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Opinionista

Sasol saga is a lesson for corporate South Africa

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Ron Derby is the host of the weekly Power Business Show and after 16 years as a financial journalist is in an entirely new world, called broadcasting. Be kind. His career started at Moneyweb and from that grounding, worked at Business Day, been deputy editor of Financial Mail, editor of Business Times. He has also worked at Reuters, Bloomberg and had a stint at London’s Financial Times. He has covered all South Africa’s mainstream industries – retail, banking and commodities as well as economics.

In truth, SA is but a novice when it comes to the allure of the international financial world.

The Sasol story is yet another example of a corporate empire believing the hype stirred by an investment community that had pushed its previous chief executive (in this case, David Constable) along with the board to make what was ultimately a bad investment. There are many such tales where the pursuit of growth with the promise of super rewards for executives takes precedence when projects or mergers are considered.

This is especially true when these transformational deals occur at the top of cycles, missing the old investment adage that the time to buy is when prices are low and the time to sell is when they are high.

It’s a lesson for corporate South Africa. In truth, SA is still but a novice when it comes to the allure of the international financial world, having been reintroduced to its allure over the past two decades. The harshest lessons began at the peak of the Chinese super-commodity cycle. Remember that?

At that point, some of the world’s most prominent investors, who had never quite followed the world of resources, and the companies that mine resources became some of the sector’s most vocal investors. Commodity desks were being established in the US’s smallest to biggest and most influential banks and they were being aggressively staffed.

By virtue of their location in the world’s leading financial centres, their views carried much more “weight” than fund managers in the small “dorpie” of Cape Town, home to much of SA’s fund management industry. The men and women in corporate headquarters listened to their own spin a little too much and made deals where they would normally have been wary, given the dizzying heights that commodity prices had reached a decade ago.

The timing of Sasol’s US expansion is a classic case. The 69-year-old company started the project in early 2014 and in July of that same year, oil prices peaked at about $105 a barrel. Today, oil averages between $55 and $60 – despite sanctions against one of its biggest exporters, Iran. Were prices still around or close to levels when ground was first broken, I am certain the cost over-runs that led to resignations of Sasol’s joint CEOs, Bongani Nqwababa and Stephen Cornell, would have been seen as par for the course for any major project.

Sasol’s chairman, Mandla Gantsho, highlighted a “culture of fear” as one of the central reasons for the cost over-runs, as it had prevented bad news about its Lake Charles, Louisiana, project flowing up the management chains of the organisation. It wouldn’t have posed such a problem with supportive oil prices. It’s a culture that certainly exists in corporate South Africa as seen by the leadership of former Steinhoff CEO Markus Jooste.

But before we delve any further into why the culture is fostered, let us remember that it was not that long ago when Jack Welch, the former General Electric head, was hailed as the greatest CEO in modern history. Fear was a central thread in his leadership.

Ironically, former Sasol CEO Constable probably has much more to answer for than the outgoing CEOs. In much the same way, the Eskom executives who signed off on the initial design plans for Kusile and Medupi should answer for the problems of the project, over and above the corruption that fed into the cost escalations. But that’s a story for another day.

The story of believing one’s own hype stirred by either an adoring investment public or panicked shareholders isn’t a story for Sasol or Eskom exclusively: quite a few similar examples come to mind. The most obvious example was the investment decision more than a decade ago by Anglo American to invest in Brazil’s Minas Rio iron ore project.

It was one of the factors that led to the resignation of Cynthia Carroll, maybe more than not paying a dividend for the first time since World War II. Anglo lifers are still cursing under their breath.

Minas Rio cost at least $13-billion to purchase and build and has thumped the earnings of the diversified miner. At the time of the deal, investors were egging on miners such as Anglo to increase their exposure to iron ore and other base metals to feed the insatiable appetite from China. To not do so, would be a recipe for your stock to come under pressure and for the board to come under even more pressure to get their executives to spend. A classic case of group-think.

No attention was being paid to some growing concerns of a wobble in the US housing market, which would later in that year morph into a full-blown sub-prime crisis and send the world’s biggest economy into a Great Recession between 2007-2010. Some would argue, and I would too, that the global economy has yet to fully recover from the fallout.

It has taken Anglo some time to recover from that Minas Rio investment and it’s still seen as a bad deal.

Bowing to pressure for growth at all costs is something that AngloGold Ashanti also fell for, from US hedge fund investor John Paulson who made his fame by betting against the US sub-prime housing market. He was pushing the miner to get out of South African assets years ago after Marikana and the headline-grabbing labour tensions in our mining fields were making front-page news across the globe.

Under pressure from shareholders such as Paulson and a rising debt load, AngloGold proposed and then in under a week withdrew a corporate break-up and rights issue because of an investor backlash. The plan was to spin off international assets in a UK company and to reduce debt through a rights issue.

In trying to appease the investment community, former CEO Srinivasan Venkatakrishnan had to withdraw with haste from what was criticised as a half-baked plan in a period that some of the miner’s employees call their own “eight days in September” as shares slumped 14% on the day the plan was announced. Paulson, whose star has significantly dimmed over the past few years due to underperformance of his fund, was one of the deal’s detractors.

One can only hope that after more than two decades of being exposed to the vagaries of global capital markets, to the investment bankers and other characters that suddenly emerge as voices that are too big to ignore, corporate South Africa and the public sector keep their feet on the ground. Sasol, our miners and, certainly of late, our retailers and property players were guilty of tripping over their own hype.

On the other spectrum, a panicked shareholder and one under severe pressure from consultants made Eskom give the green light to an expansion project that was too great for a company that hadn’t undertaken one as big in more than two decades. BM

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