Clothing chain Pepkor has barely recovered from the Steinhoff hangover — replete with sordid backroom deals that enriched Markus Jooste — yet it has now done a “related-party deal” of its own, without bothering to ask shareholders for the green light.
In what Pepkor says is a “transformative transaction”, it will pay R1.57bn to buy Shop2Shop, a fintech business part-owned by CEO Pieter Erasmus, while injecting its own R10bn stake in payments platform Flash into the business.
The idea seems solid: create one fintech operator to handle payments and provide services for the 176,000 merchants, including spaza shops, operating in the R1-trillion informal market. A large chunk of Pepkor’s 32-million customers are in this group.
The awkward part is that Erasmus — the gritty CEO of Pepkor from 2001 to 2017 and again from 2022 — is also a 31.2% shareholder in Shop2Shop. In other words, that R1.57bn from Pepkor shareholders will, in part, benefit him.
It is a classic related-party deal. And the JSE is full of them, from property CEOs offloading the malls they personally own to shareholders, to former Spar chair Graham O’Connor selling R250m of services to the retailer.
Alec Abraham, an analyst at Otto1890, says these deals aren’t ideal. “It creates conflicts of interest — but they do occur in South Africa. And boards typically allow it, because it’s a boys’ club, and they might also benefit from such a deal at some point,” he says.
Abraham says the Shop2Shop deal seems to make sense — “it’s just a pity that the CEO’s involvement has made it look so murky”.
Related-party deals aren’t always illegitimate either, provided proper governance is followed. But in many cases, the executives organise sweet deals for themselves at the expense of shareholders — which is why, usually, the JSE wants them put to a vote.
However, Pepkor opted not to do this. It is implementing the deal based on its view that “a shareholder vote for this transaction is not required under the JSE listings requirements or in terms of the Companies Act, [as it] falls below the regulatory thresholds”.
Percentage points of propriety
Pepkor argues that this would qualify as a related-party deal only if Erasmus owned more than 35% of the company being bought, rather than just below that.
Which sounds like a hyper-technical point — especially given Pepkor’s proximity to Steinhoff, another company that chose not to put deals that benefited the CEO to a shareholder vote, such as the purchase by Steinhoff of the Thesen forests in Knysna.
The fact is, as acting Pepkor chair Ian Kirk tells the FM: “We could have put it to a vote, but we decided to go another way — you can criticise us for that, but it’s not dishonest.” Kirk says shareholders were “overwhelmingly supportive”.
Now, it might seem ungenerous to draw parallels with Steinhoff, given that there are ethical light-years between what Jooste did (shunting R106bn in “fictitious” deals through Steinhoff’s accounts) and Erasmus, who famously detested Jooste’s way of operating.
Nor, in fact, is there any hint of dishonesty in the Shop2Shop deal, which aims to create a R21bn fintech business that could be listed on the JSE.
But why risk the unseemly comparisons to Steinhoff, the poster child of illicit CEO-enriching deals, when you could just put this deal to a shareholder vote? Is it arrogance? Maybe a tin ear for market sentiment?
As it is, there is a golden thread connecting Pepkor to Steinhoff. In 2015, Jooste’s company bought outright control of Pepkor for R63bn, and it was only through some ace manoeuvring after Steinhoff’s 2017 crash that Pepkor emerged alive.
Given this, you’d think a vote would be the smart play. As it turns out, it isn’t just hand-wringing governance critics who think so: Pepkor’s own directors believed it should have been put to a vote.
“Some directors voted against the decision by Africa’s biggest retailer to combine its Flash arm with Shop2Shop” in the absence of a vote, Bloomberg has reported. “Shareholders’ views would have demonstrated better corporate governance, according to Asief Mohamed, CEO of Aeon, which holds a 0.4% stake in Pepkor.”
Even Steinhoff insiders are bemused that Pepkor opted not to go the extra mile to demonstrate ethical governance. “It’s puzzling, just given the history, that Pepkor thought it OK to do it like this,” one former Steinhoff executive tells me.
In written responses to the FM, Pepkor’s Ian Nel will not say which directors voted against the deal or why. “Individual director votes and board deliberations are confidential and are not disclosed,” he says.
But Nel says parallels with Steinhoff are “unwarranted”, assuring us that the company “takes corporate governance and regulatory compliance very seriously”.
Which is, of course, easy to say. Sugar giant Tongaat Hulett, after all, was lauded as a gold standard of governance before its, you know, R10bn fraud.
A secret opinion
Pepkor, however, says Erasmus declared his interest and recused himself from all board discussions. “The board has the responsibility to approve the transaction and from the outset took numerous steps, which were not required, to satisfy itself that this transaction is fair to Pepkor and all its shareholders.”
Oh, and it got an independent fair and reasonable opinion, it says. Asked if it would provide this opinion to the FM, Pepkor refused, saying it is “not a public document”.
Now, this Shop2Shop deal may end up being very good for Pepkor. But that doesn’t justify skipping all the hard parts of governance — especially if your CEO is likely to make a killing, in part thanks to Pepkor shareholders’ contribution.
You’d think that a company that had so recently found itself so close to the Steinhoff firestorm would want to build shareholder trust by going the extra mile on transparency and governance, rather than doing just what the lawyers reckoned it could get away with.
