Ac­quis­i­tive coun­ters: buy­ing trou­ble?

Financial Mail - Investors Monthly - - Editor's Note - MARC HASENFUSS email Marc on hasen­fussm@times­me­

THE CEN­TRE CAN­NOT HOLD, and things are fall­ing apart. Or so the market main­tains, judg­ing by the brit­tle share prices of JSE “growthby-ac­qui­si­tion” coun­ters such as Torre In­dus­tries, Dis­tri­bu­tion & Ware­hous­ing Net­work (Dawn), Fa­mous Brands, Stel­lar Cap­i­tal Part­ners, As­cendis, Brait, enX Group and An­chor.

In­vestor fret­ting re­volves mainly around two is­sues: op­er­at­ing as­sets toil­ing in un­favourable eco­nomic con­di­tions; and whether there has been an over­pay­ment for as­sets.

There is a third con­sid­er­a­tion. Will ex­ec­u­tives grasp the net­tle to en­sure value is sal­vaged for share­hold­ers, or will value seep away through pro­longed pussy­foot­ing?

Some­times the out­comes for ac­quis­i­tively as­sem­bled com­pa­nies are down­right nasty — re­mem­ber the fate of share­hold­ers in such il­lus­tri­ous busi­nesses as Macmed Health Care, Brain­ware, Queens­gate and MGX Hold­ings, to name a few that have (dis)graced the JSE over the decades.

If any­thing, there is re­in­force­ment of the no­tion that suc­cess­ful ac­quis­i­tive coun­ters — think Bid­vest/Bid­corp, Hosken Con­sol­i­dated In­vest­ments and PSG Group — are the ex­cep­tion rather than the rule.

That said, not all the ac­quis­i­tive coun­ters that got their bal­ance sheets in a tan­gle are nec­es­sar­ily doomed. Sab­vest, headed by the un­flap­pable Christo­pher Seabrooke, pa­tiently turned its for­tunes around, and debt-laden Su­per Group was also steered back to the growth path (with the help of in­vest­ment in­sti­tu­tions that backed suc­ces­sive res­cue rights is­sues). Metro­file was sal­vaged from the im­ploded MGX and trans­formed into a com­pelling busi­ness.

Re­turn­ing to my sam­ple of un­der-pres­sure ac­quis­i­tive coun­ters, I don’t think there are any cor­po­rate catas­tro­phes about to un­fold. But there may still be con­sid­er­able down­side to en­dure.

At this point, coun­ters such as Stel­lar have dropped to lev­els re­flect­ing a das­tardly dis­count on some of the core as­sets (think peren­ni­ally prof­itable in­vest­ments like Pre­scient and Amecor). Brait is start­ing to look in­ter­est­ing too, while Dawn might be bi­nary to braver in­vestors. For­mer market dar­lings As­cendis and Fa­mous Brands, well, they may not have found a floor yet.

Iron­i­cally, while these coun­ters are shaken down, the market is happy to af­ford a pre­mium rat­ing to Long4Life, unashamedly set up by deal-mak­ing doyen Brian Joffe as an ac­quis­i­tive ve­hi­cle. Deal flows are just start­ing to trickle in, and there’s no fun­da­men­tal un­der­pin to grasp just yet.

Ad­mit­tedly, there is op­por­tu­nity for a well-cap­i­talised in­vest­ment ve­hi­cle to pitch of­fers for qual­ity as­sets at rea­son­able prices. But ex­e­cu­tion risks re­main — even for some­one as as­tute as Joffe.

So . . . will I go long on Long4Life? You bet your sweet cash — if it drops be­low 600c.

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