ERM – willing and Sable
Can a property group offer better long-term returns than Bidvest?
SOMETIMES DEALS JUST DON’T look like they make too much sense. But then later everything falls nicely into place.
One hopes that holds true for the recent property deal(s) struck between Enterprise Risk Management (ERM) and Sable Holdings.
ERM – an asset rich shell now under the control of Telematic Frontiers International Corporation – has voiced its preference to delve into property investments. Sable was listed in 1969 and has been a fairly rewarding property investment, but has endured some ups and downs in recent years.
ERM and Sable in November last year announced a deal to acquire – via a 50/50 arrangement in Amrich 58 Properties – a 34% stake in property owning company Rotaflex for R32,3m.
In February this year Sable and ERM opted to buy out the remaining 66% stake in Rotaflex for R47,5m. The remaining shares in Rotaflex are controlled by Telematic, one of the major investors in ERM. So we are looking at a related party transaction.
The mechanics of the two-prong transaction are intriguing and quite mysterious seeing Rotaflex is rather vaguely described as a “company with a diversified portfolio of retail, commercial, residential and commercial properties”.
And to ad to the complexity, Sable and ERM also struck an agreement around a consolidation of interests that saw ERM selling its 50% stake in Amrich to Sable in exchange for the issue of 392 500 new Sable shares at 4 000c each (worth R15,7m).
The main deal sees Sable settling the acquisition of the remaining 66% stake in Rotaflex by issuing around 1,9m new shares to ERM at 4 000c/share (worth roughly R75m).
ERM’s holding in Sable increases to 21,49%, ranking the group as the second biggest investor in the property group next to Isdale Holdings.
The SENS announcement says that Sable entered into the Rotaflex transaction to increase the size, diversity and geographical location of its property portfolio. Rotaflex – which holds a net portfolio value of R95m – will bring Sable’s property assets to R436m. ERM, on the other hand, gains exposure to a “much stronger and more diversified property portfolio”.
There are, however, a few issues over which ERM shareholders might mull.
The Sable/Rotaflex deal commits a sizeable chunk of ERM’s resources (which when last we looked were R100m, comprising listed investments and cash) to securing a significant minority stake in a listed property player.
The major hitch – as Finweek sees it – is that the Sable shares are hopelessly illiquid. And what’s more, the 4 000c issue price to ERM is a sizeable premium to the share’s historical trading range.
At the time of going to press, Sable shares were last traded at 3 750c but bids were coming in at 3 400c.
Perhaps it’s significant that one of the conditions precedent is for ERM to perform a due diligence investigation into the value of Sable shares.
Value indeed is the crux of the deal. In the year to end June 2006, Sable produced headline earnings of 282c/share, which means at 4 000c the property group is being accorded a historical price:earnings multiple of 14 times. Sable’s net asset value was last stated as 2 500c/share.
Time will tell whether ERM has done well by the Rotaflex arrangement.
But when one reflects on the investment portfolio that the group – then under care and maintenance of Harold Joffe – assembled, questions may be asked as to whether the switch into Sable is really such a wise move.
ERM’s results for the year to end August 2006 showed the group still held a R36m investment portfolio comprising 60 000 Bidvest shares, 800 000 Apex-Hi A shares, 20 000 Anglo American, 15 500 Sasol and 15 000 Highveld Steel.
That’s a useful portfolio in anyone’s book – especially considering the appreciation in Anglo American, Bidvest and distribution flows from Apex-Hi and Highveld.
The portfolio, which was worth R66m in 2005, has been sold down – most notably the Bidvest holding, which originally comprised 380 000 shares. Cash at end August 2006 topped R58m. If ERM had maintained its Bidvest holding at 380 000, that stake would have been worth R54m today.
No doubt the proceeds from selling off most of the Bidvest holding were mobilised to clinch the stake in Sable.
As such, ERM’s directors – led by new CEO Mark Stein – are really saying that they believe that the major investment in Sable – struck at a premium price – will be more rewarding over the longer term than the 380 000 shares originally held in Bidvest.
Some may beg to differ…