PIC on the back foot after R12.6bn bid for Adcock

2013-11-17 14:00

Questions are being raised on whether it is following government orders by refusing to let a foreign-owned company acquire ownership of Adcock Ingram

Friday’s R12.6 billion binding offer by Chilean company CFR Pharmaceuticals for Adcock Ingram has put the Public Investment Corporation (PIC) on the back foot.

The PIC, which has a reputation as an activist shareholder, has indicated that it is not supporting the deal.

Companies are generally afraid to mess with the PIC which has R1.4 trillion to invest and has significant stakes in almost every big company in South Africa.

The decision by CFR to make the offer brings the power of the PIC into question.

The PIC owns 19% of Adcock. Often, its power as a major shareholder can make or break a deal but CFR believes it has enough support to get the deal through.

The PIC, which invests on behalf of the Government Employees Pension Fund (GEPF), has recently received flak from various quarters for not backing the CFR bid.

On Friday, CFR made a cash and share offer of R12.6 billion, with R8.1 billion being cash and the balance to be settled in CFR shares.

The newly combined company will be listed on the Santiago and the Johannesburg stock exchanges.

Shareholders who have indicated support for the deal (but only represent 45% of Adcock’s share capital) are Visio Capital, Absa Asset Management, Stanlib Investment Management, Afena Capital, 36One Asset Management and Sanlam Asset Management.

Holders of another 7.5% of the shares eligible to vote at the general meetings have provided letters of support.

Adcock’s BEE shareholders have entered into agreements with CFR to ensure that they remain as shareholders.

Adcock chairperson Khotso Mokhele said: “We are unanimous in our view that CFR remains the most compelling option on all counts – from the offer price, strategic rationale and ability to execute, through to the creation of a unique emerging markets pharmaceuticals player.

“The combination with CFR makes an enormous amount of sense and we are pleased with the support we have received from a substantial number of our shareholders, including our BEE shareholders and key multinational partners.

“We appreciate the engagements with relevant senior South African government representatives, these have been positive and constructive.”

The PIC did not announce any change of heart. Its chief executive Elias Masilela and the PIC spokesperson could not be reached on Friday.

But Masilela told Rapport he would not comment on the offer. He said the PIC had met CFR, but not Adcock and its position remained unchanged.

He said: “No discussions have taken place with Adcock since we raised our issues with them, so the position is still the same. In the current form in which it stands, we are not supporting it. But there will be discussions with our investment team.”

Questions have often been raised about the motives of the PIC’s actions.

In this case, questions have been raised over the PIC’s opaque comments on the deal, with no information on what it objected to.

With the GEPF as its biggest client, many wonder if and how the PIC strikes a balance between the agendas of the government and investment returns.

In the PIC’s 2013 annual report, Masilela admits the PIC has a role to play in the country’s development.

“The manner in which we invest and integrate our actions to the solution matrix for finding a long-lasting reversal of socioeconomic imbalances is one critical way of placing the future in our hands,” he wrote.

The PIC has made controversial investments in the SA National Roads Agency for about R15 billion, as well as recently acquiring 25% of media group Independent Newspapers, a move that many have questioned.

Various media reports have claimed that the PIC is doing government’s bidding by refusing to let a foreign-owned company get its hooks into Adcock Ingram.

David Couldridge, an analyst at Element Investment Managers, says the Adcock issue has nothing to do with shareholder activism.

“It is about the application of fund investment policy. The policy has to ensure the fund has the right assets to back the fund’s defined benefit liabilities.

“The question is what action, guided by the investment policy, GEPF/PIC should take in relation to the Adcock transaction,” said Couldridge.

When influential shareholders decide to flex their muscles, it is generally welcomed and governance experts agree that it is a healthy sign of responsible investing. But the PIC has been criticised for sometimes playing devil’s advocate rather than being a shareholder activist.

Charl Kocks, a governance analyst at Ratings Afrika, said: “Shareholder influence could be the one that a large or otherwise very powerful shareholder uses to get his or her or its way, or another type of action is the ‘lone voice of reason’.

“[The latter] is quite rare and could be viewed to be the conscience of the business community,” he said.

The PIC has generally intervened on issues of corporate governance, including issues like remuneration policy, which is a thorny issue for many companies and its bravery in this area has often been welcomed.

Meanwhile, the fact that CFR has made a firm bid and has the support of a significant number of shareholders does not mean it will necessarily go ahead. A shareholder meeting next month will decide the fate of the deal.

City Press understands that although CFR does not have the PIC on board yet and has not received a letter of support from it, a meeting took place between the PIC and CFR this week.

City Press also understands that one of the reasons the PIC gave for not supporting the deal was that it was non-binding, but now it is binding.

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