A dressing down for Bain
Edcon fair value is well above what Bain’s offering
ANOTHER VOICE has been added to the growing chorus of overseas-based shareholders whose refrain is that Bain Capital’s offer for Edgars Consolidated Stores (Edcon) is too low. Columbia Wanger Asset Management, a Chicago-based asset management company with a 2% stake in Edcon, is the latest to protest against the R46/share offer.
Columbia Wanger international investment analyst Fritz Kaegi says fair value for Edcon is well above the offer price, although he wouldn’t be drawn on specifics, saying only “it’s a rather large double-digit number”.
Kaegi’s conclusion rests on two pillars. On a simple price:earnings basis, Edcon is cheap when compared to global, emergingmarket retailers (Edcon traded on an earn- ings multiple of 13,7 times at the time of writing). Also, Edcon has several billion rand in receivables – R3,8bn at last count – that could be securitised.
Says Kaegi: “There’s big demand for fixed income instruments and South Africans continue to demand credit. We’re delighted that Edcon sits right in between.”
Kaegi’s comments come after revered emerging markets investment guru Mark Mobius, of Templeton Asset Management – which holds 3% of Edcon – said the offer was “50% too low” according to media reports. On the same day, London-based Aberdeen Asset Management (a 2% shareholder) also criticised the offer for being too low. “We don’t see any reason why we should sell our shares,” says Kaegi. “Edcon has implied the offer is in shareholders’ interests, but we’re happy to hold for now.”
Columbia Wanger, which also holds positions in Impala Platinum and Finweek parent Naspers, typically holds shares as long-term investments. “For at least four years,” says Kaegi.
Collectively, the three international institutions hold 7% of Edcon.
Should 10% of shareholders vote against the deal come the shareholders’ meeting on 16 April at Edgardale (the company’s headquarters on the southern outskirts of Johannesburg’s CBD), the company will remain listed on both the JSE and Namibian Stock Exchange.
The R46/share offer represents a 51,3% premium to the closing price of Edcon shares on 16 October 2006, the last trading day before the first cautionary announcement relating to the offer was published.
Acknowledging the premium, SA analysts note that the market had run particularly hard between October and February this year, when the deal was announced, and that in light of that the offer wasn’t considered overly generous.
Still, there were no outcries, as was the case with the controversial bid for food retailer Shoprite. Why, then, the huge discrepancy in valuation by the South African and international money management camps?
Kaegi’s view is that Edcon has been cheap relative to other retailers of the same calibre operating in other emerging market economies. Given that Columbia Wanger’s net is cast wider than that of SA managers its perspective is clearly different.
Major shareholders in Edcon include the Public Investment Corporation (10,1%), JPMorgan Chase Bank (8,4%), State Street Bank & Trust (7,8%), Coronation Fund Managers (8,08%) and Investec Asset Management (5,6%).
United Retail, which holds Edcon treasury shares, has a 9,13% stake in the company.
Stanlib Asset Management (with 6,1%) has already indicated that it would support the deal.