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| Financial director’s report continued |
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| Dial refinancing |
In December, Dial refinanced their investment in the Group. Bidvest helped to facilitate the arrangement at a R350 million net cost. The transaction ensures a continuation of our partnership and the first distributions have been paid to members of the consortium. The benefit of Bidvest’s facilitation of the transaction is reflected in the increase in the diluted headline earnings per share of 23,2%.
Under the refinancing arrangement, our subsidiary, BB Investment Company bought 18 million shares from Dial at R79,38 a share for R1,4 billion. The R1,3 billion balance of Dial’s indebtedness was funded by Investec Bank Limited. To enable Dial to obtain financing on this amount, Bidvest granted Dial a put option against Bidvest covering 15 million Bidvest shares at R75 a share. The option is only exercisable should Bidvest shares fall below R75. Dial may only sell its Bidvest shares to Bidvest, which has a preemptive right over those shares until December 2011. |
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| Legislative changes |
The National Credit Act was implemented on 1 June 2007 and had an immediate effect on Bidvest businesses with direct exposure to the retail market, principally Bid Auto. The effect in 2007 was minimal. However, we anticipate some financial fallout in 2008.
The knock-on effect on South African operations trading in the business-to-business environment will take longer to materialise.
The phasing out of the secondary tax on companies was announced in the February Budget to lower the cost of doing business in South Africa. The intention is laudable. Unfortunately, government will replace STC by a tax on shareholders. The changes will affect distributions from October when the first phase of the new system will be implemented – a reduction of STC from 12,5% to 10,0%.
The second phase is scheduled for introduction in the first half of calendar 2008 when we can expect to see a dividend tax on shareholders, administered as a withholding tax at company level. Conversion to a dividend tax collected at shareholder level is expected by the end of 2008.
No details are yet available on government’s compulsory pension scheme for lower paid workers. The impact could be significant as many of our businesses have created jobs at the lower end of the pay scale. Government reportedly hopes to introduce its national social security fund by 2010. Extensive consultations are expected in the interim. |
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| Company law |
Two additional pieces of South African legislation have recently been in the spotlight: section 38 of the Companies Act and the Corporate Laws Amendment Act.
We welcome changes to company law that will enable a business to embrace new partners and permit participation by historically disadvantaged South Africans at shareholder level. Common sense protections will ensure long-term business viability is not compromised when giving financial assistance to new partners. Our legislators were also wise in addressing the issue of protection for existing shareholders by insisting that shareholders have the final say on assisted transactions.
The requirement for 75% shareholder consent will not only promote amicable relationships in the post transaction period, but act as a safeguard against attack by parties seeking short-term advantage rather than the long-term good of the company and established shareholders.
As an international company, Bidvest also welcomes efforts to align South African corporate practice with international norms. It is only prudent to examine safeguards to protect local companies from the financial scandals that have afflicted some international groups and their professional advisers, prompting new measures to ensure audit committee independence and guard against undue influence by executive directors.
However, a prescriptive approach to audit committee composition – as set out in the Corporate Laws Amendment Act – may prove impractical. In South Africa’s situation, micro-management of corporate governance by well-intentioned lawmakers creates an unnecessary level of complexity. We contend with shortages of auditing skills while non-executive directors with experience of leading large groups face major calls on their time. Executive directors help to ensure the proper working of an audit committee. They are facilitators, not manipulators.
Corporate governance is not a last line of defence when criminal law fails to deter theft and fraud. These structures promote ethical and efficient company operations by those whose track record and personal standing provide strong reassurance that honesty and fair-dealing will prevail. A corporate rogue who is undeterred by the criminal law will not be thwarted by elaborate governance provisions. A balanced approach is required to ensure that corporate practice facilitates wise stewardship without impeding the inner workings of the organisation. |
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| The future |
Our businesses, in international and African markets, are well positioned for further growth. New investment will be maintained as will spending to service our expanding infrastructure.
The management of risk will be critical in all markets. However, our teams are known for achieving good results in all types of economic conditions and we are confident of our ability to perform in a higher interest rate environment.
The balance sheet remains exceptionally strong. We have the resources for further acquisitions, though the focus in our automotive and Asian businesses will be on consolidation and synergies in the wake of substantial acquisitions in 2007. |
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| Personal note |
| This is my first report as financial director and first opportunity to salute my predecessor Peter Nyman. He set the benchmark for financial stewardship at Bidvest. Unassuming, but painstaking, he was known for down-to- earth humility even when reporting stellar results. I am proud to follow in his footsteps. |
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