by Richard Coulson
First published in The Tribune
The whiff of confusion arising from Bahamas Supermarkets has become the acrid odor of high-level mistakes. The painful statements made by Chairman Basil Stands at the recent AGM in releasing the company’s audited reports (nine months late) raise serious questions of corporate governance in a famous retailer patronized by nearly every Bahamian. What we see now is a public company:
• whose directors for two years had no clear idea of its earnings (which turned out to be losses that could reach $10 million) and yet declared dividends of over $10 million.
• that has never divulged the beneficial owners of the secretive holding company that owns 78% of its shares.
• that is effectively controlled by a foreign concern that holds the largest equity interest.
• that by refusing to list on BISX, has stifled corporate disclosure and paralyzed share trading by the 2,000 Bahamian shareholders who own 22% of the company.
It’s not the hard-working check-out ladies, stock clerks, or sales tabulators who have done anything wrong. Any fault lies with the directors, who operate in the glaring absence of any Bahamian laws enforcing corporate transparency or bestowing rights on minority shareholders.
The news at the AGM was long anticipated but still shocking when announced. For months it was known that the KPMG audit for the year ended June 2007 was delayed because the company could not produce valid figures for the auditor’s review. Finally, a few months ago the company hired a separate team of accountants that worked tirelessly (and of course expensively) to help KPMG complete the task. At the last moment, the audit was produced, dated July 28, 2008, just meeting the legal deadline.
Compared to the $8 million profit in 2006, the audit showed a small loss for 2007, while the directors had earlier been expecting a profit of some $4.7 million. Surprise, surprise! And worse, the Chairman had to warn of probable major losses, around $10 million, for the latest fiscal year just ended this June – to say nothing of the current year forecast.
The seeds of this corporate shambles were sown over two years ago. Until that time, the company had been controlled by Florida’s Winn-Dixie and had jogged along pretty comfortably, with the 22% Bahamian minority getting monthly dividends. But with the bankruptcy of Winn-Dixie, Bahamas Supermarkets suddenly was “in play”, and two groups entered competing bids. The initial front-runner was backed by two local businessmen, Jerome Fitzgerald and Mark Finlayson, but was pipped by a higher offer from a new special-purpose company, BSL Holdings Ltd., who had to come up with $56 million in cash for 78% of the 4,560,000 shares outstanding, or about $16 per share. Of course, this offer was not made to the local Bahamian shareholders!
The composition of BSL, and the source of its funds, were then and remain to this day something of a mystery. Royal Bank provided a hefty acquisition loan, and at first it was rumored that Abaco Markets was the main equity backer, but this was officially denied. It appears that one of Abaco’s major shareholders, Franklin Butler, took a piece, since he remains a Supermarkets director. It can be guessed the Fidelity Group or its clients were involved, since Fidelity CEO Anwer Sunderji sits on the board and is credited with being the creative mind behind the deal. The foreign Barbados Shipping & Trading wanted to invest, but under our Government policy could not take direct equity and instead provided a $10 million convertible loan, in return for a couple of directorships.
After the buy-out was completed in mid-2006, the first serious mis-step was taken in early 2007 when Supermarkets abruptly terminated the one-year Transition Services Agreement with Winn-Dixie. According to Bryan Knowles, the Supermarkets CFO who resigned last May, this decision by the directors was opposed by management because the necessary back-office support systems had not yet been replaced. This led to a breakdown of the company’s reporting and accounting controls and the resultant failure to complete a timely audit.
Chairman Sands told the AGM that his previous (and wrong) estimate of $4.7 million profit in 2007 was based on bad information given to him by Knowles and Supermarkets management. To protect his professional reputation, Knowles has fired back with a press statement that he should not be blamed since he repeatedly warned the directors of the accounting issues and doubts about earnings. It’s pretty rare to see a dispute on internal corporate issues so publicly aired.. Whoever is right, it shows a break- down between management and board, for which the directors must ultimately bear the responsibility. Indeed, Sands made the remarkable admission that the directors could have “acted with greater speed and questioned management more aggressively” – almost a flat condemnation of himself and fellow directors in their oversight function..
It was during this fiscal year ended June 2007, when earnings were highly uncertain and eventually recorded a loss of $189,000, that Supermarkets paid dividends totaling $7,592,000. Early in the following fiscal year the directors approved two more dividends totaling $2,736,000 – this being a year when Chairman Sands now says a loss of $10 million may be expected.
These whopping “dividends from losses” were paid to meet one need: BSL Holdings had to be reimbursed for the $56 million cost of its ambitious acquisition, which includes servicing the $24 million loan from Royal. The dividends and operating problems have starved Supermarkets’ cash flow and, as forecast by Sands, will destroy earnings for at least another year.
In this state of affairs a “white knight” has appeared from beyond our shores . Barbados Shipping & Trading, the original lender to BSL Holdings, has been acquired by Neal & Massy, a Trinidad-based supermarket chain, and persuaded Government to permit conversion of the loan to equity, giving the foreign group the largest single equity stake in Holdings and thus becoming the controlling shareholder of Supermarkets. This control is clearly for real, since the new Supermarkets spokesman on all significant matters is director Anthony King, CEO of Barbados Shipping, which has had to sink another $5 million into the Nassau companies.
The audit report reveals even more levels of foreign control, as Supermarkets was party to three separate agreements with companies from Trinidad and St. Lucia under which it paid for “Management Oversight”, “Store Management Suite Services”, and “Technical Support Services”. Bahamians will certainly be surprised to learn that this expertise could not be found locally. One wonders how Government regards this gaping hole in its policy of “retail is for Bahamians”.
One also wonders how the silent 22% Bahamian shareholders now value their investment in Supermarkets. The quoted over-the-counter share price of this non-BISX company is a meaningless joke, since the price has not moved from the long reported $15. Any share trading is invisible, since the two so-called dealers in the stock, Fidelity and Colina, provide no information whatever about any trades they may have executed. At the least, a listing on BISX would have provided some market discipline, as the Exchange would have insisted on full disclosure of ownership and formally suspended trading until the annual report was finally produced.
At present, trading on BISX would provide some market guidance for valuing the company, as the quoted price would have crashed after news of the losses. For the public shareholders, the future looks bleak, with illiquid shares and losses that will nullify any speedy renewal of the stream of dividends they enjoyed in years past. In short, the buy-out from Winn-Dixie has been a calamity for these investors. Once again, Bahamian minority shareholders are suffering from actions over which they had no control.
Looking forward from this sorry history, one can only speculate whether some smart lawyer might organize these people to make a claim charging that the directors failed to act “in the best interests of the company”, as required by Section 81 of the Companies Act. Under our jurisprudence that seems a long shot, but certainly not in the US or the UK, so who can tell?
Commercially, the negative publicity surrounding Bahamas Supermarkets may help its head-to-head competitor Super Value. Although their products and services are much the same, shoppers are drawn to a business created, owned and run by a hands-on Bahamian who’s often seen patrolling the shop floor. Maybe removing one’s buying from Supermarkets could be likened to kicking a man when he’s down – but maybe a good kick is just what’s needed.
Nassau, Bahamas, September 28, 2008
Mr. Coulson has had a long career in law, investment banking and private banking in New York, London, and Nassau, and now serves as director of several financial concerns and as a corporate financial consultant.
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