TRADE OF THE MONTH

You can buy a cheaper round of Dis­tell by or­der­ing Capevin, and get in the mood for some ex­cit­ing cor­po­rate ac­tion

Financial Mail - Investors Monthly - - Contents - Marc Hasenfuss

The reasons for the con­tin­ued ex­is­tence of low-key hold­ing com­pany Capevin are rather murky, but at least the value propo­si­tion is easy to divine.

The com­pany’s sole in­vest­ment is a 26.78% stake in Dis­tell, a con­sis­tently prof­itable liquor con­glom­er­ate which owns best-sell­ing brands such as Sa­vanna, Hun­ters, Fleur du Cap, Klip­drift, Riche­lieu, Amarula, Neder­burg, Tassen­berg, Graca and Chateau Lib­er­tas (among many others).

The share­hold­ing is held via Capevin’s 50% in­ter­est in Rem­gro-Capevin In­vest­ments.

Aside from be­ing a con­duit to Dis­tell’s value, Capevin passes on div­i­dends re­ceived as ef­fi­ciently as pos­si­ble. The com­pany at­tracts hardly any costs, the big­gest be­ing a small ad­min­is­tra­tive fee (roughly R500,000 for the six months to end December 2015) to Rem­gro Man­age­ment Ser­vices.

But the truth is that Capevin is a legacy hold­ing com­pany which stems from a com­pli­cated con­trol struc­ture which at one stage in­volved listed KWV In­vest­ments and the old KWV Group. The con­trol has been sim­pli­fied some­what, but Capevin still rep­re­sents an ar­chaic struc­ture that re­ally has no place on the mod­ern JSE.

The “of­fi­cial” reason for re­tain­ing the hold­ing com­pany struc­ture is to pro­tect trade­mark agree­ments at Dis­tell that could be at risk if the share­hold­ing were to change. The trade­marks are not spec­i­fied, but one is thought to be Gil­bey’s Gin.

Still, th­ese agree­ments can­not re­al­is­ti­cally rep­re­sent a mas­sive portion of Dis­tell’s sales. What’s more, the ben­e­fit for Dis­tell of los­ing the cum­ber­some con­trol struc­ture would surely out­weigh the loss of sales in brands that might no longer be core to the busi­ness. It would be easier to raise cap­i­tal to take ad­van­tage of global op­por­tu­ni­ties, and the frus­trat­ingly tightly held share would be­come more liq­uid.

How (and when) Capevin will be col­lapsed is not clear at this stage, but such a move should un­lock value for share­hold­ers, what­ever hap­pens.

Even if it is not trig­gered in the short term, the hold­ing com­pany re­mains a share that can be con­fi­dently bought for the longer term, pro­vided in­vestors have con­fi­dence in Dis­tell’s abil­ity to maintain stout mar­ket share in SA as well as grow sales in Africa and se­lected in­ter­na­tional mar­kets.

The sig­nif­i­cant mi­nor­ity stake — on a see-through ba­sis — was worth around R9.4bn at the time of go­ing to press. This com­pares to a mar­ket cap­i­tal­i­sa­tion of R7.78bn for Capevin, and im­plies a straight­for­ward dis­count of about 17% on the value of the Dis­tell stake.

Dis­tell put in a spir­ited per­for­mance in the six months to end December 2015, when rev­enue jumped 11% to R12.2bn on a sales vol­ume in­crease of less than 8%. Head­line earn­ings in­creased 18% to 532.5c/share.

The per­for­mance re­flects new op­er­at­ing ef­fi­cien­cies and mar­ket­ing strate­gies ush­ered in by CEO Richard Rush­ton (ex-SABMiller) as well as a sub­stan­tially weaker rand (which helped the com­pany’s ex­port and in­ter­na­tional earn­ings).

There might be some de­bate over whether Dis­tell de­serves to be ac­corded a 20 times earn­ings mul­ti­ple, es­pe­cially since the busi­ness is not a high-growth story (op­er­a­tionally speak­ing). But it has been a most con­sis­tent per­former over more than a decade and a half.

The X-fac­tor at Dis­tell comes with cor­po­rate ac­tion. And there have been two sig­nif­i­cant off­shore deals: the ac­qui­si­tion of co­gnac pro­ducer Bis­quet and scotch maker Scot­tish Leader.

What might spur fur­ther global ac­qui­si­tions is the pro­posed sale by SABMiller — soon to be in­cor­po­rated into AB InBev — of its in­flu­en­tial 28.86% stake in Dis­tell. The ob­vi­ous buyer would be Rem­gro, which re­port­edly has pre-emp­tive rights on SABMiller’s shares.

With Rem­gro as the out­right con­trol­ling share­holder there can be two pos­si­ble out­comes. One would be a bid to buy out mi­nori­ties in Dis­tell (in­clud­ing Capevin) and a delist­ing of the com­pany.

Or Rem­gro could re­tain the Dis­tell list­ing and push plans to build a global liquor busi­ness by mak­ing se­lected ac­qui­si­tions (though earn­ings mul­ti­ples in the liquor sec­tor are quite stiff).

Rem­gro has, in the past, en­joyed in­cred­i­ble suc­cess not only in build­ing brands, but also in “glob­al­is­ing” lo­cal in­vest­ments — take Roth­mans In­ter­na­tional (now part of Bri­tish Amer­i­can To­bacco) and Medi­clinic In­ter­na­tional (with op­er­a­tions in Switzer­land, the Mid­dle East and the UK) for ex­am­ple.

Our gut feel is that Dis­tell — un­der Rem­gro’s in­flu­ence — will con­tinue to for­tify its global and African op­er­a­tions. It could be an ex­cit­ing time ahead for Dis­tell, and we rec­om­mend buy­ing into a po­ten­tially intoxicating cor­po­rate cock­tail via the bet­ter-priced Capevin.

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