RBR Capital Advisors
RBR Capital Advisors: OPEN LETTER TO THE BOARD OF DIRECTORS OF GATEGROUP
EQS Group-News: RBR Capital Advisors / Key word(s): Miscellaneous OPEN LETTER TO THE BOARD OF DIRECTORS OF GATEGROUP February 29, 2016 Dear Chairman and Members of the Board of gategroup, 1) Grow in emerging markets and retail on board. We have always pointed out that it is much safer and creates much greater value for shareholders if the company initially emphasizes cost savings rather than acquisitions. We would not be surprised if Gerard van Kesteren and the majority of investors, ourselves included, would back such a front-loaded strategy. checks and balances Corporate governance: We are convinced that the checks and balances at gategroup are not implemented adequately. While we believe that management should have a high degree of entrepreneurial freedom, we are very concerned about the lack of control and supervision exercised by the board. Many conversations with Andreas Schmid and management have led us to the unacceptable conclusion that the board has not reviewed any of the major contracts signed within the last 12 months. Furthermore, we cannot understand how the board can approve a group strategy without making a full review of all of the pre-existing major contracts. Overall, this situation cannot be supported and is a breach of the board’s fiduciary duty to shareholders. due diligence The assessment and approval of top management jobs by the board is flawed. We have already highlighted in our letter from June 24, 2015, that we have serious reservations about Messrs. Anbeek and Fisch continuing to serve on the executive management board. From our many conversations with Andreas Schmid, we conclude that the board has never properly assessed these gentlemen on the executive board. Furthermore, the appointment of Mr. David de la Torre as the Chief Commercial Officer of gategroup was executed without a proper assessment by the board and has consequently proved to be a fiasco. Given that he resigned within less than six months for “personal reasons” and already secured a new job within days of his resignation (!), our initial suspicions are confirmed that he was appointed for reasons other than his qualifications and ambitions. Financial targets: We have outlined in several letters and meetings (most recently in an e-mail from January this year to Julie Southern, Head of the Nomination and Compensation Committee, with Andreas Schmid CCed) that 8-10% EBITDA margins are an achievable and appropriate margin target for 2018. If you analyze the bottom-up measures that were announced on September 3, 2015, you will also come to a very similar conclusion. Adding up the savings from the announced white collar overhead reduction (we estimate CHF 40 million in ongoing savings) and the 10-25% of savings potential from CHF 400 million SG&A results in a total savings potential of CHF 80-140 million. This equals more than 250bps to almost 500bps margin improvement potential (from a basis of 5.6% in 2014). Interestingly enough, this does not even include any further margin improvement potential from better sourcing (we estimate 100-150bps margin improvement potential) and improved blue collar efficiency (we estimate 100-200 bps improvement potential). Even when taking some substantial headwinds into consideration, you end up well within the range of 8-10% for 2018. This does not compare to the figure announced, an artificially low margin improvement potential of 25-50bps p.a. by 2020. Despite several requests from our side, the board has failed to deliver any satisfactory explanation for this shortfall. Coincidentally, management has started to lower its guidance on expectations for 2016 earnings. Of the announced 300 headcount reduction, only 220 were actually carried out by the year’s end, and it seems that the remaining 80 will not be leaving as certain plans regarding IT have changed in the interim. At the same time, management has communicated that only 10% of the targeted 10-25% savings on SG&A can be realized. Moreover, substantially less than 10% will be achieved within the next 12 months. As far as we understand, best practice would be to achieve substantial savings in SG&A within the first three months from inception. gategroup management has had this mandate since April 2015 and has not made any significant savings to this day!
Management incentive plan: Ever since we started our discussions with Andreas Schmid we emphasized that an appropriate management incentive plan is paramount to achieving ambitious targets and aligning management and shareholder interests. We conclude from our last e-mail exchange with Julie Southern, that to our dismay, no new long-term incentive plan is in place. We are seriously concerned that Andreas Schmid as Chairman might not be giving this issue the full consideration it deserves. We are not surprised that management is lowballing expectations for earnings as long as their incentive plan is up in the air. We are convinced that we are not the only shareholders who think this mismanagement is a waste of shareholders’ time and detrimental to the company’s reputation and performance. Gategroup handles stock exchange regulations on ad hoc publicity arbitrarily to suit its narrow interests. Last year, gategroup received our formal request regarding agenda items and motions on February 11 and did not publish this ad hoc relevant information until March 2. Furthermore, the information contained in the press release contained intentionally misleading information. gategroup confirmed four of our five board candidates and talked about a fifth unconfirmed candidate. The fifth candidate was in fact Paolo Amato, and 10 days later his name showed up on the list of candidates of gategroup. This year, however, gategroup decided to make our informal discussions public without even having received our formal request letter and without awaiting the names of all of our candidates. Based on all of this, we have decided to give shareholders an opportunity to have a better board of directors. Since the listing of the shares, Andreas Schmid has been the only candidate available for the position of chairman. Given his track record and gategroup’s calamitous performance under his leadership, we believe it is preposterous to claim that it would be in the best interest of the company and the shareholders to not give shareholders a better alternative. Anthonie Stal has been on the board of directors since 2009, which includes the time period of the infamous fraud scandal. Under his tenure, the board approved the highly controversial share incentive scheme which rewarded the board of directors with an excessive share payout with no relation to any operational performance targets. At last year’s presentation of the candidates for the board of directors, which was held in Zurich ahead of the AGM, he was notably absent because he missed his flight. On paper, Remo Brunschwiler looks like the perfect candidate for a board of directors. Nevertheless, we would like to bring to the attention of all gategroup shareholders that Remo Brunschwiler was part of the defamation of one of our candidates for the board of directors last year. While we understand that during a contest there will be heated arguments, we are convinced that certain behavior is absolutely off limits and that it raises serious questions regarding Brunschwiler’s moral and ethical standards. Therefore, we will recommend to all shareholders that they not re-elect Andreas Schmid, Anthonie Stal and Remo Brunschwiler. We firmly believe that it is in the best interest of the company and all stakeholders to continue down the path of improvement and rejuvenation of the board of directors which was already set at last year’s AGM. We can assure you and all shareholders that we want the best possible solution for the company. Therefore, we are going to correct the grave error in judgement of the board and propose Gerard van Kesteren for re-election. In addition, we will propose a new, highly-qualified and independent individual as well as a representative of the largest shareholder, RBR and Cologny, for the board of directors of gategroup. There is no need to introduce Gerard van Kesteren. We are simply honored and fortunate to have such a high-quality individual willing to represent all shareholders on the board. We admire him for his business acumen and even more so for his highest standards of integrity. His involvement is an indispensable guarantee that a new era has started at gategroup. We are very pleased to propose Nils Engel as a new independent candidate to the board of directors of gategroup. Nils Engel, a Swiss citizen, has an impressive CV as an entrepreneur and as the former CEO of BZ Bank, a boutique investment bank with strong Swiss roots and one of the earliest and most vocal defenders of shareholders rights in Switzerland. Having spent his formative years at BZ Bank and ultimately attaining the position of CEO, Nils Engel has vast experience in advising CEOs and board members of publicly listed companies. He has a keen knowledge of shareholder value creation and proper corporate governance. As an entrepreneur, he manages and develops a franchise network for Burger King, which gives him first-hand experience in the food and hospitality industry. Needless to say, gategroup could greatly benefit from his experience: Burger King implemented best-in-class, zero-based budgeting, which has led to substantial operational improvements and windfall profits for shareholders. Lastly, a few words as to the motivation of RBR and Cologny, as the largest shareholder of gategroup, for deciding to propose Rudolf Bohli, a Swiss citizen, as a board candidate. As the largest shareholder in gategroup, we have a vested interest in seeing gategroup prosper. Our fiduciary duty to our investors is aligned with the interest of all shareholders of gategroup. We are committed to improving corporate governance, strengthening the management team and achieving industry leading performance. In addition, we support the re-election of Julie Southern, Fred Reid and David Barger to the board of directors as they contribute the critical airline expertise and network. This expertise was lacking on the board until the last AGM. As a further sign that it is not our intention to gain undue weight on or control of gategroup’s board, we specifically decided not to propose a candidate for chairmanship. We ask the current board to propose an alternative candidate for chairman. We will continue our dialogue with the current board of directors. As Swiss citizens versed in our tradition of Swiss diplomacy, we remain open to a consensus solution, but we cannot compromise on the fundamental requirements of proper corporate governance: Investors have waited too long. In fact, it has been eight years of dismal underperformance, beset by a fraud scandal. It is time we all focus on the future and the great potential of gategroup and leave the unpleasant past behind us. We look forward to the shareholders expressing their views at the AGM and always remain at your disposal with our best interests for the company in mind.
Rudolf Bohli Jonathan Herbert +++++ Additional features: Document: http://n.eqs.com/c/fncls.ssp?u=YSAJDRKMJH Document title: OPEN LETTER TO THE BOARD OF DIRECTORS OF GATEGROUP
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