In­ter­est­ing times

BCX of­fers up­side re­gard­less of Telkom deal

Finweek English Edition - - Companies & markets - BELINDA AN­DER­SON

SOME BE­LIEVE THAT Busi­ness Con­nex­ion (BCX) shares of­fer value – re­gard­less of whether the Telkom deal goes through or not. Oth­ers are still not con­vinced and be­lieve the shares can fall fur­ther. But that’s what makes mar­kets.

The shares have been un­der sig­nif­i­cant pres­sure con­cern­ing un­cer­tainty sur­round­ing the deal – with an over­whelm­ing view that the out­come of the Com­pe­ti­tion Tri­bunal process will be neg­a­tive – and fall­ing as far as R6,80 in late March. BCX then climbed back 5% to R7,25 in a sin­gle trad­ing ses­sion on 2 April be­fore the fol­low­ing ses­sion saw some of those gains erased – il­lus­trat­ing the volatil­ity of a counter with an un­cer­tain out­come.

Last week saw the news that there would be fur­ther de­lays in the Com­pe­ti­tion Tri­bunal process af­ter chair­man David Lewis was hos­pi­talised with a back in­jury.

Telkom and BCX said in a joint state­ment that the hear­ings had been post­poned to 18 May and would now be sched­uled to end on 1 June (from the pre­vi­ous end date of 12 April).

At an of­fer price of R9,25/share most share­hold­ers would still be hold­ing out for a pos­i­tive out­come. How­ever, some are tak­ing the view that the deal doesn’t nec­es­sar­ily need to pro­ceed for it to be worth­while hold­ing BCX shares for the long haul.

In a re­cent re­port, Con­sil­ium Cap­i­tal an­a­lysts said: “We be­lieve Busi­ness Con­nex­ion of­fers up­side, whether the pro­posed Telkom trans­ac­tion goes ahead or not.”

Con­sil­ium says un­cer­tainty con­cern­ing the fu­ture of the deal had placed both the com­pany and share­hold­ers “in a state of limbo”, in­flict­ing dam­age in re­spect of lost busi- ness op­por­tu­ni­ties and staff. One ex­am­ple was

the re­cent de­par­ture of group ex­ec­u­tive for strat­egy and telecom­mu­ni­ca­tions Willem van Rens­burg. Though Van Rens­burg didn’t at­tribute his de­par­ture di­rectly to the trans­ac­tion and re­lated un­cer­tainty, he did say he wanted to pur­sue other op­por­tu­ni­ties in the sec­tor. That must have played a role in his de­ci­sion.

Con­sil­ium says BCX of­fers value up to R9,64/share (41% up­side from R6,83 at the time of writ­ing its re­port), plac­ing the Telkom of­fer at fair value.

Con­sil­ium Cap­i­tal, un­der li­cence from Collins Ste­wart in Lon­don, uses a val­u­a­tion method­ol­ogy called cash flow re­turn on cap­i­tal (CFROC), which mea­sures cash flow gen­er­ated rel­a­tive to the as­set base and is an al­ter­na­tive method­ol­ogy to those used by most in the mar­ket. The method­ol­ogy takes a long-term view and in­cor­po­rates the com­pet­i­tive life cy­cle of a com­pany.

But other an­a­lysts take an op­po­site view to Con­sil­ium. Irnest Ka­plan, MD of Ka­plan Eq­uity An­a­lysts, puts a value of be­tween R5 and R5,50/share on BCX. Ka­plan has for some time been bear­ish about the com­pany’s prospects and low­ered his fore­casts at the time of BCX’s in­terim re­sults. He be­lieves Telkom will be sig­nif­i­cantly over­pay­ing for BCX if the deal goes through and says the share will fall sig­nif­i­cantly if it doesn’t go ahead.

Though there’s al­ways a chance of an­other suitor, Ka­plan doesn’t be­lieve that an­other com­pany would match Telkom’s price.

The Tri­bunal hear­ings be­gan in mid-March and though the die were un­doubt­edly loaded against Telkom from a sen­ti­ment per­spec­tive, it wasn’t clear from the early stages what the out­come would be.

Bear­ish on BCX.

Irnest Ka­plan

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