Hosken Consolidated Investments Limited (HCI) is a black empowerment investment holding company which is listed in the financial sector on the JSE Securities Exchange South Africa. HCI’s major shareholder is the South African Clothing and Textile Workers Union. The group is involved in a diverse group of investments including hotel and leisure; interactive gaming; media and broadcasting; transport; mining and properties.
The following article was taken from Mastermind, the official monthly newsletter of Sanlam Private Investments, a division of Sanlam Ltd. Issue 49, September 2011.
The demanding valuations of blue chip industrial shares have forced us to search for new opportunities in the less researched mid and small cap section of the market. We favour companies that have generated a high return on equity over the long term and are trading at decent valuation multiples, but with their earnings at cyclical low levels from where they are expected to recover.
One such company is Tsogo Sun Holdings: a hotel, gaming, and entertainment group with assets such as Montecasino, Gold Reef City and Southern Sun Hotels. This company is operationally geared to a recovery in hotel occupancy levels and casino gaming revenues, which are currently rising from a suppressed base. The company has managed its cost base well and is expected to generate strong cash flow. The share has performed well this year, but we find a cheaper entry point via Hosken Consolidated Investments (HCI) who owns 41% of Tsogo Sun.
Tsogo Sun constitutes about 60% of HCI’s intrinsic value.
The other major asset in HCI is a 63% stake in Sabido ( the remainder is owned by Remgro), which owns e-tv and accounts for 23% of HCI’s value.
It’s a surprising and depressing sentiment from a man who heads two companies in the JSE top 40, with luxury goods group Richemont sixth, and industrial operator Remgro, which has stakes in Mediclinic and FirstRand among others, at 25th.
Afrikanerbond – Johann Rupert – Remgro – Richemont
HCI also has interests in smaller transport, manufacturing and energy businesses. HCI has shown a good track record of identifying value enhancing deals using the cash flow generated by its portfolio of businesses.
HCI is currently trading at a 30% discount to our estimated net asset value. This discount should narrow as we expect management to start applying the underlying cash flows to repay debt and increase dividends.
This article was taken from Mastermind, the official monthly newsletter of Sanlam Private Investments, a division of Sanlam Ltd. Issue 49, September 2011.
Johnny Copelyn has built an empire controlled by a union investment company. But it’s Copelyn, not the union, who seems to be in the saddle. And some of his tactics are out of bounds. Hosken Consolidated Investments (HCI), despite owning a media company, is not enthusiastic about talking to journalists. When the FM contacted chairman Marcel Golding six months ago to ask for an interview, he was less than forthcoming.
“Why do you want an interview?” he asked. “It’s all in the annual report.” “Marcel is very nervous about this,” said CEO Johnny Copelyn when he finally agreed to sit down with the FM in December. So just what is it that a JSE-listed company that punts itself as the largest trade union-owned black empowered company on the JSE is so scared about?
After all, the story is one you would imagine carries some bragging rights: Back in 1997, communists Copelyn and Golding quit parliament to form the company by injecting R481m worth of assets belonging to the investment arms of the SA Clothing & Textile Workers’ Union (Sactwu) and the National Union of Mineworkers (NUM) into the HCI shell. Now it is a R9,5bn company with some of SA’s choice casino, media and other assets.
Along the way, however, HCI has made plenty of enemies – ironically, more of them former comrades than capitalist competitors.
Notably, the Mineworkers’ Investment Co (MIC), which was largely founded by Golding, walked out of HCI in protest at Copelyn and Golding’s autocratic leadership style in 2000, selling its shares at around R2,60. HCI now trades at R75. And then there was the messy Johnnic battle, which ultimately led to Christine Ramon and Cyril Ramaphosa (once NUM general secretary, while Golding was deputy) resigning, after losing a bitter fight.
In an interview at his plush apartment in Hyde Park, Copelyn immediately rejects the view of HCI as expedient corporate raiders.
“We were reluctant warriors,” he says, referring particularly to the Johnnic battle. “HCI always comes off looking like a bunch of cowboys, but in truth, I don’t think we did more than aggressively defend ourselves against people trying to screw us into the ground.”
Since its beginning, and largely through what some rivals term Copelyn’s “Machiavellian” tactics, HCI’s stock has climbed 36-fold since 2002. The company’s assets now include e.tv, finance house Mettle, dairy company Clover, Tsogo Sun and, after a particularly bloody battle, Johnnic.
However, if the raft of documents obtained by the FM over the past year is any indication, HCI might well have a lot to feel nervous about. Those it has picked on are gathering ammunition with which to retaliate.
To start, consider its all-important status as a black-empowered company.
According to HCI, it is 53,9% black-owned. It says Sactwu owns 40,5% of the company – 30% is in the hands of Sactwu Investment Holdings and 10% is owned by the Sactwu Educational Trust. Copelyn himself owns 10% (worth a considerable R954m, at last count) and Golding 7% (R668m).
In its annual report, HCI says it is “rated the number one financial services company in terms of broad-based black economic empowerment (BEE) ownership and the fifth overall empowered company on the JSE”, a status affirmed by consultants EmpowerLogic on issuing it with an empowerment certificate in February 2007.
So why was it then that the Mpumalanga gambling board (MGB) refused to approve HCI’s request for permission to buy the 50% it didn’t own of Fabcos Investment Holdings (FIH) last year? In the labyrinthine holding structure of Tsogo Sun, the deal would have given HCI another 19% effective interest in Tsogo Investment Holdings (TIH).
The gambling board told the FM its refusal was because HCI used its “position of strength to manipulate decisions to its own advantage” and referred to its “manipulation of BEE credentials”.
The MGB was the only one of four provincial gambling authorities to refuse permission for the deal, which has put something of a dent in Copelyn’s efforts to take control of Tsogo Sun.
HCI didn’t take this lying down and lodged a review application in the Pretoria high court in May last year.
This case has yet to be heard, but already hundreds of pages in court papers have been filed by each side, and there are some particularly damaging claims against Copelyn.
For one thing, unsavoury practices have emerged – the MGB’s compliance committee has recommended that the Scorpions get involved (see page 39).
Secondly, an investigation into HCI by the gambling board isolated glaring governance weaknesses, including the fact that “minutes were not kept as prescribed in the Companies Act… [which] makes it difficult to place reliance on the completeness of HCI’s records pertaining to discussions of meetings”.
In affidavits, Copelyn, a qualified lawyer, says HCI was “unaware of the precise requirements of the Companies Act in this regard, and [our] failure to comply with them was inadvertent, and not by design”.
One of HCI’s former allies-turned-bitter enemies is Nafcoc Investment Holdings. It was Nafcoc that laid the objection at the MGB, and in its complaint raised some pointed questions about HCI’s empowerment status.
In a letter to the gambling board, Nafhold CEO Michael Leaf says: “In order to verify [that the Sactwu Education Trust and the HCI Foundation were black], our attorneys requested copies of the trust deeds… [but] the request was refused by HCI.”
Leaf argued this was a crucial missing part of the puzzle and that it would be necessary to check the identity of the trustees, the way in which they were appointed, the identity of the beneficiaries, and (most importantly), who actually controls the flow of funds.
Apparently, Nafcoc subsequently got certain trust deeds, but the information these contained was scarce indeed.
However, Leaf had a legitimate concern. Former HCI colleague Gavin O’ Connor said last year it was “basically Johnny’s show [and] he runs it himself and brooks not a whole lot of dissent”.
So does HCI belong to the unions or to Copelyn and Golding?
Cynics would point to the fact that Sactwu has nearly a R4bn interest in HCI, yet there is only one director, Amon Ntuli, on the board of Sactwu Investments Group, the entity that holds the stake in HCI.
Ntuli was the longest-serving president of Sactwu – 12 years – but is no longer part of the union. Instead, he sits as a director on HCI’s board and there are no Sactwu officials on HCI’s board or on Sactwu Investments Group’s.
Copelyn says Sactwu made a conscious decision not to have any active union leaders on HCI’s board, but the seven members on the board, from Ntuli to Yunis Shaik (brother of convicted fraudster Schabir Shaik), all have “very long, senior connections with the unions”.
But if Sactwu were really in charge, would it have supported HCI in only ever issuing occasional dividends? If a company is making money for union members, surely these members ought to see some of this cash.
One of the more alarming discoveries about Sactwu Investment Group which emerged during the FM’s investigation is hidden deep in the archives at the registrar of companies in Pretoria.
Though the company was formed in 1995, a meeting was held by Sactwu Investment Group in August 2002, for the “creation of preference shares”.
Preference shares are typically used to create capital for a company that has the function of debt but is legally the same as equity. But they can also be used to give one party a specific right of control over a company. In this case, only one preference share was issued, to a company called Ortaga Investments.
The agreement gave Ortaga the right to get “preferential cash dividends” – an immediate payment of R13m – but also voting rights in the event of a liquidation or if a “resolution is proposed which directly affects… the interests of the holders”.
Importantly, that meant that Sactwu could not “dispose of the whole or substantially the whole of the [business] of the company, or the whole or the greater part of its assets”.
Effectively, this meant that Ortaga would have a veto right if Sactwu tried to sell its assets, including its position in HCI. In some situations it had a third of the votes in Sactwu Investment Holdings – a considerable position of influence over the union’s investments.
So what is Ortaga, you might ask? Discreetly tucked away in the appendices of HCI’s annual reports, it emerges that Ortaga was actually a 100%-held subsidiary of HCI in 2000. By 2003, the Sactwu Education Trust had taken a minority shareholding in Ortaga.
To the cynical eye, far from Sactwu Investment Holdings controlling HCI, the preference share actually gave Ortaga (and its owner, HCI) real influence over Sactwu Investment Holdings.
When the FM raised this issue with Copelyn, he said there was no intention to control Sactwu, that Ortaga was used as a funding vehicle and that it was now dormant. The preference share, he says, has been redeemed.
He says any preference share “would have residual rights to control the HCI shares until you’ve paid the pref debt holder his money, such as [that] you can’t sell without its permission. Those are typical of debt structures.”
While funders like Brait may indeed have used Ortaga to fund Sactwu, the odd Ortaga preference share agreement provides some insight into how the balance of power over the union investment company could be subtly altered. Was Sactwu aware of this? In fact, is Sactwu really aware of what’s going on at HCI?
Says Copelyn: “If you were to sit down with [secretary-general] Ebrahim Patel and say, Ebrahim, do you know anything about these businesses? Do you know what Tsogo owns, how much it makes, what its debt levels are; do you have a clue what you have here? I’m sure you’ll find he is [well informed].”
Copelyn says Sactwu is “very confident of the level of control it’s got, and if it weren’t, it would put more people on the board”.
Patel tells the FM the union had “respected management autonomy” and was “satisfied that we’re consulted on all critical decisions”.
Though he says he isn’t aware of all the minutiae of HCI, “we do try to keep an eye on enough detail to ensure that HCI is managed well”.
However, Patel appears to realise the danger of being an absentee shareholder, saying that one of the biggest challenges facing unions is to “not
take the eye off the ball” by letting their investment companies do as they please. “This sets the platform for grief later on,” he says.
When it comes to HCI, he says that “for the future, we will look at ways of strengthening corporate governance because it has grown so significantly”.
Many empowerment deals, in an effort to be “broad- based”, include faceless “union investment companies”, “women’s groups” and “community groups”.
But little verification seems to take place into whether these groups exist in the first place, and whether the individuals ever benefit from the deals in which they are supposedly included.
As Nafhold said in its objection to the gambling board: “A precise analysis of HCI’s BEE status is difficult to undertake [because] HCI’s shareholding appears to be in a state of continuous flux, and much of the shareholding is held by entities whose structure, control and beneficiaries are obscure.”
What makes this even trickier is that Sactwu Investments Group is owned only partly by the union itself, and partly by a number of amorphous trusts. Given the views of critics, who talk about how Copelyn runs a ship in which his is the last word, the true shareholding position deserves fuller ventilation
As it built its business, HCI made much capital from Sactwu’s involvement, and traded on that to win casino licences and pay-TV licences. But how much of HCI’s R10bn in wealth has actually gone to the union?
For his part, Copelyn is adamant that his company is run solely for the benefit of around 500 000 people, who are either members of Sactwu or its members’ families.
“Is there something that union members receive out of this? There absolutely is, and these numbers are big in the aggregate. It’s certainly now over R100m that has been distributed to members over the past decade, through things like Sactwu’s bursary scheme,” he says.
But Copelyn admits its dividend policy is “sporadic”, and says this is because the company was focusing on growth.
“You’ve got to balance the growth of the company against a dividend policy… it had huge debt levels in it, and the businesses it was involved in were either start-ups or making losses,” he says.
He also points out that when HCI unbundled its shares in Softline and Unifer in 1999 to shareholders, Sactwu and the MIC benefited by more than R650m, allowing them to settle debt and fund social programmes.
“There were no BEE companies who made such a payment back to broad-based BEE structures at the time and I don’t believe there has been one since,” says Copelyn.
Patel says Sactwu has “exercised patience” as HCI consolidated its investments. He points out that HCI’s money has been put to use in a new R10m HIV/Aids fund set up this year to provide funeral benefits for union members after they have left their jobs.
But besides ownership, there are other issues, too.
As Nafhold says in its submission: “A report by HCI’s own empowerment consultants reveals that apart from ownership, HCI’s empowerment ratings in other critical respects, including management and employment, are extremely poor.”
However, Copelyn says HCI has “impeccable empowerment credentials” – HCI’s annual report shows that nine of 11 directors are black, as are three of its five executives. It should also be pointed out that the FM’s Top Empowerment Companies survey rated HCI as the most empowered in the financial sector.
Nafhold says that there are “sound reasons to doubt the reliability of the findings” of EmpowerLogic, and that HCI ought to be subjected “to a BEE audit by an independent consultant”.
However, Patel says that Sactwu Investment Group’s shareholding is “complicated” and consists of Sactwu itself as well as various trusts. The FM has been assured it can access a copy of Sactwu Investment Group’s share register.
Copelyn is correct, however, when he says that had HCI not been involved in so many fights, these debates would probably not have arisen.
“Because of all the fighting,” he says, “a lot of very negative things have been said about HCI by people who have it in mind to undermine HCI, such as whether our black credentials are good enough or that it’s a personal fiefdom of Johnny Copelyn.”
But for a “reluctant warrior”, HCI has certainly managed to get involved in more than its fair share of scraps.
In a revealing insight, in 2006 MIC MD Paul Nkuna told the Sunday Times that his company sold its shares in HCI because “we wanted to be more active in the asset and there was no prospect of that”.
Was that because Sactwu controlled HCI so closely? “No,” Nkuna told the Sunday Times, “[it was] pretty much controlled by John Copelyn and Marcel Golding, and we were not going to be rubber-stamping decisions.”
Copelyn says problems arose with the MIC when it decided to support Primedia over HCI, at a time when the two parties were clashing over bidding for a TV licence. “[The MIC] was on the board of both HCI and Primedia and that was intolerable to us. We required that either it got off Primedia’s board, or got off ours. Do I think we were right? I know we were right,” he says.
An equally vicious spat broke out when HCI tried to delist the company in 2002 for R3,50/ share, shortly before the loss-making e.tv turned a profit.
In that case, UK asset manager Marathon took HCI to court to block the delisting. Ultimately, HCI scrapped its delisting plans and Marathon was vindicated by the fact that HCI is now making headline earnings of R4,13/share, and its stock is bobbing about R75/share.
Others have also noted HCI’s autocratic tendency.
In 1997, consultancy BusinessMap said of a fledgling HCI: “It is those who appear to have been most successful in their investment strategies, Sactwu’s Johnny Copelyn and Marcel Golding, who are under greatest scrutiny. They have proceeded with an aggressive style, without paying heed to a progressive corporate-governance model.”
Indeed, governance isn’t their strongest suit. Last year Copelyn apparently took a lengthy sabbatical from the office without shareholders knowing about it.
Johnnic’s shareholders will be left feeling a tad uneasy about the company’s future under HCI. Last year, Copelyn surprised everyone by announcing that Johnnic wanted to buy into a US private equity fund, Blue Wolf, and its subsidiary, Montauk Energy.
However, the SA Reserve Bank vetoed HCI’s efforts to buy into Blue Wolf. Nonetheless, Johnnic spent R428m on buying 93% of Montauk, which extracts natural gas from landfill sites and converts this into energy that it sells.
But for the six months to September, Montauk lost R25m. As Johnnic admitted, this was “behind expectations” as it wasn’t able to sell the gas for the sort of prices it imagined it could.
Which raises the question: why exactly is Copelyn spending union members’ money on risky private equity investments in the US in the first place?
“Does Sactwu mind? The issue has never arisen,” says Copelyn. “We made it clear Johnnic won’t be allowed to compete with HCI in Tsogo… so we need to find areas where HCI will be prepared to step back,” he says.
Copelyn says Johnnic has an ADR programme. (An ADR is a negotiable US certificate representing ownership of shares in a non-US corporation.) This gives Johnnic American shareholders, and spare cash, enabling it to do larger deals than HCI. But, he admits, “it’s a testy issue”, and “we are unclear what Johnnic’s main claim to fame should be”.
Now another fight looms, this time with Gold Reef and its prospective private equity suitor, Ethos (see story below).
There are other fights looming: the SA Revenue Service is challenging some of HCI’s deductions for casino opening expenses, and the competition tribunal is apparently none too pleased that Johnnic still hasn’t sold off Gallagher Estate, as it agreed to do when acquired by HCI.
Copelyn says the Gallagher Estate disposal will take place, but Johnnic has taken its time to fulfil the condition.
The Mpumalanga gambling board lawsuit could have the most dramatic consequences for HCI investors, if it gets its way and forces HCI to sell the FIH shares.
In this context, perhaps it is no surprise that HCI responded aggressively to the MGB, arguing that the hearings were biased, that the gambling board showed a “novel approach to black empowerment”, and that the findings were just plain wrong.
But if HCI fails to have the decision set aside, it will mean that HCI’s interest in TIH will drop to 41,5% (as opposed to 60%), and put Nafcoc in a position to bolster its stake to 45%.
As Copelyn says in one of his affidavits, “HCI’s main asset is its holdings in TIH, which make up roughly 50% of HCI’s value. Without control, it is significantly depreciated in value as a core asset.”
In this case, Copelyn says HCI would be forced, because of “market sentiment”, to sell its TIH stake and alter its investment focus.
But the issue of whether this will make any difference to the 500 000 people who rely on Sactwu’s investment has been lost on the battlefield.