ERM – will­ing and Sable

Can a prop­erty group of­fer bet­ter long-term re­turns than Bid­vest?

Finweek English Edition - - Companies & markets - MARC HASENFUSS

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…

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