A new fee structure could freshen the basket

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.