The Fridjhon-Sawit clash 17 August 2006

A response to the Sawit allegations against Michael Fridjhon

Grape recently published, as a news item, the text of a letter by the Trustees of the South African Wine Industry Trust (Sawit), in which they expressed outrage at an article by Michael Fridjhon in Business Day, 'Knotted deal leaves a bitter aftertaste'. The subject matter: KWV's BEE deal, and the loan from Sawit which, as was recently announced, was to be withdrawn.

We have received a substantial paragraph-by-paragraph response to the claims coming from the Sawit Trustees. We know the identity of its author, but anonymity was requested for reasons we accept. The author, we are confident, is well placed to make a valuable input to the emerging debate (though not involved in it thus far).

Because the response deals closely with the Sawit letter we reproduce that here too, in green italics and indented.

SAWIT LETTER: Your wine correspondent Michael Fridjhon (Wine Industry, ‘Knotted deal leaves a bitter aftertaste’: Business Day July 24) says he ‘can hardly pretend to be impartial.’ He is right. Moreover, his article contains numerous inaccuracies and defamatory allegations.

He states the ‘romance’ between South African Wine Industry Trust (SAWIT) the Industrial Development Corporation (IDC) and the KWV is ‘officially over’ – referring to SAWIT-supported empowerment group Phetogo acquiring 25.1% of KWV, and comments ‘divorce is never a pretty business.’ A call to the SAWIT chairman, CEO or trustee he singles out - a basic tenet of journalism - would have established that no ‘divorce’ has occurred. As Business Day reported the following day. Without, however, informing readers that they had been previously misinformed by your correspondent.

RESPONSE TO THE SAWIT LETTER: The divorce, between SAWIT and Phetogo, was announced by Charles Erasmus himself stating that SAWIT is not happy with the transformation achieved by Phetogo within KWV. Erasmus confirmed that RAINN (a consulting company) was appointed to investigate the empowerment and/or transformation achievements of the investment.

In the interest of transparency it will help if Erasmus will make the RAINN report available. We can all learn how to or not to do empowerment deals in the wine industry.

There have been, unsurprisingly given its complexity, difficulties in bedding down this BEE deal but the gains recorded by Phetogo shareholders offer opportunities for earlier-than-contracted settlement of SAWIT’s financing so the Trust can recycle funds to other projects.

The SAWIT loan, R135 million at 1% interest the first year and 2% the next (as confirmed by Sakkie van der Vyfer, ex PWC Director, and full time advisor to Erasmus), is extremely generous. It is impossible to find similar funding in the open market. So once again it is in the interest of the public to understand how to do similar deals in the wine industry.

The deal is bound by complex (but not ‘opaque’ as Fridjhon alleges) legal contracts, drawn up by SAWIT’s lawyers, Sonnenberg, Hoffmann and Galombik.

It would be interesting to see the final transaction cost (SFG and HSBC working on behalf of SAWIT) of the deal and how much of this was funded by SAWIT as a grant to Phetogo.

Fridjhon asserts SAWIT ‘Trustees who signed off the [KWV-Phetogo empowerment] deal – and who included wine savvy people such as John Platter – are strangely silent about the whole sorry business.’

Erasmus and Sakkie van der Vyfer spoke to the media, but the Trustees were silent. A full shareholders' register of all the Phetogo shareholders will go a long way in supporting the independence and interest of all Trustees.

This broad-based deal draws together many thousands of new Black shareholders from winelands and countrywide groupings, including trade unions and 300-plus of KWV’s own Black staff. Fridjhon’s claim that these were ‘largely well-heeled’ is not true. These shareholders are now direct stakeholders in the wine business, an historic advance in a largely white-run industry, The value of their holdings has appreciated by more than 80% since 2003. ‘Sorry business’?

The release of the RAINN report will help independent observers to decide if the direct shareholding indeed translated into 'empowerment'. The first response of Erasmus, after reading the report, seems to indicate that 'no' real transformation was achieved by the investment. Hence his announcement of the withdrawal of the SAWIT loan to Phetogo.

Until we know who the shareholders are, the public and media will continue to speculate. I am not sure if Carmen Stevens, Bonile Jack, Peter Volkwyn, etc are 'well-heeled', but then again one is not sure if they are part of the deal. The point remains: who are the shareholders and what role do they play as shareholders?

‘Strangely silent’? Chairman Dr. Thandi Ndhlovu and CEO Charles Erasmus are available for interview and fact-checking.

The wider wine industry is interpreting the deals and silence on what is happening in SAWIT from a different perspective. Thandi Ndhlovu recently did a deal with Boland Kelder. It would be interesting to know if this deal was funded by SAWIT.

The previous chairperson, Gavin Pieterse, manage to get a huge consulting contract (widely published in various media) from SAWIT while he was the chairperson. This was done, apparently, with the consent and blessings of the Tustees (including John Platter, Mike Ratcliffe).

It was only after constructive criticism in the media that Pieterse resigned as chairperson. Therefore it is in the interest of the current and previous trustees, such as Platter, to be as transparent as can be.

So is Platter, though retired as a trustee. Fridjhon called none of them, flouting another basic tenet of responsible journalism, the right of simultaneous reply to serious allegations.

Fridjhon mentions a ‘mountain of debt’ incurred by Phetogo. A common feature of virtually all BEE and M&A arrangements is gearing: the Trust’s financial advisers, the IDC and KWV all approached the Phetogo agreements with financial sustainability in mind.

Fridjhon claims the KWV shares were purchased ‘at a price significantly higher than the average for the six months preceding the transaction.’ In fact, the shares were purchased at a discount.

The public do not have the information. The shares bought from the group of JP du Plessis, GT Ferreira, Thys Visser, etc (or asset strippers as Lourens Jonker, previous KWV chairman referred to them) were not bought at a discount. Please let us know what was paid for the shares bought from VINPRO. Surely you don’t except the wine public to blindly believe that what you are saying, without any evidence, is true?

Fridjhon says the trustees who agreed to the deal ‘should be held accountable for their cavalier disregard of fiduciary obligations’ and that the new board ‘might do well to consider initiating a witch hunt surrounding the activities of its predecessors.’ He says the trustees had ‘no …qualms’ about not complying with ‘the objectives of the Trust Deed.’

These are wild and grave libels.

Whatever the merits or otherwise of the Phetogo-KWV deal, the trustees applied their minds, with the best of intentions, fully aware of their fiduciary responsibility. They deliberated lengthily and earnestly on the deal, championed by Minister of Agriculture Thoko Didiza.

Only after Ministerial assurances that extra monies would be sought to “top up” SAWIT coffers so as to enable SAWIT to support other projects until repayment of the Phetogo loans, did the full complement of Ministerial trustees agree to proceed. The SAWIT Trust Deeds were amended, to free up previously ring-fenced and unutilized sinking fund monies; Sonnenberg, Hoffmann & Galombik drew up the documents to ensure legal compliance.

The unilateral way in which Erasmus called in the loan (if one can believe the media) seems to contradict your statement of assurances to 'top up' SAWIT coffers. Why is he calling for the money stating that SAWIT needs the money?

In support of his call for a ‘witch-hunt’, Fridjhon states that KWV trustees ‘seem to have voted with the interests of the KWV, rather than the Trust, in mind.’ A SAWIT quorum and majority can be obtained even if KWV trustees recuse themselves, which in this case they did for obvious reasons.

His take on the VAT squabble is simplistic and inaccurate. Some of SAWIT’s activities are vattable, others not; after considerable deliberation between the Receiver, lawyers and financial consultants, an equitable compromise was reached.

Fridjhon is clearly unaware of these and other salient facts and developments.

It seems that Fridjhon is right, according to your response, with respect to SAWIT paying VAT. However he stated a figure of R50 million. What is the amount? The recent discount, of R18 million, Erasmus gave to KWV on settling their debt early brings the total discount to R68 million. Please be transparent and let us know the truth.

When the Minister chose not to renew his term as SAWIT Chairman, the succeeding trustees, after serious deliberation, embarked on different strategies. These eventually overcame much of the previous litigious, adversarial, stalemated relationship between the KWV and the Ministerial trustees. (As epitomized in Fridjhon’s reference to the KWV as ‘former wein-fuehrer’).

Fridjhon’s allegations are outrageous and he and Business Day owe the trustees an unambiguous apology.