibility to communicate it to boards,” says Leinberger adding: “We have a fiduciary responsibility to the clients for whom we manage money to protect their capital and this is part of that process.”
Avusa’s share price fell some 4% as news began to break about the board departures and Desai’s imminent exit, although late Monday, the Avusa CEO insisted that he was still the boss.
“I guess one would have expected a stronger reaction if that market was overly concerned,” said Richard Tessendorf, a media analyst with Avior Research.
“From our perspective we have been bearish on Avusa for a while now, just from the sense that we don’t see the portfolio as that well positioned in terms of developments around things like broadband,” he says. “If you look across their portfolio, if you look at music and gaming sales, or perhaps newspapers or at least paid for newspapers, you see a lot of headwind for those industries in the long term if you take developed markets as a case study. From that perspective I didn’t think they are too well positioned.”
But this hasn’t dampened Capitau’s interest and CEO David Field says the board changes at Avusa are only about shareholders taking action. “It is not that Capitau has gone away. Avusa put the announcement out that we needed treasury approval, so obviously that is something we are working on. We still have interest in Avusa, the market has an awareness of this. I don’t want to be difficult but that’s all I can say because it is a bit of a difficult situation.”
But what of Desai? The CEO whose job is said to hang in the balance has a fixed-term contract with Avusa to the end of March 2013. So even though he may be set to leave early, he’s likely to get a fairly handsome golden handshake. DM
Some firing squads are all issued with blank cartridges with the exception of one person. This helps alleviate personal responsibility for the execution squad.