Adrian Gore protects wealth with Discovery put options

Discovery CEO Adrian Gore bought put options on the company’s shares to protect his wealth in case the share price declines below R95.50.

The CEO also sold European call options with an average strike price of R153.37 per share, thereby betting against the share price increasing above this level.

This was revealed in a SENS announcement from Discovery released after market close on Friday, 17 May 2024.

In simple terms, a put option gives you the right to sell a stock at a certain price within a certain period.

A put option is bought when someone suspects a company’s share price will go down and is bought as “insurance” to protect their wealth from this decline.

Conversely, a call option gives you the right to buy a stock at a certain price by a certain date.

A call option is bought when someone suspects a company’s share price will go up and they want to profit from this growth.

Discovery explained in the SENS announcement that Gore’s hedging transactions are “related to funding arrangements entered into to follow various rights offers and subscriptions for Discovery shares over time”.

Discovery told Daily Investor that this was not a naked put option and the two transactions outlined in the SENS are collectively an ongoing hedging strategy for the funding of Gore’s shares, rather than him taking any position on the expected movement of the share price. 

They said the transaction is a continuation of a strategy that was initiated in 2013, which is necessary to update over time, that relates to Gore following his rights at the time of a rights issue, preferring not to be diluted.

“This transaction replaces the existing hedging strategy in exactly the same way the earlier associated transactions did, as announced in 2016, 2019 and 2020. The mechanics of this offer a small window for fulfilment, so there is little option around the timing,” the company said.

Gore took out these put options on Monday, 13 May 2024, when the company’s shares were trading at around R116.62.

The company’s share price tanked the day after – 14 May 2024 – to R107.21 after President Cyril Ramaphosa said he’d sign the widely opposed National Health Insurance (NHI) Bill into law.

Shares in Discovery and other South African medical insurers slumped after this announcement.

Despite widespread criticism of the legislation, Ramaphosa assented to the NHI Bill on Wednesday, 15 May 2024.

Discovery’s shares dropped as much as 7.4%, the most since March, while its peers, including Momentum Metropolitan Holdings, Sanlam and Old Mutual, also traded lower.

The NHI Bill provides a framework for providing universal care through a state-run fund. In addition, it bans the private sector from financing any treatment the NHI provides.

Ultimately, the legislation aims to provide quality health care for the 85% of South Africans who have no medical coverage and rely on a decrepit public system with too few doctors.

According to Bloomberg data, Discovery derives about 34% of its earnings from its South African health division.

Avior Capital Markets analyst Adrienne Damant told Bloomberg that under the NHI Bill, that division will no longer be allowed to operate fully.

“Ultimately, it’s an essential part of Discovery’s business that regulation is outlawing,” she said.

South Africa’s FTSE/JSE Health Care Providers Index was among the biggest decliners on the JSE on Tuesday, 14 May. 

Hospital operator Netcare led the retreat in the healthcare sector, falling 5.7%, the most since April 2023. Shares in Life Healthcare also dropped 2%.