A new fee struc­ture could freshen the bas­ket

Financial Mail - Investors Monthly - - Analysis - Marc Hasenfuss

Zeder is at a fas­ci­nat­ing junc­ture. The mar­ket, which two years ago cov­eted the com­pany’s agribusi­ness bas­ket, ap­pears now to be tak­ing a more jaun­diced view.

At the time of writ­ing Zeder’s SOTP (sum-of-the-parts) value was 957c/share. This means the mar­ket price was of­fer­ing a dis­count of about 30% on a port­fo­lio largely dom­i­nated by listed consumer brands con­glom­er­ate Pi­o­neer Foods.

Scan­ning Zeder’s help­ful SOTP value break­down it’s easy to see that the share price ef­fec­tively re­flects the value of its listed in­vest­ments — mainly Pi­o­neer and the much smaller hold­ing in poul­try group Quan­tum Foods — with the other hold­ings ac­corded no value.

So in­vestors buy­ing Zeder at the pre­vail­ing dis­count are in ef­fect get­ting Zeder’s un­listed port­fo­lio for free. Th­ese hold­ings in­clude promis­ing op­er­a­tional busi­nesses such as agri-ser­vices busi­ness Zaad and fruit mar­ket­ing gi­ant Capes­pan as well as in­flu­en­tial stakes in prof­itable farm­ing com­mu­nity re­tailer Kaap Agri and a fledg­ling Zam­bian com­mer­cial farm­ing en­ter­prise.

On paper, the val­u­a­tion looks com­pelling. But there are com­pli­ca­tions. In­vestors have re­cently been faced with a rather nasty curve ball in the man­age­ment and per­for­mance fees Zeder has to fork out to its largest share­holder, PSG Group.

The big­gest con­cern about the fee struc­ture is it will place huge cash flow strain on Zeder — es­pe­cially in the years when PSG earns per­for­mance fees. It’s not un­rea­son­able to ar­gue the fee struc­ture has been the big­gest reason for such a wide dis­count open­ing up on Zeder’s shares.

At Zeder’s AGM last month, a new fee struc­ture was pro­posed where PSG would swap its con­trac­tual rights on the man­age­ment fee for the is­sue of an ad­di­tional 12% share­hold­ing in the agribusi­ness. The pro­posal is that 208m new Zeder shares be is­sued to PSG, lift­ing the in­vest­ment com­pany’s stake from 34.5% to 42.4%.

The value of the share is­sue is a whopping R1.36bn — which will di­lute ex­ist­ing Zeder share­hold­ers. But the to­tal op­er­at­ing costs to Zeder will re­duce to a more rea­son­able R20m-R25m/year.

This re-ar­range­ment also en­tails the cur­rent man­age­ment team of Zeder be­ing em­ployed by the com­pany (rather than be­ing sec­onded by PSG). Their costs will be for Zeder’s ac­count.

PSG will still be in­volved on Zeder’s board and ex­ec­u­tive com­mit­tee for the next five years, and will be paid R5m/year (in­creased an­nu­ally for in­fla­tion) for th­ese ser­vices. Af­ter five years Zeder’s in­de­pen­dent di­rec­tors will de­cide whether this ar­range­ment with PSG con­tin­ues or not.

The pro­posed fee re­arrange­ment will need ap­proval of 75% of Zeder’s share­hold­ers — ex­clud­ing, of course, PSG. The gen­eral meet­ing is sched­uled for end-Au­gust.

Devel­op­ments are un­likely to cause the Zeder dis­count (which has been as wide as 40% at times) to nar­row markedly in the months ahead. But per­haps it’s not un­rea­son­able to see the dis­count back at around 15% again be­fore year-end?

More im­por­tantly, though, is the fact that PSG’s in­ter­ests are now more aligned with mi­nor­ity share­hold­ers and this should go some way in mas­sag­ing tense mar­ket sen­ti­ment.

Deal-mak­ing at Zeder has largely in­volved in­ter­nal reshuf­fling of in­vest­ments, and fresh cor­po­rate ac­tion does seem over­due. With PSG well cap­i­talised from last year’s book-build ex­er­cise, there may be scope for Zeder to mo­bilise its scrip — once the dis­count nar­rows to more rea­son­able lev­els — to raise fresh cap­i­tal for new op­por­tu­ni­ties.

PSG, as a big­ger share­holder, may also use its in­flu­ence to build up the promis­ing smaller in­vest­ments — es­pe­cially Capes­pan and Zaad, which both have scope to in­crease global rev­enues.

The fate of Kaap Agri, which surely war­rants a JSE list­ing sooner rather than later — should also be­come clearer. If a JSE list­ing is not in the off­ing then Zeder might take an­other tilt at buy­ing out Kaap Agri’s mi­nor­ity share­hold­ers.

Per­haps in­vestors should also not lose sight of Zeder’s “king­maker” stake in Pi­o­neer Foods. Fur­ther con­sol­i­da­tion in the lo­cal consumer brands sec­tor could be a sig­nif­i­cant X-fac­tor for Zeder.

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