Barloworld R23bn buyout offer: Governance response ‘unconvincing’

Analysts are unconvinced by the three pages JSE-listed Barloworld devoted to governance issues in the circular published this week about the proposed R23 billion buyout offer for the group and the potential conflict of interests of group’s chief executive officer.

Barloworld CEO Dominic Sewela was previously accused by analysts of a conflict of interests over the involvement of a trust for his and his family’s benefit in a consortium led by Saudi Arabia’s Zahid Group that has made the buyout offer.

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Analysts have also been extremely critical of the lack of transparency and lack of information provided by Barloworld about the proposed transaction in the cautionary announcements it released prior to an announcement on 11 December 2024, about seven months after it published the first cautionary announcement on 26 February 2024 about an unsolicited non-binding indicative offer (NBIO) made by the consortium.

Issues

An annexure in the circular dealt with a number of issues, focusing on:

• Why it took so long for the offer terms of the consortium to be disclosed to the market given that it first approached Barloworld with a NBIO at the end of February 2024 and the firm intention announcement was only published in December 2024;

• Why it took so long to issue a cautionary and disclose details to the market of the consortium and the nature of the deal;

• The process followed from the time of the consortium’s approach to Barloworld and the associated timelines; and

• Why Barloworld did not place the CEO on garden leave immediately, given his involvement in the consortium.

The circular said it is not market practice to place “conflicted” members of management on long-term gardening leave during a management buyout process.

It added that the independent board is of the view that while management-led buyout transactions present an opportunity for conflicts in relation to the management members involved, such transactions are not uncommon in capital markets – and, if properly managed, may result in a positive outcome for the shareholders of the company.

“As a director, the CEO has a fiduciary responsibility to continue to operate the business of Barloworld in its best interests,” according to the circular.

“It was the view of the independent board that Barloworld and its shareholders should not be denied the benefit of the CEO’s expertise and experience, provided that the risks of any conflicts of interest are appropriately mitigated.”

It added: “The independent board introduced clear and enhanced governance protocols to address any concerns that may result from the CEO’s involvement in the consortium and the newco [consortium’s] offer.

“These protocols have served to ensure that the business continues to be run efficiently and in the best interests of all shareholders and the company while mitigating any potential conflicts between the newco offer and the day-to-day running of the company’s operations.”

‘No involvement or influence’

The circular added that the CEO has had no involvement in or influence over the company’s assessment of the consortium’s offer.

“The independent board is confident sufficient safeguards have been put in place to ensure the company is managed with minimal disruption.”

The circular said that following the first approach to Barloworld, the company and the consortium entered into a non-disclosure agreement and the independent board “was immediately constituted, as is customary for transactions of this nature”.

“In terms of applicable law and regulations, the company was required to publish a cautionary only in specific circumstances, for example, if confidentiality of the discussions could not be maintained.

“Furthermore, in accordance with the Companies [Act] Regulations and guidance from the TRP [Takeover Regulation Panel], the company was limited in its ability to disclose more fulsome details (other than the identity of the consortium members) pending release of a firm intention announcement.”

The circular said the independent board in May 2024 agreed to facilitate a due diligence process for the consortium’s advisors but the proposed transaction was delayed by potential trade control breaches in the company’s Russian operations.

It said the consortium delivered its binding offer to the independent board in early December 2024, an implementation agreement was entered into between the parties on 11 December 2024, and, in line with its regulatory obligations, the company disclosed fulsome details to the market in a firm intention announcement on 11 December 2024.

The circular said at the time of the initial approach, the independent board and its advisors were confident in their ability to maintain confidentiality on the details of the NBIO.

It said Barloworld was under an obligation to keep discussions confidential and the independent board did not believe it would be in the best interests of Barloworld or its stakeholders to make public the details of the consortium members without a more formal offer having been presented.

“However, as discussions progressed and given the relatively large number of parties involved in the transaction negotiation and due diligence process … the independent board made the decision, out of caution, to release a cautionary announcement, which it did on the 15 April 2024.”

Shareholders urged to vote ‘in favour’

Dr Lulu Gwagwa, chair of the independent board, said the publication of the circular represents a significant milestone in the proposed transaction process and provides comprehensive information to Barloworld shareholders.

This, she said, included detailed transaction terms, the independent expert’s opinion, and the governance processes that “we have followed throughout”.

“The independent board, having assessed the final view of the independent expert, supported by appointed advisors, recommends to shareholders to vote in favour of the scheme of arrangement,” she said.

Analysts not impressed

Analysts were unimpressed by the explanations in the circular and the process followed by Barloworld and the independent board.

One analyst who did not want to be named said Barloworld should have immediately issued a cautionary announcement stating that the company has been approached by whoever, including the CEO of the company, with an indicative proposal that may or may not result in this consortium making a bid for the entire share capital of Barloworld.

The analyst said this was necessary because Barloworld clearly took the approach seriously and believed there was strong possibility it may or may not result in the consortium making a bid for the entire share capital of Barloworld and the consortium had the financial backing to consummate the proposed transaction.

He said this is indicated by the fact that it immediately constituted a five-person independent board and the consortium’s advisors being granted access to conduct a due diligence of Barloworld.

“The only reason you do not inform the market is because you did not believe it was a bid that was implementable and the transaction would not be consummated,” he said.

Confident about confidentiality, yet …

Another analyst, who also did not want to be named, highlighted the comments in the circular about Barloworld being confident about keeping details of the proposed transaction confidential but then failing to publish a cautionary announcement when details of the proposed transaction were leaked and published by Bloomberg on 6 August 2024.

This analyst said a listed company has an obligation to release information about a proposed transaction if there is a leak but Barloworld did not release more information.

“I think Barloworld has handled this very badly,” he said.

“If I was a shareholder who sold significantly lower than the offer price, I would sue for damages because I do not think this board has carried [out] its duties – no matter what legal advice they got, particularly when there was the leak.”

Read: Major Barloworld shareholder rejects R120 offer, demands R130

The firm offer announcement in December 2024 valued Barloworld at R23 billion and comprises a cash offer of R120 per share, which will not be reduced by the R3.10 per share dividend already declared by Barloworld on 22 November 2024.

Read: Barloworld pays dividend despite earnings drop

A general meeting of Barloworld’s ordinary shareholders is scheduled to take place at 9am on 26 February 2025.

It will be conducted entirely by electronic communication to consider, and if deemed fit, approve with or without modifications the special and ordinary resolutions required to be passed to enable the proposed transaction to be implemented.

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