Sun sets on HCI’s plan to sell Tsogo properties

It was always going to be difficult to persuade the Tsogo Sun minority shareholders to buy into HCI’s plan to sell a chunk of the hotel and gaming group’s properties to Hospitality Property Fund.

In the end the R23bn plan had to be abandoned. The share prices of both Tsogo Sun and HCI have slipped on this week’s news. HCI is the controlling shareholder in Tsogo with 47% and is also the largest shareholder in Hospitality.

The plan was to sell a portfolio of seven of Tsogo Sun’s casinos and hotel businesses to Hospitality in exchange for shares, which would have resulted in Tsogo ending up with 87% of Hospitality. The deal would also have seen Tsogo split into three separately listed divisions focused on property, gaming and hotel management.

However, despite the best efforts of HCI CEO Johnny Copelyn, minority shareholders were not persuaded of the benefits of separating the casino operations from its properties.

They believe it would have increased the operating company’s risk profile, a belief that is supported by evidence from the UK.

HCI’s plan was no doubt influenced by the attractive tax treatment of real-estate investment trusts (Reits) such as Hospitality. If implemented Tsogo Sun would have handed over a huge chunk of its annual income in the form of rental to Hospitality. This would have been taxfree in Hospitality’s hands and would have been immediately paid out to shareholders.

The cash receipts would have been very useful for debtburdened HCI, which is trapped between pursuing attractive black empowerment opportunities and the need to maintain a substantial BEE shareholding.

Protecting its empowerment credentials means that HCI cannot take the obvious route of issuing shares to reduce debt levels as this might dilute its BEE shareholding. So, it’s back to the drawing board for one of the best-managed BEE groups on the JSE.

With margins of subsidiary Métier Mixed Concrete under immense pressure as a result of the depressed local construction sector, Sephaku Holdings is trimming its head-office costs.

As a starting point, the group says it will not replace departing nonexecutive directors Mpho Makwana, Rose Raisibe Matjiu and Kenneth Capes.

The JSE-listed company, with a portfolio of assets focused on the building and construction materials industry, is bracing itself for a tough operating environment that has resulted in low mixed-concrete volumes and pricing that hit Métier severely.

Métier’s performance in the six months ended September 30 was reflective of the state of the local construction industry. Earnings before interest, tax, depreciation and amortisation (ebitda) margin decreased from 13.01% to 8.31% mainly due to lower pricing.

While it waits for the market to turn and for the benefits of the government’s stimulus package to kick in, Sephaku is reducing its expenses. Métier sells readymix concrete to customers including building contractors and residential developers.

Other than not replacing the executives, Sephaku said other cost management measures included reducing travel expenses “and other noncritical operational activities”.

Only time will tell if the measures will make a dent in Sephaku’s operating profit, which stood at R160.4m in the six months to September.