10 biggest business blunders of 2014

Epic boardroom bust-ups, crippling strikes and a slide into darkness characterised a turbulent year for South African business. Loni Prinsloo, Malcolm Rees, Asha Speckman and Rob Rose rank the biggest business blunders of 2014

1) African Bank

The dramatic collapse of South Africa’s largest unsecured lender, African Bank, sent shockwaves through the country. Besides erasing billions in shareholder wealth, African Bank’s implosion cost thousands of jobs and rattled international confidence in the economy.

The collapse came after African Bank alarmed the market in early August by announcing that it would need a minimum of R8.5-billion in extra funding from shareholders to continue as a going concern — just months after raising R5.5-billion. After its bad debt continued to soar — a legacy of years of out-of-control lending — the lender also announced it would need to put aside a further R3-billion in provisions and that it expected a full-year loss of more than R7.6-billion.

Panic spread in an already bewildered market, which had previously been assured by former CEO Leon Kirkinis that the R5.5-billion it raised in December 2013 would be enough to set the bank on a course to profitability. With all faith lost in management’s ability to right the sinking ship, African Bank’s share price went into freefall, tumbling from an already dismal base of R6.88 to 31c, wiping out more than 95% of its value in three days. The share price has plummeted from R30 a share since March 2013.

The collapse forced the Reserve Bank to place African Bank under curatorship, with a consortium involving major banks and the Public Investment Corporation committing to underwrite R10-billion for a “new” bank, theoretically to be formed by somehow separating its good book of still-recoverable debt from the remainder of its toxic assets.

But, by the end of 2014, plans to relist African Bank on the JSE still seemed like a distant dream with the “complete mess” at the bank making it difficult for curator Tom Winterboer to separate its financials from those of its former subsidiary, furniture business Ellerines, to place an accurate value on what was left. Ellerines, which includes brands such as Beares, Geen & Richards and Dial-a-Bed, was placed in business rescue hours after the release of the shock trading update and several of its units have now been sold.

The Reserve Bank has since initiated an investigation headed by advocate John Myburgh into whether African Bank had been reckless, negligent or fraudulent prior to the collapse.

African Bank's demise marked the end of the mammoth unsecured lending boom which had been growing almost exponentially since the financial crisis in 2008, providing, arguably, an artificial catalyst for wider growth in the country.

As shareholders and creditors cling to the slim hope of recovering a portion of their lost investments, the real tragedy is the chronic indebtedness now faced by thousands of low-income South Africans to whom African Bank lent freely.

2) Eskom

There were few more hated institutions in South Africa in 2014 than Eskom after it implemented a new round of crippling power cuts to avoid a total collapse of the country’s power system.

This is the second time that planned power cuts have been implemented, after the cuts in 2008 that cost the country an estimated R50-billion.

The power shortages doubtlessly constrained economic growth but, fortunately, two ratings agencies, Fitch and Standard & poor's, stopped short of donwgrading South Africa's debt in November. However, South Afruca will continue to experience very tight power supplied for at least another two years as Eskom struggles to complete its new coal-fired power stations, Medupi and Kusile- both already years behind schedule.

Eskom has blundered and mismanaged its way through this crisis, the seeds of which were sown back in the 1990s when policymakers ignored warnings that the country would run out of power by 2007 unless action was taken. Eskom’s requests for cash to build new power stations were denied, mainly because the government tried (and failed) to privatise Eskom at the time.

This leaves South Africa with an uphill battle today: to expand capacity, Eskom will have to spend R300-billion over the next five years as it attempts to bring an additional 20 000MW online by 2025. The problem is, Eskom is yet to secure short- or long-term funding, and, in November, Moody’s downgraded Eskom’s credit rating to “junk” status, which will make borrowing even more expensive. Consumers had better brace themselves for further nasty increases in electricity prices.

3) Mining Strikes

Nearly a year ago, on January 23, South Africa was hit with the longest and most costly labour action it has ever experienced. The strikes on the biggest platinum mines lasted more than five months and cost mining companies and workers close to R35-billion. It led to a 0.6% reduction in the country’s economic output during the first quarter of 2014.

Violent strikes have been flaring up since 2012 when the Association of Mineworkers and Construction Union (Amcu) — which is not part of the Tripartite Alliance — started recruiting members in the platinum and gold sectors. The mining strikes appear to be a symptom of growing political and socioeconomic unhappiness in the country.

The first major strike led to the deaths of 34 miners on August 16 2012, at Lonmin’s Marikana mine in Rustenburg. The mining industry has since shed 35 000 jobs. Just last month Harmony Gold announced its intentions to cut a third of its workforce at its Kusasalethu mine, where it has been losing money since September 2012 when Amcu members participated in wildcat strikes. The strikes have led to workers’ earnings increasing by 15% in the two years since September 2012, but come at a cost as mining companies are selling and closing down mines.

After the platinum strike this year, South Africa’s largest platinum miner, Anglo American Platinum, announced plans to sell six mines.

4) The Post Office

It has been a busy year for the Post Office, which was caught up in numerous matters — except delivering the post. The ailing utility’s management battled to contain a crippling four-month strike over wages and its reluctance (at least initially) to permanently employ casual workers, some of whom have been in this category for years.

Mail began piling up at depots, mainly in Gauteng, and the Post Office lost many angry customers who turned to competing services such as the courier firms as a solution. This is business the Post Officemay have lost forever.

Among the countless costs to business, medicines for terminally ill patients were not delivered and long-distance learning materials for students did not reach their destinations. To add insult to injury, some striking workers turned violent, which led to 84 employees being injured, and Post Office vans and premises were torched in the chaos.

But the real trouble was evident when the Post Office could not afford to pay its workers in September and requested a loan of R320-million from the National Treasury. The next month, the Post Office again approached Treasury, cap-in-hand, this time for a guarantee of R700-million to allow it to continue operating in the short term.

By that time two directors had quit over the Post Office's shoddy governance — which includes R2.1-billion in irregular expenditure. The rest of the board voluntarily resigned in November allowing Telecoms Minister Siyabonga Cwele to appoint an interim committee to stabilise the business. Mercifully, the strike has ended — but that’s far from the end of trauma for the Post Office.

5) SA Revenue Services

Revelations that top officials at the SA Revenue Service had overseen a “rogue unit” that spied on taxpayers and politicians has left a stain on an institution seen as one of the few irreproachable state bodies around.

By the end of 2014, recently appointed SARS commissioner Tom Moyane had moved to purge his executive management team, suspending top officials including Deputy Commissioner Ivan Pillay, while others resigned.

The purge came alongside evidence, obtained by the Sunday Times, that SARS’ rogue unit had, among others, run a brothel and bugged President Jacob Zuma. Incredibly, the momentum driving the SARS debacle had its roots in a romance — between former lovers Johan van Loggerenberg, the head of SARS elite Tax and Excise Enforcement Unit, and Belinda Walter, the Pretoria-based attorney whose clients included figures under investigation by the unit.

The lovers’ acrimonious split lead to Walter filing a complaint against Van Loggerenberg at SARS in which she made a host of allegations including the existence of the rogue unit.

Although SARS vociferously denied any wrongdoing, claiming that it was being attacked by a network that included rogue state intelligence officials, its own panel appointed to investigate the allegations would later largely support Walter’s allegations and the series of damning Sunday Times articles.

According to the panel, headed by advocate Muzi Sikhakhane, there existed “prima facie evidence” that SARS operated a covert unit that illegally spied on taxpayers, including some of those it had cut deals with.

6) PPC and Ketso Gordhan

The hot-tempered resignation of Ketso Gordhan, the highly rated CEO of cement company PPC, sparked a boardroom bust-up that lurched from astonishing to farcical pretty quickly in the last few months of 2014. Gordhan resigned after the board refused to back him in “exiting” PPC finance director Tryphosa Ramano, but he then immediately tried to withdraw his resignation — an offer the board politely declined.

Since he quit, PPC’s share price has tumbled nearly 25% as revelations of just how dysfunctional the board had actually been continued to tumble out of the closet. In October, shareholder Foord finally had enough and called for a precedent-setting “special shareholders meeting” to replace the board. This seemed like the best (and only) route back into the executive suite for Gordhan, who was widely trumpeting his view that he wanted to come back and lead the company (presumably without Ramano).

The showdown never happened, however.

In the end, PPC’s board did a deal with the activist shareholders that meant the special shareholders meeting did not happen — a missed opportunity for investors to wield their power and demand change.

Darryl Castle has now been appointed CEO, and faces a daunting task. What of Gordhan, you ask? He remains out in the cold, despite saying last month, remarkably, that he was still hoping “a new board elected in January will understand that the current board is being seriously personal and petty in not inviting me back to be the CEO, and will make the right decision”.

Gallo Images/Thinkstock 

7) British American Tobacco

One of the most sensational stories to emerge last year concerned South Africa’s largest JSE-listed company, mammoth cigarette manufacturer British American Tobacco (BAT).

A detailed Business Times investigation revealed that BAT’s global anti-illicit tobacco unit, headquartered in the UK, had been allegedly illicitly conducting “corporate espionage” by paying South African agents to spy on its competitors.

Evidence obtained by Business Times showed how BAT had apparently paid these informants using international payment cards registered in other people’s names — a method that is illegal under international anti-terrorism and money-laundering law.

Under the guise of its war on illegal tobacco, BAT allegedly succeeded in placing agents as senior members within the Fair Trade Independent Tobacco Association, an industry body ostensibly established to represent the concerns of a body of “low-cost” cigarette manufacturers which represented the greatest threat to BAT’s market share.

The evidence emerging from the BAT spying debacle, which was attested to in court papers later in 2014, suggests that the independent tobacco association had been established in co-operation with elements in SA state intelligence with the view to monitoring the new wave of tobacco players.

BAT has consistently denied being involved in any illegal activity but has avoided facing up to questions on the spying allegations.

8) HCI: Marcel Golding and Johnny Copelyn

The sight of the almost-indestructible Johnny Copelyn — head bowed and tearful — at the AGM of Hosken Consolidated Investments in November, remains one of the lingering images on last year’s business pages.

Copelyn and long-time friend Marcel Golding, both trade unionists who had quit Nelson Mandela’s parliament to form HCI back in 1997, were considered an unbreakable partnership. Over the years, their combined deal-making nous lavished rich spoils on the investment company they sweated to build over the years. HCI assets included Tsogo Sun, Johnnic, e.tv, Seardel and KWV.

Then, as if from nowhere, HCI executive chairman Golding was summarily “suspended” by his former friend in October, supposedly for “misconduct”. Golding, true to his nature, wasn’t about to let it rest there and let rip with a series of astounding claims, including that Economic Development Minister Ebrahim Patel had sought to influence e.tv’s broadcasts to present a rosy picture of the ANC in the lead-up to the elections in May.

According to Golding, Copelyn and HCI director Yunus Shaik had no problem with e.tv — supposedly the last independent television broadcaster around — being used so insidiously to present propaganda on behalf of the ruling party.

But, much behind-closed-doors negotiation later, Golding agreed to walk out quietly. At the AGM, Golding and Copelyn sat together in a choreographed show of unity that fooled nobody, saying they would prefer not to comment further on the “sad” decline of the partnership.

Why had it happened? According to Golding: “People want control, they want power. It’s a lethal cocktail. Greed, power and ignorance.”

9) R699 scam

It seemed too good to be true — drive a brand-new car for as low as R699 in monthly repayments.

When the five-year-old scheme imploded in July, more than 20 000 consumers could suddenly no longer afford to pay for the cars.

In particular, the collapse embarrassed the big banks — Standard Bank, Absa and Nedbank’s Motor Finance Corporation — which collectively lent R2.8-billion in car loans to people who might not otherwise have qualified for the credit, and exposed poor lending controls at the finance houses.

One bank, however, came out smelling of roses — FNB, which rejected an offer to partner with Satinsky 128 — the company behind the sham — dubbing it a ponzi scheme.

Satinsky sold vehicles at low instalments to customers who received “rebates” if they displayed its advertising on the vehicles. The rebates were paid by Satinsky’s Hong Kong-based business partner, Blue Lakes Trading & Promotions, which suddenly stopped paying in June. If it paid the minimum of R570 monthly to each of the 29 000 customers affected, the company would have needed to fork out R16.5-million. It gets murkier too — the banks allegedly gained commission for their part in accepting customers through Satinsky.

The scheme was weakened, apparently terminally, when Absa terminated its relationship with Satinsky in 2013, exposing founder Albert Venter to a litany of complaints from furious customers.

10) Pinnacle Technologies

The bizarre arrest and release of Takalani Tshivhase, a director of computer hardware firm Pinnacle, nearly halved the company’s share price from R20 to R11.45 in March.

Tshivhase was accused of attempting to bribe a senior police R5-million to secure a R1.6 billion for Pinnacle. Charges were later dropped but the allegations have left an indelible mark on the share price.

The stock closed 2014 about 50% lower than at the starts of the year, trading around R12.

In a bittersweet end, the company was not ultimately awarded the deal, which involved the supply of 3000 MaxID devices — which read smartcards, passports and drivers' licences - to the SAPS.

The allegations were made 14 months after the bribery allegedly took place in January 2013. In August, the National Prosecuting dropped the charges due to insufficient evidence and Pinnacle's share price recovered to R14.15.

The company dodged another bullet when the Financial Services cancelled its investigation in September into potential insider trading, without taking action against the company, Tshivhase, CEO Arnold Fourie or director George Wiehahn. The trio traded stock to the value of R29-million shortly before Tshivhase's arrest was announced.