The prob­lem with Rem­gro

The skewed listed-un­listed po­si­tion stems mainly from the enor­mous suc­cess Rem­gro has en­joyed by back­ing pri­vate hos­pi­tals group Medi­clinic, writes Marc Hasen­fuss

Financial Mail - Investors Monthly - - Front Page -

Maybe the smaller in­vest­ments will have a val­ueen­hanc­ing role at a later stage — per­haps with the ben­e­fit of cor­po­rate ac­tion

The stature of Rem­gro* as a com­pelling in­vest­ment ve­hi­cle on the JSE is, it seems, once again open to ques­tion.

A decade ago Rem­gro was viewed as a bor­ing in­vest­ment counter, a per­cep­tion that started chang­ing only when the late (great) CEO Thys Visser started shak­ing things up in the port­fo­lio.

These days, Rem­gro is hardly bor­ing — but to some in­vestors the JSE’s premier in­vest­ment ve­hi­cle might be in­creas­ingly look­ing like a vic­tim of its own suc­cess(es).

As things stood at the end of the in­terim pe­riod on De­cem­ber 31 2015, Rem­gro was to all in­tents and pur­poses a re­flec­tion of its large listed in­vest­ments. The big­gest five listed in­vest­ments — pri­vate hos­pi­tals group Medi­clinic, the RMBH/ FirstRand bank­ing hub, the RMI in­surance clus­ter, RCL Foods and liquor giant Dis­tell — gen­er­ated al­most all Rem­gro’s earn­ings.

In terms of value, the big five rep­re­sented 78% of the R153bn net as­set value. If other listed in­vest­ments or listed prox­ies — such as Grindrod and e-Me­dia — are in­cluded, this fig­ure shifts through the 80% mark.

This is not ideal for a com­pany that, not too long ago, in­di­cated a pref­er­ence for un­listed in­vest­ments. In truth, Rem­gro does have an ar­ray of in­ter­est­ing un­listed in­vest­ments — rang­ing from the R9,4bn hold­ing in con­sumer brands giant Unilever to a R745m po­si­tion in glass group PGSI.

The prob­lem is that the un­listed in­vest­ments (apart from Unilever, per­haps) don’t re­ally come into reck­on­ing now that the port­fo­lio is dom­i­nated by listed in­vest­ments. To be hon­est, the skewed listed-un­listed po­si­tion stems mainly from the enor­mous suc­cess Rem­gro has en­joyed by back­ing pri­vate hos­pi­tals group Medi­clinic. This ven­ture was started in Stel­len­bosch by Rem­gro di­rec­tor Ed­win Hert­zog in the 1980s, and has grown from a large lo­cal player into a sprawl­ing in­ter­na­tional busi­ness with a pri­mary list­ing on the Lon­don Stock Ex­change.

Rem­gro CEO Jan­nie Durand is prag­matic about de­vel­op­ments — specif­i­cally the emer­gence of Medi­clinic as the dom­i­nant in­vest­ment in the R150bn port­fo­lio. “We in­vest in good busi­nesses, and Medi­clinic has en­joyed a spec­tac­u­lar per­for­mance. We de­lib­er­ately in­vested heav­ily in Medi­clinic, and we are happy with the way things are fall­ing into place.”

Philo­soph­i­cally, though, hav­ing an in­vest­ment com­pany loaded mainly with listed hold­ings does ar­guably make Rem­gro less com­pelling as an in­vest­ment ve­hi­cle than smaller coun­ters like Brait, GPI, Sab­vest or AEEI.

In the case of the lat­ter four, the main value propo­si­tion lies in un­listed in­vest­ments that can­not eas­ily be ac­cessed (if at all) other than through the listed in­vest­ment com­pany.

In the in­stance of Rem­gro, it is pos­si­ble to cus­tomise a “replica Rem­gro” by choos­ing the mix of listed in­vest­ment hold­ings that suits in­di­vid­ual risk and re­ward con­sid­er­a­tions. With Rem­gro’s dis­count to in­trin­sic value nar­rowed, an in­vestor could feel jus­ti­fied in com­pil­ing a “Rem­gro-lite” by buy­ing Medi­clinic, RCL Foods, Dis­tell and Grindrod — but avoid­ing the

fi­nan­cial ser­vices as­sets such as RMBH, FirstRand and RMI as well as Rem­gro’s mixed bag of pe­riph­eral in­vest­ments.

The one thing in­vestors do re­lin­quish by buy­ing only parts of Rem­gro is ac­cess to a man­age­ment team that has proven over decades to be a smart al­lo­ca­tor of cap­i­tal and an as­tute as­ses­sor of risk.

But could it be ar­gued that in­vestors can af­ford to forgo the value that man­age­ment brings to Rem­gro be­cause man­age­ment’s ef­forts will prob­a­bly still be re­flected in the larger listed in­vest­ments.

Be­fore ques­tion­ing the rel­e­vance of Rem­gro as an in­vest­ment ve­hi­cle, it’s per­haps in­struc­tive to go back to 2012 when the com­pany re­it­er­ated a com­mit­ment to en­sure share­holder value was un­locked. This would be done by clean­ing up the in­vest­ment port­fo­lio, strength­en­ing ex­ist­ing in­vest­ments and mulling share buy-backs if no mean­ing­ful ac­qui­si­tions or in­vest­ments could be made.

In terms of de­liv­ery, Rem­gro strength­ened its in­vest­ment in Medi­clinic by fa­cil­i­tat­ing and fund­ing off­shore ac­qui­si­tions. The same could be said for trans­form­ing Rain­bow Chick­ens into a richer ar­ray of food brands un­der RCL Foods and for­ti­fy­ing Dis­tell’s off­shore po­si­tion with the ac­qui­si­tion of co­gnac brand Bisquit and Scotch pro­ducer Burn Ste­wart.

The con­di­tions for share buy-backs have not been op­ti­mum as the in­crease in cor­po­rate ac­tiv­ity among Rem­gro’s in­vest­ments has led to the dis­count to in­trin­sic value nar­row­ing markedly (though it was over 15% at the time of writ­ing).

Rem­gro has not swept vig­or­ously to clean up its port­fo­lio. The stake in tech­nol­ogy com­pany Brite­house was sold re­cently, earn­ing Rem­gro a profit of R94m. But there are many small in­vest­ments, es­pe­cially in its in­dus­trial and me­dia hubs, that are un­likely to move the nee­dle even, in the un­likely event, that these are rapidly dou­bled in size. The sense is that Rem­gro is quite at­tached to some of its smaller busi­nesses. Durand makes a point of prais­ing the per­for­mances of in­dus­trial coun­ters like in­dus­trial gasses spe­cial­ist Air Prod­ucts, oil com­pany To­tal and build­ing prod­ucts group Wis­peco — even though the col­lec­tive prof­its and value is tiny in the big­ger pic­ture.

Maybe the smaller in­vest­ments will have a val­ueen­hanc­ing role at a later stage — per­haps with the ben­e­fit of cor­po­rate ac­tion (Wis­peco, for in­stance, made an ac­qui­si­tion re­cently) or as part of a dif­fer­ent (and sep­a­rately listed) struc­ture.

But Rem­gro’s un­fa­mil­iar debt po­si­tion — linked to par­tic­i­pa­tion in new-look and big­ger Medi­clinic and re-pack­aged into off­shore bonds as well as pref­er­ence shares — might still in­form de­ci­sions to sell off smaller in­vest­ments when these debt in­stru­ments fall due.

Pos­si­ble port­fo­lio changes were hinted at by Durand in Rem­gro’s re­cent in­vest­ment pre­sen­ta­tion. Most sig­nif­i­cantly, he ar­gued that hold­ings in RCL Foods and Dis­tell should be re­garded as un­listed in­vest­ments be­cause of a lack of liq­uid­ity in the re­spec­tive shares. Per­haps this be­trays a de­sire by Rem­gro to buy out mi­nor­ity share­hold­ers in both Dis­tell and RCL?

There was an­other telling ad­mis­sion. Asked whether Rem­gro had a pre-emp­tive right on the size­able stake that SABMiller (now in the throes of a takeover by AB InBev) re­tained in Dis­tell, Durand in­ad­ver­tently of­fered a valu­able in­sight into the com­pany’s in­vest­ment strat­egy. Af­ter be­ing cor­rected on his orig­i­nal con­tention that an ac­qui­si­tion of SABMiller’s Dis­tell stake would trig­ger a manda­tory of­fer to mi­nori­ties, Durand half-joked that it (a manda­tory of­fer) “would not be a bad thing”.

Own­ing 100% of size­able as­sets like RCL Foods and Dis­tell would greatly en­hance Rem­gro’s in­vest­ment propo­si­tion — es­pe­cially since both com­pa­nies can be scaled up markedly by ac­qui­si­tions, joint ven­tures and merg­ers.

The devel­op­ment of Medi­clinic could also usher in struc­tural changes at Rem­gro over the longer term. With its Lon­don Stock Ex­change list­ing fa­cil­i­tat­ing the use of scrip as cur­rency, Medi­clinic is ex­pected to stay on the ac­qui­si­tion trail as it ex­tends its global reach. In ref­er­enc­ing Medi­clinic’s rapid growth, Durand spoke of “chil­dren get­ting big­ger than their par­ents” and “giv­ing un­der­ly­ing in­vest­ments room to fly so that they can leave home”.

In­vestors could read a lot into these state­ments. But Durand specif­i­cally cited Rem­gro’s other great in­vest­ment, cig­a­rette group Roth­mans In­ter­na­tional, which even­tu­ally was merged into Bri­tish Amer­i­can To­bacco and un­bun­dled with a sec­ondary list­ing on the JSE.

Whether Rem­gro in­tends —– some time down the line — to un­bun­dle its stake in Medi­clinic re­mains to be seen. But such a move would shift larger un­listed in­vest­ments like Unilever, Dark Fi­bre Africa, the Mile­stone China Fund and Sea­com into the spot­light.

The bot­tom line is that there is clearly still dy­namism at Rem­gro which should pre­clude the counter be­ing slated as an in­vest­ment en­tity eas­ily mim­icked (and re­fined) by in­vestors buy­ing the in­di­vid­ual listed com­po­nents of the port­fo­lio.

Pri­vate hos­pi­tals group Medi­clinic and the RMBH/FirstRand bank­ing hub are two of Rem­gro’s big­gest five listed in­vest­ments.

Jan­nie Durand, the CEO of Rem­gro

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