Making money as they go
A buyout frenzy is not all bad news as investors get to cash out. The FM rounds up those likely to be next in line
Another day, another two delistings. On Monday two more small caps — services group CSG Holdings and electronic communication company Alaris — disclosed buyout offers that will lead to both delisting from the JSE.
This is great news for small- and mid-cap punters, but it is bad news for the JSE, whose universe of stocks continues to shrink. And it’s a bleak pronouncement on the still-fragile local economy.
Opportune Investments chief investment officer Chris Logan reckons the rising number of delistings is first and foremost a consequence of the government policies that have also resulted in unemployment soaring to 34.4%.
“The lack of new listings and unabated delistings should be part of the national debate as to how the structural decline in our economy is turned around, as a vibrant, expanding stock market means a vibrant, expanding economy,” Logan says.
Yet, while the JSE has its work cut out for it to attract (and retain) listings in the months ahead, investors can’t be too unhappy with the exit trend. There is good money to be made.
The Pioneer buyout by PepsiCo hinted that perhaps local investors underappreciated the longer-term prospects of some of the JSE’s more prominent companies. The recent premium-priced buyout pitches at technology group Adapt IT and logistics company Imperial support that notion.
Liquor giant Distell is in discussions with brewer Heineken, and if a deal is done, a delisting will follow. Bell Equipment has made noises about buying out minority shareholders — though there has been initial resistance to efforts to take the company private on the cheap. Rumours are also swirling that consumer brands giant AVI might have an offer for part of its business, and that the remaining parts may be broken up and sold off. That has already sparked the share price.
There are other examples. Tower Property Fund’s buyout offer has been enticingly pitched at a premium of more than 60% to the closing share price before the proposals were made, and at a premium of more than 55% to the average volume-weighted adjusted price (VWAP) of the stock over 30 days.
Spanjaard’s offer to shareholders represented premiums of 25.6% to the 30-day VWAP and 21% to the 60-day VWAP. NVest and Zarclear’s respective offers were at smaller premiums, but there has already been good support from shareholders wanting to take the cash and run.
The buyout offer for
CSG, from a unit of empowerment investment giant African
Rainbow Capital (ARC), was pitched at a 75% premium to the 20c that the share price closed at before the announcement. That might sound extravagant, but the deal values CSG at only about
R185m. CSG paid
R100m alone for RTT
Group and Revert Risk
Management in 2017, and has — at last count — a hard NAV of about R200m. Buying a services group for little more than hard NAV at the cusp of a turnaround (bottom line swung from a R79m loss to a profit of R51m in the year to end-March) might turn out to be one of the sweetest deals ARC ever does. Short-term punters will be delighted at the turn of events, but other shareholders might balk.
The Alaris delisting proposal is most disappointing, following as it does the release of sterling results to end-June — revenue was up 35% at R328m and after-tax profits were up 50% at R46m, or 39c a share.
The FM has suggested previously that Alaris — which mainly services foreign clients in the defence, security and civil protection segments — should follow the example of renewable energy group Montauk and tracking technology specialist Karooooo by listing on an overseas bourse. Both Montauk and Karooooo (formerly Cartrack) were given more appropriate market ratings once listed on the Nasdaq, and Alaris might also have found a more appreciative investment community offshore.
In any event, a consortium of local and international investors made their offer at a 30% premium to Alaris’s closing price last Friday, and a
22.4% premium to the VWAP. These investors might revisit the idea of a listing after bulking up Alaris, though it seems such a development would almost certainly be tied to a primary offshore listing.
So who are the next potential delisting candidates?
There are probably some clues in the statements by both Zarclear and Spanjaard about their rationales for delisting. Zarclear felt its listing no longer offered benefits due to the significant costs and expenses associated with it. The group also cited the poor market ratings and lack of liquidity achieved by small-cap investment holding companies, saying the portfolio had an inherent likelihood of a persistent discount to NAV that was “difficult to overcome in a listed environment”.
Spanjaard, more interestingly, indicated that the primary rationale for delisting is to improve its flexibility in doing deals, including BEE transactions, “without the requirements of a circular … which introduces substantial delays and costs”. The company also says a delisting would result in “substantial” cost and management time savings.
Zarclear’s rationale could apply to a number of investment counters on the JSE.
Grand Parade Investments (GPI) is finalising the sale of its Burger
King operations, which will leave the group’s portfolio centred on minority stakes in Sun
International-controlled gaming assets SunWest
(the GrandWest and
Golden Valley casinos) as well as limited-payout machine operator
Sun Slots and sports betting business Sunbet.
GPI CEO Mohsin Tajbhai is noncommittal at this stage, saying the future strategy of the group will be reassessed after finalisation of the long-awaited sale of Burger King. While the new-look GPI might be viewed as a cleaner casino play than Sun International, with access to the two best-performing assets — Sun Slots and GrandWest — market interest might be muted. If a large discount persists, GPI, which still has sizable head office costs (albeit much reduced from previous years), will owe it to shareholders to cash in its gaming chips, return the capital and delist the company. The current share price offers a discount of 30% on the latest intrinsic NAV of about 450c.
Zeder, which last year finalised the sale of its kingpin holding in Pioneer Foods, is another investment company that might be ready to be taken private. The group is already under cautionary due to approaches for some of its remaining investments — most likely Capespan and The Logistics Group. If these investments are sold, the main value store will lie in seeds and chemicals business Zaad, which carries a value of more than R2bn, and JSE-listed Kaap Agri.
Gut feel is that PSG, which effectively controls Zeder, might take action. PSG CEO Piet Mouton has already indicated that PSG has too many listed components, which effectively allows investors to clone or customise the group’s portfolio. Without Capespan and The Logistics Group, PSG could push for an unbundling of the Kaap Agri stake and then make a buyout offer to Zeder’s minority shareholders. The company could be delisted, and PSG could tuck away an attractive unlisted holding in Zaad.
Brait also might have a limited lifespan on the JSE, especially now that Ethos is calling the shots. If the controlling stake in a leaner and meaner Virgin Active fitness group can be sold for an acceptable price, it would make no sense to retain Brait’s listing for the sake of the remaining holdings in consumer brands conglomerate Premier Group, glass business Consol and the leftover exposure to the UK-based New Look fashion chain. If there is any consolation for the JSE, it does seem likely that either Premier Group (once appropriately fattened up) or Consol could be (re)listed.
In terms of operating companies, the possibilities are legion. It seems likely that investment giant Remgro will at some stage make a move to offer minorities at RCL Foods a buyout option.
The same might apply to property-rich industrial group
Deneb Investments and broadcast group eMedia, where the controlling shareholder, Hosken Consolidated Investments, already holds a dominant position and would not need to break the balance sheet to mop up minorities and delist these heavily discounted counters.
And don’t be surprised if the founding or controlling shareholders of broader industrial enterprises such as enX, South Ocean, ARB Holdings, Insimbi, Transpaco, Santova and Sebata take advantage of dismissive market ratings to buy back their businesses in their entirety.
The prime movers at computer maker Mustek — which is trading on a three times earnings multiple despite a solid long-term profit record — must have mulled taking this quality business private. Mustek certainly won’t need to use its listing to raise cash any time soon, so why incur the costs and hassle of maintaining a listing?
Small employment and training businesses such as Workforce and Primeserv, which have long traded at low single-digit earnings multiples, can’t be too happy about the listed environment either.
The bottom line is, bank on more delistings for the foreseeable future.