By Janice Kew.
Pepkor’s deal to merge its fintech arm with a rival business has upset some directors and investors because shareholders were not allowed to vote on a transaction that marks a major shift in strategy for Africa’s biggest clothing retailer.
Some directors voted against the decision by Africa’s biggest retailer to combine its Flash arm with Shop2Shop in July to create a company valued at about R21 billion ($1.3 billion), according to a person familiar with the situation who didn’t want to be named because the board vote isn’t public.
The directors objected to the lack of investor involvement while a top 30 investor, Aeon Investment Management, said shareholders should have voted on a deal where Pepkor Chief Executive Officer Pieter Erasmus also has a clear financial conflict of interest.
Pepkor will own 57.1% of the enlarged fintech group, while Erasmus — who held a minority position in Shop2Shop — will own a 13.2% stake valued at about R2.8 billion based on the transaction’s implied valuation. That could change before the deal is completed.
The transaction doesn’t require shareholder approval under Johannesburg Stock Exchange rules because it doesn’t meet the exchange’s threshold for a related-party transaction. Erasmus recused himself from deliberations and decisions concerning the merger, according to Pepkor.
Even so, seeking shareholders’ views would have demonstrated better corporate governance, according to Asief Mohammed, chief executive officer of Aeon, which holds a 0.4% stake in Pepkor. Some directors voted against the transaction as they believed it should be put to shareholders, according to a person familiar with the situation that didn’t want to be named because the board vote isn’t public.
“It would have gone down better had they done it,” Mohammed said. “Seeking shareholder approval would have been good governance.”
Mohammed said Pepkor could have offered a voluntary, non-binding shareholder resolution, letting investors express their views while leaving ultimate responsibility for the transaction with directors.
“You could do that, and then you can maybe engage if necessary,” he said.
Pepkor says it obtained independent valuations of both businesses and a voluntary independent fair-and-reasonable opinion.
The retailer declined to disclose how many individual directors had voted in favour of the deal, citing the confidentiality of board proceedings. Governance concerns over the deal come as Pepkor pushes deeper into financial services to find new sources of growth beyond its core discount-retail operations.
Cape Town-based Flash serves 170 000 informal traders, enabling them to sell virtual products such as airtime, mobile data and prepaid electricity. Shop2Shop is another payment platform for informal traders with more than 210 000 users.
Pepkor has said combining Flash and Shop2Shop will expand its payments, lending and merchant-commerce businesses and broaden distribution for its planned digital bank. It plans to list the new firm — FintechCo — in the medium term.
Pepkor’s stock has dropped 31% this year, compared with a 25% decline on the eight-member FTSE/JSE Retailers Index.