Tilting at the windmills
01 July 2013 - Peter Townshend
It has been almost five years since we launched our Africa funds. During that time we have learnt many lessons, one of the most important being the relevance of good corporate governance. It is not that we didn’t appreciate this aspect before, but in South Africa and most other developed markets, the bar is set fairly high and we tend to take it for granted that companies will adhere to a certain minimum standard. We are occasionally disappointed but, for the most part, all the good stuff related to corporate governance happens as a matter of course.
This is not necessarily the case in many of the less developed markets we invest in across Africa, where corporate governance standards can vary wildly. It has been our experience that having the highest governance standards can be the key ingredient for the most successful companies and this is something we have written about often. A measure of how much emphasis we place on this lies in the fact that almost 45% of our portfolio is invested in the subsidiaries of global multinationals such as Heineken, Unilever, Lafarge Cement, British American Tobacco, etc. There are many reasons we favour businesses like these: they produce everyday consumable products with enviable brand names; they service underpenetrated markets that can grow at above average rates for decades; they produce exceptional returns on each dollar invested; they produce very strong cash flows that are largely paid out as dividends; and they generally have the highest standards of corporate governance. But even here, we are occasionally disappointed.
We are busy fighting one such disappointment in Nigeria. On behalf of our clients, we hold a small position ($7 million) in GlaxoSmithKline Nigeria (GSK Nigeria). The UK parent company, GSK Plc, which owns 46% of GSK Nigeria, has put forward a proposal whereby it is offering to pay 48 naira per share to other shareholders in order to raise its stake in GSK Nigeria to 75%. To get approval, the scheme needs 75% of shareholders to vote in favour. The big issue here is that, currently under Nigerian regulations, GSK Plc is allowed to vote its shares on the deal.
In most developed markets, regulation expressly prohibits related parties from voting their shares in a transaction such as this. In its home market in the UK, GSK Plc, as the related party, would not be allowed to vote and the scheme would need 75% approval from shareholders, other than GSK Plc, for it to pass. This best practice ensures that minority shareholders’ interests are protected and do not get steamrollered by the majority shareholder. GSK Plc controls the board of GSK Nigeria (who, disappointingly, have seen fit to recommend this scheme to shareholders). It manages the operations, determines capital allocation and has complete insight into every aspect of the business and its prospects, a very privileged and powerful position. And, because GSK Nigeria has a fragmented shareholder base with no other large holders, it will in all likelihood be able to get this proposal through. If this is the case it will be a bitter pill for minority shareholders to swallow.
GSK Nigeria produces household name products such as Ribena, Horlicks, Lucozade and Panadol. In spite of the many upheavals and challenges in Nigeria, the company has grown both turnover and profits by over 20% per year for the last five years. These are growth rates that match the best we have seen anywhere in the world and demonstrate both the phenomenal opportunity for consumer goods companies in Nigeria as well as the quality of GSK Nigeria brands. The firm has also invested substantial amounts back into the business, spending some $50 million on capital projects over the period and we believe that the benefits of this spend are only now going to be realised. Just as the shareholders should expect to see an acceleration of returns, the parent company is trying to increase its stake, at a bargain price.
Nigeria has a vibrant stock exchange – though with a limited number of investment opportunities comparable in quality to GSK Nigeria. Many of the highest-quality listed firms are subsidiaries of global multinationals, all of which appreciate the opportunity in Nigeria and understand that it is one of the largest undeveloped consumer markets in the world. We believe there may be other multinationals that would also like to own a larger chunk of their Nigerian subsidiaries. By exploiting a shortcoming in Nigerian regulations, it is possible for the majority shareholder to propose, and probably succeed in, pushing through a scheme such as this. We have seen it happen with Nigerian Bottling Company (taken out by Coke), we may well see it happen here, and we are concerned that we will see it happen again in the future. If so, it will be to the detriment of all investors – individual Nigerians, local pension funds as well as foreign fund managers such as ourselves, as we are presented with a dwindling number of world-class investment opportunities.
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Notes to the editor:
Coronation Fund Managers Limited is one of southern Africa’s most successful third-party fund management companies. As a pure fund management business it provides individual and institutional investors with expertise across Developed Markets, Emerging Markets and Africa. Clients include some of the largest retirement funds, medical schemes and multi-manager companies in South Africa, many of the major banking and insurance groups, selected investment advisory businesses, prominent independent financial advisors, high-net worth individuals and direct unit trust accounts. We are 25% staff-owned, have offices in Cape Town, Johannesburg, Pretoria, Durban, Gaborone, Windhoek, London and Dublin and are listed on the Johannesburg Stock Exchange. As at the June 2013 quarter-end, assets under management total R434 billion.