PASSED OVER

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

Financial Mail - Investors Monthly - - Contents -

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.

Pic­ture: THINKSTOCK

Pic­ture: THINKSTOCK

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