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My view of the PIC/Lancaster investment in Steinhoff

My view of the PIC/Lancaster investment in Steinhoff
Jayendra Naidoo. (Photo: Qilai Shen / World Economic Forum)

The narrative that the PIC deal team was grossly inferior to the Lancaster Group advisers is completely unfair to the skill and expertise of the senior PIC team members who were involved.

The findings and recommendations of the Mpati Commission of Inquiry into the Public Investment Corporation has generated much media coverage, including several articles which appeared in Daily Maverick. The Lancaster Group, Lancaster 101 (the entity in which the PIC invested in 2016), and I, have been on the receiving end of much undeserved adverse comment. I write this article to clarify issues and place the facts on record relating to the PIC investment in Lancaster 101 (“L101”).

Ex-unionist Jayendra Naidoo owes PIC R11bn for dodgy Steinhoff BEE deal, inquiry reveals

By way of background, I am the sole shareholder of Lancaster Group, a company I formed in 2014. In 2015, Lancaster Group was invited to acquire a significant block of shares in Steinhoff. This was the result of two years of negotiation. Having had a prior business relationship with Dr Christo Wiese as an investor in Pepkor Holdings between 2003 and 2011, I approached Dr Wiese with a proposal to acquire a shareholding in Pepkor once again.

However, at a point when our discussions were quite advanced, he sold his entire shareholding in Pepkor to Steinhoff, and subsequently arranged for the then Steinhoff CEO, Markus Jooste, to continue the discussion with me. This led ultimately to an offer from Steinhoff to Lancaster Group to acquire shares in Steinhoff. It was a purely commercial transaction, with shares offered at market value, based on the notion of working together as value-adding business partners.

At the time, Steinhoff was a highly regarded blue-chip company listed on the JSE. Many international investment banks had a relationship with Steinhoff as a result of its international operations. To raise the funding for the investment opportunity, I approached several international and local banks, as well as the PIC. I appointed an advisory company who developed an innovative proposal for funding the transaction. In addition, they secured a guarantee from an international investment bank to protect up to R10-billion of investment in Steinhoff shares.

With this capital protection mechanism available, several reputable banks became interested to provide funding, and provided indicative funding term sheets. However, it would have required several banks working together to provide such a large quantum of funding. I was cognisant of the risk of working with a large consortium of banks. At the time the PIC, who had an extensive track record of private investments through their Strategic Investment Portfolio, also indicated their interest in the proposal and saw the possibility of using this transaction to work more actively with Steinhoff to promote broader economic transformation, advancing black management, and creating benefits for black suppliers and local producers.

The prospect of a stronger relationship with the PIC was welcomed by Steinhoff as well, so I elected to work with the PIC on this transaction. Bear in mind that the PIC was already invested in Steinhoff and was interested in increasing its association with Steinhoff.

Once the engagement began, the PIC appointed a “deal team” that engaged intensively with our advisers. The original proposal submitted by Lancaster Group was explicitly on the basis, which is the commercial norm, that it was open for negotiation. The negotiation between the PIC deal team and our advisers resulted in several amendments. The changes that the PIC secured included the PIC acquiring a direct 50% shareholding in the equity of the special purpose company to be created (which was a new company created for the transaction, namely L101), an allocation of 25% of the L101 shareholding for the benefit of a B-BBEE Trust (to be established by Lancaster Group in accordance with an agreed scope), a reduction in the transaction size to R9.35-billion, an obligation on Lancaster Group (and Steinhoff) to undertake specific transformation activities such as developing black suppliers, and several other points.

During this process the PIC deal team demonstrated themselves to be knowledgeable, professional, and clearly experienced in sophisticated financial transactions. I must emphasise that this was a robust and commercial engagement. The narrative that the PIC deal team was grossly inferior to the Lancaster Group advisers is completely unfair to the skill and expertise of the senior PIC team members who were involved.

Despite the commercially demanding terms, the transaction made sense to me given the PIC’s interest to partner and further invest in Steinhoff-related initiatives. The PIC approval was granted by their Investment Committee, not by their CEO, Dr Matjila. The inference by the PIC Commission that the reduction of the size of the transaction from R10-billion to R9-billion “may signify collusion” between myself and Dr Matjila is totally unfounded given that it was simply one of many requirements imposed by the PIC deal team to adapt the transaction to the requirements of their Investment Committee.

Pursuant to this agreement, the PIC entered into a loan agreement with L101 constituted as described above, not with Lancaster Group, nor with me personally. Lancaster Group is a 25% shareholder in L101 and is only entitled to 25% of any benefit which would accrue to L101.

The L101 shareholders agreement entitled the PIC to nominate two directors, and they duly nominated one full-time employee who was part of their deal team, and one of their non-executive board members who was part of their Investment Committee. In my view it is quite normal for an investor to nominate directors to the board of a company it invests in, and it is also quite standard to source people for these roles from within its own ranks.

To the best of my knowledge I understand that the PIC determines nominations to investee companies at its Board, via a formal process. The suggestion that the member of the PIC Investment Committee who was nominated as a director of L101 had a “conflict of interest” is at odds with standard commercial practice, and frankly unfair to the individual concerned, and to the other members of the Investment Committee who approved the transaction.

I have noted the commission recommendation that the PIC obtain a legal opinion regarding fees paid to the Lancaster Group by Steinhoff pursuant to this transaction. The fee was publicly disclosed at the time of the transaction, as mentioned in the Commission Report itself. I am advised it would not be appropriate for me to comment further on this issue at this time.

The shareholders agreement of L101 tasked Lancaster Group to create a B-BBEE Trust after the completion of the transaction and to transfer 25% of Lancaster Group’s shareholding in L101 to the B-BBEE Trust. The Trust was specifically designed to be a means of funding social and enterprise development activities that promote the interests of black people. The Trust was not intended to provide benefits to any individuals nor to serve as an investment vehicle for any BEE groups. In the course of establishing the Trust, the lawyers of L101 highlighted the financial and administrative challenges of current legislation regulating trusts, including the very unfavourable tax treatment afforded to trusts.

They proposed the alternative of establishing the entity, with the same scope and principles, as a non-profit company which would thus enable the entity to retain a greater proportion of its income for its developmental activities. Their proposal was duly considered by the L101 board and shareholders (including the PIC) and approved, with amendments then made to the company’s shareholder agreement. As I indicated in my statement to the commission last year, all obligations in respect of the B-BBEE Trust have been fully and properly dealt with in accordance with the Shareholder Agreement.

As part of the transaction, Steinhoff had invited Lancaster Group to become part of a voting pool arrangement, which I had accepted prior to engaging with the PIC. However, at an advanced stage of discussions it was discovered by Steinhoff that the Dutch regulations under which Steinhoff now operated restricted the entry of new members into the voting pool. Accordingly, Steinhoff proposed an alternative, namely, to establish a joint Strategic Forum between Steinhoff, its controlling shareholder, Lancaster Group and the PIC. After careful discussion this was agreed upon, recognising that the Forum could in fact allow for a higher form of strategic participation than may have been available in the existing Steinhoff voting pool.

It was at a meeting of this Strategic Forum that the idea to list Steinhoff’s retail assets, acquire Shoprite, and to create an African retail champion, was discussed and supported. This eventually led to the formation and listing of Steinhoff African Retail (“STAR”).

Pursuant to this decision there was an opportunity to make a further investment in STAR. In order to finance the investment, the Board and shareholders of L101 (obviously including the PIC) proposed that L101 raise new funding from a third party bank. To facilitate that and given the manifest benefits for its stake in Steinhoff, the PIC agreed in its capacity as senior lender to L101 to amend its security arrangements in respect of its loan.

As history records, the underlying assumption of continued high growth in Steinhoff did not materialise. Unbeknown to all – including the PIC who had been an investor in Steinhoff for 20 years, those who had sold assets to Steinhoff, myself, many individual investors, sovereign wealth funds, private asset managers, banking institutions and others who invested in it, Steinhoff’s apparent stellar track record was in reality a fiction and the result of a long-running fraud.

The Steinhoff share price plummeted as a result of the revelations in December 2017 about Steinhoff’s financial misrepresentations. Neither the PIC nor the Lancaster Group were responsible for this state of affairs, and in fact, together with so many other investors, we are also the victims of this financial misrepresentation. As a result, in April 2019, after the publication by Steinhoff of the summary of the findings by the PWC forensic investigation, L101 instituted legal action against Steinhoff for the recovery of the investment made.

PIC has similarly instituted action against Steinhoff for recovery of its direct investment in the company via its Listed equities portfolio. We are engaging with the PIC with a view to recovering what we can under the circumstances.

Whatever else may validly be said, I am comfortable that the transactions described above between the PIC and Lancaster were not only opportune at the time, but also, certainly from my side, entirely above board and at arm’s length. DM


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