SPACS A PUNCH

Cap­prec & Hulisani are ready to rum­ble

Financial Mail - Investors Monthly - - Front Page - Stafford Thomas

Cap­i­tal Ap­pre­ci­a­tion and Hulisani, two very dif­fer­ent com­pa­nies, have one thing in com­mon: they started off as spe­cial pur­pose ac­qui­si­tion com­pa­nies (Spacs). This is a sec­tor IM thinks is well worth in­ves­ti­gat­ing.

First au­tho­rised by the JSE in 2013, Spacs come to mar­ket as cash shell com­pa­nies whose man­age­ment teams are en­trusted by share­hold­ers to un­der­take yet-to-be found ac­qui­si­tions. To its credit, the JSE put in place strict rules un­der which Spacs func­tion. Among these are that all share­holder cap­i­tal must be paid into an ac­count man­aged by an es­crow agent. If no in­vest­ment is made within 24 months of list­ing, the agent must re­pay the cap­i­tal to the share­hold­ers.

“It makes it cru­cial for a Spac to have a strong man­age­ment team with sec­tor ex­per­tise and a track record of deal mak­ing,” says Ge­org Kahle, a Nor­ton Rose Ful­bright di­rec­tor.

Cap­i­tal Ap­pre­ci­a­tion (Cap­prec) met the cri­te­ria to a T when it went to the mar­ket in Oc­to­ber 2015 to raise R500m, the min­i­mum re­quired for a JSE main board list­ing.

It went on to raise R1bn, in­clud­ing R250m from the Pub­lic In­vest­ment Corp. In ad­di­tion, Cap­prec’s three founders pumped in R390m of their own money. The founders present an im­pres­sive line-up. They are Motty Sacks, co­founder of Net­care; Alan Salomon, a for­mer Bid­vest vet- eran; and Michael Pim­stein, for­mer Mac­steel CEO. Salomon is chief fi­nan­cial of­fi­cer.

In Fe­bru­ary, Cap­prec an­nounced three ac­qui­si­tions val­ued at a com­bined R928m in the fi­nan­cial tech­nol­ogy (fin­tech) space. Hav­ing made an ac­qui­si­tion, Cap­prec will cease be­ing a Spac. It is head­ing to the com­puter tech sec­tor, says Bradley Sacks, joint CEO of Cap­prec with Pim­stein.

In its choice of fin­tech ac­qui­si­tions Cap­prec opted for busi­nesses serv­ing fi­nan­cial ser­vices providers.

“They have deep pock­ets,” says Bradley Sacks. “Stan­dard Bank, FNB, Ned­bank and Absa last year spent R30bn on their tech re­quire­ments.”

Of the three ac­qui­si­tions be­ing un­der­taken the largest is African Res­o­nance

Of the three ac­qui­si­tions be­ing un­der­taken by Cap­prec the largest is African Res­o­nance. It will come aboard at a cost of R525m — R295m to be set­tled in cash and R230m through the is­sue of 230m new Cap­prec shares.

It places an his­tor­i­cal val­u­a­tion of about a 10.3 p:e on African Res­o­nance.

The se­cond-big­gest ac­qui­si­tion, Rin­well, comes with a price tag of R225m payable in cash. Rin­well de­liv­ered a taxed loss of R5.3m in the six months to June 2016.

The third ac­qui­si­tion is spe­cial­ist fi­nan­cial ser­vices soft­ware de­vel­oper Syn­the­sis, at a cost of R142.3m — R82.3m to be set­tled in cash and R60m through the is­sue of 60m new Cap­prec shares. It places an his­tor­i­cal val­u­a­tion of about a 7.4 p:e on Syn­the­sis.

Cap­prec in­tends to take its newly ac­quired trio in­ter­na­tional. African Res­o­nance has al­ready made a move in this di­rec­tion through the es­tab­lish­ment of Res­o­nance Aus­tralia, in which Cap­prec has bought a 17.45% stake for R36m.

Re­ac­tion to Cap­prec’s deals has been pos­i­tive, with the mar­ket lift­ing its share price 10% since they were an­nounced, to 88c.

How much more of the same there is to come in the short term is a hard call. But one thing is cer­tain: ex­pect more ac­tion from Cap­prec. “We are very growth ori­ented,” says Bradley Sacks. “We still have R450m cash and will use gear­ing or even go to the mar­ket for more cap­i­tal if needed.”

For in­vestors with a far lower ap­petite for risk but want­ing to achieve solid in­come re­turns Hulisani is worth a close look.

Listed in April 2016 af­ter rais­ing R500m, re­new­able en­ergy-focused Hulisani earned it­self a per­ma­nent place on the JSE in Fe­bru­ary through the R142.5m ac­qui­si­tion of 100% of Red­cap and Euro­cape, own­ers of a com­bined 6.67% stake in the op­er­a­tional 80MW Kouga Wind Farm in the Eastern Cape. Hulisani fol­lowed this up in the same month with an R88.9m deal that will give it an in­di­rect 66% stake in the op­er­a­tional 7 MW Rustmo1 So­lar Farm in North West.

For in­vestors Hulisani’s big at­trac­tion is the low-risk, an­nu­ity na­ture of its in­come from 20-year agree­ments to sup­ply elec­tric­ity to Eskom.

“The con­tracts have yields of 6%-8%,” says Asanda Not­she, a port­fo­lio man­ager at Manzi Cap­i­tal. Pay­ments are ad­justed in line with in­fla­tion and come with a gov­ern­ment guar­an­tee.

It makes Hulisani a strong con­tender for cash that in­vestors may be con­sid­er­ing putting into in­fla­tion-linked bonds (link­ers).

The dif­fer­ence is that a 20year linker comes with a yield of around only 2%.

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