One day in September: How Choppies fell
Mbongeni Mguni | Friday July 12, 2019 13:30
But for the events on September 29, Choppies’ well-told tale of humble beginnings from a single store in Lobatse to a seven-country giant, would have remained unblemished.
In future, those who chronicle Choppies’ history will of necessity include the group’s dramatic fall in value last year, the suspension from trade that has ankle-cuffed shareholders to an uncertain future, the behind-the-scenes battle that felled the CEO and the overpowering odour of scandal.
Next month, shareholders are due to meet for the first time since November 2017 at an Extraordinary General Meeting (EGM) whose agenda could include axing the Board, adopting a turnaround strategy and raising capital to help liquidity.
A group that boasted revenues of P8.9 billion in 2017, faces an uncertain future, with events stemming from that fateful day last September, when the “well-told” rags-to-riches saga unravelled.
On that day, at least P1.7 billion in value was erased from Choppies when the group’s share price fell by nearly 77% in the space of a few hours on the Botswana Stock Exchange (BSE), its primary listing.
Someone, some people within the ranks of Choppies’ investors had sensed danger and pressed the exit button. The red flags had been waving from earlier in the year when Choppies announced, first that it had changed auditors, then that certain discoveries the new auditors had found meant the 2018 full year results would be delayed.
Weeks prior to the crash, the BSE had briefly halted trade on the counter seeking clarification on the nature of the delays, a development that saw some investors reduce their exposure to the stock ahead of September 29.
With its suspension, Choppies went dark, only surfacing infrequently to announce that investigations into historical transactions and possible financial impropriety were ongoing. The door of mandatory BSE disclosures was being held only slightly ajar and the true nature of the state of the group was known only by those in the board.
The May 21 suspension of maverick CEO and 20% equity holder, Ramachandran Ottapathu (popularly known as Ram) only heightened speculation that the new auditors and those leading the forensic and legal probes had uncovered group-damaging, investor-jarring information.
Corporates only jettison their CEOs in worse case scenarios, when it is requisite to publicly show a break from a previous pattern or culture and when it is necessary to convince investors that action to remedy a wrong has been taken. Normally, CEOs are the face of trust in an organisation and corporates jump through hoops to retain them.
In Ram’s case, not only is he the brains behind Choppies’ success and the single largest shareholder, but the suspended CEO’s personhood is nearly indistinguishable from Choppies. Ram’s contract states that he was in charge of entering into contracts on behalf of the company and “doing all acts in the ordinary course of business he considered in the best interests of the company,” clauses which made him in effect the be-all and end-all of the group.
Newly released court documents, only available because Ram threatened to sue the Board over his suspension, suggest misconduct and impropriety are not the only issues facing Choppies.
The group appears to be in need of liquidity, a fact that while it does not spell doom, would rattle shareholders when placed alongside the adverse preliminary audit findings and ongoing investigations revealed in the court filings.
Documents show that the Board met in June to discuss a rights issue, the proceeds of which would go towards “recapitalisation” of Choppies. The documents also show that Ram and his long-time ally, Choppies founder, Farouk Ismail also offered the group up to P250 million as a “bridging loan”.
Both a “bridging loan” and “recapitalisation” suggest an urgent need for short term funding and the existence of a liquidity challenge. In the absence of 2018 results and with probes ongoing into historical financials, precious few know the actual state of Choppies’ books or its outlook. Shareholders, as nervous as they are about the revelations in court, are stuck and unable to offload their stock for the time being.
More anxiety will come from revelations in court filings that Choppies’ lenders, who include Barclays, Stanbic and Standard Chartered, expressed concern through an official letter in May about the quality of financial information emerging from the retail chain.
The lenders apparently asked Choppies for a “solvency certificate” a document proving the group’s financial stability. The Board asked for a deferral saying it could not provide one until it better understood the group’s financials.
Ram’s own filings in court are also no source of comfort in this regard. The suspended CEO wrote a restructure and turnaround proposal to the Board on May 17, five days before his suspension. Stressing the need to return Choppies to a “sound financial and good corporate governance basis,” Ram proposed a business review starting with the group’s troubled North West Province (South Africa) and Kenyan operations.
“Thereafter, an extensive review will form the basis for the action plan,” Ram proposed.
“The business review will canvass the company’s existing strategy, operations, managerial competencies, finances, infrastructure and human resources.”
Ram proposed that the review should look at management of operating costs and working capital, existing outstanding debt obligations, strategic disposals or closure of units and the viability of remaining a listed entity, among others.
The suspended CEO also proposed a lawyer-led review of the Board to weed out non-performers and also add more members with retail trade experience. He also proposed that a deputy CEO be appointed, his own succession ironed out and Board chair, Festus Mogae be retired. “It is recognised that the extant Board is weak in retail or Fast Moving Consumer Good experience and the Board expertise must be supplemented as a matter of urgency.
“In addition, whilst I recognise the role that the chair (Festus Mogae) has played in the past to assist in the growth of the company, it is my view that it is time for His Excellency to relinquish the post.
“I am in discussions with a suitable person and will provide details prior to the (Board) meeting.
“This person has provisionally agreed, subject to His Excellency agreeing to retire, to accept the position as chair,” Ram wrote.
The Board, meanwhile, at a meeting on May 21 noted that a number of Ram’s proposals were in fact recommendations previously made at Board level that he had rejected, particularly around governance. The suspended CEO’s proposals were also “a cut and paste” effort from “other sources” and did not pass muster.
That May 21 meeting had actually been called to discuss, amongst others, an April recommendation from the forensic auditors, Norton Rose that the CEO be suspended or resign. The Board, according to the filings, had expected Ram’s proposal to include “timelines and modalities” of his exit and the mention of a deputy CEO position was found unacceptable.
Ram was recused from the Board meeting. The Board resolved to suspend the CEO or alternatively offer that Ram resign within three months and have the opportunity to “control the narrative” around his departure.
Aged 55-years old, and a 27-year veteran of the retail industry, Ram opted not to choose and was suspended.
The events of September 29 and the revelations since then had come to a head. Next month, shareholders sit at the highly anticipated EGM to deal with the fallout.