Big private equity players are still smarting from their ill-timed acquisitions in the years leading up to the financial crash in 2008, writes Sikonathi Mantshantsha
SA out of the private equity boom loop
Exits from the global private equity industry reached a record of almost $500bn during 2014. These were disposals of assets acquired during the boom years before the economic crisis hit markets in 2008. The higher ratings afforded to equity markets in the US and Europe were aided by the record stimulus packages that ran for many of the years since the recession in the major markets. The previous record of $354bn was in 2007, just before the economic wheels came off.
This year’s figure was 67% higher than private equity’s 2003 exit figure of a not insubstantial $305bn, says Bain & Company in its 2015 private equity report for this year. “Public equity markets in Europe and North America had registered strong gains in the preceding year, laying a solid foundation for initial public offerings,” says Hugh MacArthur, Bain’s head of global private equity. That came off 1 250 transactions, compared with the 1 219 deals concluded in 2007, says Bain.
Private equity house KKR completed one of the major transactions when it sold UK pharmacists Boots Alliance to US drug retailer Walgreen Company for $25,1bn.
The desires of cash-rich buyers feeling investor pressure to deliver growth, coincided with private equity players’ need to exit after a long and tricky investment season that had to survive the worst global economic recession since the depression of the 1920s. “In the end, exits in 2014 shattered even the lofty expectations of an industry primed for a good year,” says Bain in the report.
This private equity wave, however, passed SA by. No major corporate action materialised as the big private equity players are still smarting from their ill-timed acquisitions in the years leading up to the crash of the world’s financial system in 2008. The new owners of assets ranging from retail giant Edcon to cement producer Afrisam and gaming house Peermont Global still have their hands full trying to service the crippling debts they incurred to acquire their respective assets.
Bain Private Equity’s acquisition of Edcon in 2007 was one of the biggest buyouts in SA at R25bn, funded with debt, and soon proved to have been too optimistic as the equity markets succumbed to the subprime crisis. The Afrisam Consortium’s acquisition of the SA operations of cement maker Holcim the same year was equally optimistic. No sooner had the deals settled than global economic activity crawled to a fraction of what was required to service the debt incurred by the companies to fund the acquisitions.
Edcon is still struggling to repay the debt, estimated at R23bn, and has intimated at a restructuring of its business. That can only mean selling off noncore assets and store closures. It is still investigating its options. On top of the acquisition price, Bain had to inject R8bn worth of capital in 2010, when it realised the entity needed to be recapitalised to lower its debt.
Cement maker Afrisam also had to be rescued by new investors in 2011 and 2012, when the Pembani Group bought the debt owed to major US and European funds who were worried about the company’s precarious finances. Together with the Public Investment Corp (PIC), Pembani converted this debt to equity, flushing out Bunker Hills Investments, which had bought 60% of the company from its Swiss owners only six years previously. The PIC, which had provided most of the buyout money, had acquired a 20% stake in Afrisam.
Pembani and the PIC injected about R6bn in fresh equity to stabilise the operation in 2012. Together they now own 96% of Afrisam, with Pembani holding 30,5%. As a means to put the operation on a sound financial footing, Afrisam in February proposed a merger with its bigger rival PPC. A merger would limit competition in a saturated cement market awash with cheap imports. After a month-long
Desires of cash-rich buyers feeling investor pressure to deliver growth, coincided with private equity players’ need to exit
Exits in 2014 shattered even the lofty expectations of an industry primed for a good year
investigation into possible synergies, PPC rejected the proposal and ended the talks, saying the synergies would not be enough to justify a deal. That leaves Afrisam to paddle its own canoe in a rough operational sea where it has had to delay its expansion beyond SA’s borders.
Pembani executive chairman Phuthuma Nhleko in 2011 said expansion into the rest of Africa was the best opportunity for the company, but there has been no action on that front since he succeeded in dislodging the previous owners. The 63% that Afrisam owns in Tanzania’s Tanga Cement remains its only asset outside SA. Afrisam has been turned around and is now on a sound financial footing, says Rob Wessels, an executive director at Pembani and an Afrisam nonexecutive director. A privately owned entity, Afrisam does not publish its financial records.
A deal with PPC would have been a potential life-saver for Afrisam. PPC has a strong pipeline of investment opportunities outside SA that will add a third of capacity within about two years. Entrepreneur Nhleko, the chairman of Afrisam, would get an opportunity to realise his African dream in a combined entity without having to gear the company up again. But it isn’t that easy, and Afrisam has to trundle along on its own.
Casino and leisure company Peermont, on the other hand, is also the subject of an opportunistic buyout to take advantage of its weakened financial position following the R7,3bn private equity buyout of 2007. Empowerment entity the Mineworkers Investment Company (MIC) became a major shareholder after a debt-laden transaction from which Peermont has never recovered.
Subsequent debt restructurings have failed to deliver the desired outcome. Enter Sun International in March with a bid to acquire the entity for R9,43bn. That proposal is still before investors to consider, but the MIC’s 25% is certainly up for grabs as the empowerment entity has always intimated it would be a keen seller at the right price. Though a deal is not a foregone conclusion, Peermont’s owners do not have too many options.
Selling to Sun International will leave the entity in capable hands while also giving them much needed relief from the strangling debt they took on to acquire the assets. The most attractive asset in the Peermont stable is the Emperors Palace casino outside Johannesburg.
The aborted Afrisam/PPC transaction, as well as the Sun International/Peermont deal under consideration, mean private equity buyouts in SA will be forced sales, instead of the traditional profitable exit that has characterised the global trend. It is still not clear how Edcon will resolve its situation. What is clear is that things are also less than rosy at the company, which in February even entered into a section 189 arrangement to retrench some of its employees.
Though these three major private equity transactions were the biggest in recent memory, they were certainly not the only ones. Others were more successful, even though we have yet to see the exit of the private equity players involved.
The MIC, a long-term investment entity, has been steadily increasing its stake in broadcast house Primedia, which it acquired in a private equity buyout with Brait in 2007. It has gradually bumped up its holding to just under 50% now, from below 30% when it started. A listing of the broadcast house is not in the offing as the BEE investor has no need to exit, it has said. MIC has also used profits from its Primedia stake to fund acquisitions in financial services companies such as FirstRand.
Glass maker Consol has turned out to be a solid operation under the stewardship of Brait, though it is difficult to gauge operational performance. It has dabbled in renewable energy products to take advantage of the poor state of affairs at electricity provider Eskom.
Brait has also had a profitable exit from its investment in mass clothing retailer Pepkor. Last year it agreed to sell its 37% stake to Steinhoff International for R15bn cash and 200m Steinhoff shares. The deal means private equity house Brait will take the cash from an investment that it has held since facilitating the delisting of Pepkor from the JSE with serial entrepreneur Christo Wiese, who will remain one of the major Steinhoff shareholders after the deal.
If the few private equity successes of Brait and the MIC are anything to go by, then it can be safely concluded that the industry in SA has had a mixed bag of failures and successes. It is notable that Africa, and by that we really mean SA, did not get a mention in the Bain & Company private equity report. That is hardly surprising, given the pedestrian 1,5% annual economic growth of powerhouse SA.
The major private equity deals, both those successful and the less than successful ones, were concluded during the boom times when SA’s GDP growth touched 5% in the years to 2007. It is to be hoped that serious private equity activity will return once the country resolves its debilitating energy crisis in the next five years, thereby kickstarting sustainable growth.