At­trac­tive in­dus­trial mix

Still bear­ing up well, but new deals may add flavour

Finweek English Edition - - Companies & markets - MARC HASENFUSS

WHEN IT COMES TO mid-cap in­dus­trial con­glom­er­ates (or mini-con­glom­er­ates, if you will) it seems pro­fes­sional in­vestors mainly home in on Ar­gent or Hu­daco. We think Con­stan­tia-based In­victa Hold­ings (which has a slightly su­pe­rior mar­ket rat­ing com­pared to Hu­daco and Ar­gent) is a com­pany that might war­rant more se­ri­ous mar­ket at­ten­tion – pre­sent­ing some solid or­ganic growth prospects as well as a strong pos­si­bil­ity of some in­ter­est­ing cor­po­rate ac­tion.

Cur­rently In­victa – 67% owned by direc­tors (in­clud­ing re­tail ty­coon Christo Wiese, who holds 34%) – com­prises dis­tri­bu­tion op­er­a­tions that span the in­dus­trial, min­ing, agri­cul­tural, au­to­mo­tive and con­struc­tion sec­tors. The prod­ucts range from ball bear­ings to golf carts and trac­tors to tiles.

But there’s a po­ten­tial bal­ance is­sue de­spite the di­ver­sity of op­er­a­tions. The truth is that In­victa cur­rently re­lies heav­ily on the con­tri­bu­tion from its Bear­ing Man di­vi­sion, which sup­plies bear­ings and trans­mis­sion prod­ucts through­out Africa. In its fi­nan­cial year to end-March 2007 Bear­ing Man’s busi­ness should still ac­count for just more than 50% of group turnover.

That means In­victa should prob­a­bly have to look at bol­ster­ing its agri­cul­tural, au­to­mo­tive and con­struc­tion ac­tiv­i­ties.

The group has a ro­bust bal­ance sheet with plenty of gear­ing ca­pac­ity, and cash flow from op­er­a­tions has tra­di­tion­ally been strong. But the group is now renowned for splurg­ing its cap­i­tal. CEO Arnold Gold­stone notes: “We’re ag­gres­sive in dreams and as­pi­ra­tions but con­ser­va­tive in cash flow man­age­ment.”

Gold­stone says In­victa did try to stick to one ma­jor cor­po­rate event each year. “It’s dif­fi­cult to han­dle two or three trans­ac­tions a year… so ev­ery 18 months we’ll do a deal.” It’s prob­a­bly in the lat­ter two cat­e­gories – es­pe­cially build­ing sup­plies –where In­victa will seek out new op­por­tu­ni­ties.

Gold­stone con­cedes that In­victa – aside from the odd bolt-on ac­qui­si­tion – won’t be able to pur­sue any mean­ing­ful cor­po­rate ac­tion in the bear­ings mar­ket. Any size­able deal will also at­tract the at­ten­tion of SA’s com­pe­ti­tion au­thor­i­ties, with Bear­ing Man al­ready hold­ing around 30% of the bear­ings mar­ket.

On the agri­cul­tural side, In­victa last year

The truth is that In­victa cur­rently re­lies heav­ily on the con­tri­bu­tion from its Bear­ing

Man di­vi­sion

ac­quired New Hol­land SA – adding a sis­ter brand to its core CASE agri­cul­tural ma­chin­ery dis­tri­bu­tion busi­ness. Bed­ding down and ex­tract­ing syn­er­gies from the New Hol­land op­er­a­tions will no doubt pre­clude any new agri­cul­tural ac­tiv­ity at In­victa for the fore­see­able fu­ture.

The pos­si­bil­ity of new com­pe­ti­tion from Chi­nese play­ers in the con­struc­tion equip­ment sup­plier seg­ment would prob­a­bly also mean In­victa – which holds some vi­able niches in back­hoe load­ers, wheel load­ers, skid steers and ex­ca­va­tors – may keep clear of any new op­por­tu­ni­ties in that in­creas­ingly com­pet­i­tive seg­ment.

Shift­ing into other niches in the au­to­mo­tive busi­ness could be an op­tion, but ever since the sale of En­gineparts in 2004 the feel- ing is that In­victa is con­tent to ply its trade in the niches that its Au­to­bax (spe­cialised au­to­mo­tive and mo­tor­cy­cle parts and ac­ces­sories) di­vi­sion serves.

It seems clear that In­victa may well be lay­ing a foun­da­tion for as­sem­bling a build­ing sup­plies di­vi­sion with an em­pha­sis on re­tail­ing. At year-end 2006 the group ac­quired 60% of Cape Town-based tile re­tailer Tile­to­ria – a deal that was struck on a rather nifty 5,5 times price:earn­ings mul­ti­ple.

While Tile­to­ria com­prises only one out­let in Paar­den Ei­land, Gold­stone reck­ons there’s huge po­ten­tial for na­tional ex­pan­sion. One can rea­son­ably ex­pect it to open one or two new branches in big­ger ur­ban ar­eas over the next 12 to 18 months.

In­victa has re­tail­ing ex­pe­ri­ence through Bear­ing Man out­lets, and the im­port-based dis­tri­bu­tion ex­pe­ri­ence in the group will also come in use­ful when ex­pand­ing the tile busi­ness.

How­ever, the big ques­tion at this point is whether In­victa will look at other ac­qui­si­tions in the build­ing sup­plies mar­ket. Whether In­victa – which has stressed its cau­tious approach to deal-mak­ing – has the balls to make a large build­ing sup­plies ac­qui­si­tion in the league of Cash­build (which Wiese iron­i­cally con­trolled via Pep­kor some years back) or Italtile seems un­likely.

More likely is that In­victa would scout for smaller op­por­tu­ni­ties that would com­ple­ment the ex­ist­ing Tile­to­ria di­vi­sion and make for (rel­a­tively) easy in­te­gra­tion.

Fin­week has pre­vi­ously spec­u­lated that In­victa might turn its at­ten­tion to strug­gling Ab­so­lute Hold­ings (mar­ket cap­i­tal­i­sa­tion: R7,4m), which owns sev­eral tile re­tail­ing out­lets in the Cape and Gaut­eng. That could give In­victa a big­ger foot­print by re­brand­ing the ex­ist­ing Ab­so­lute out­lets.

Would a more di­verse build­ing sup­plies spe­cial­ist such as Build­max – which isn’t ex­actly pulling sen­ti­ment de­spite re­turn­ing to prof­itabil­ity – also fall un­der In­victa’s gaze?

Or could an op­por­tu­nity pop up at PSG’s bur­geon­ing private eq­uity flank, where Wiese has some pals (and a rather large eq­uity in­ter­est) nowa­days?

Christo Wiese – holds 34%.

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