A dress­ing down for Bain

Ed­con fair value is well above what Bain’s of­fer­ing

Finweek English Edition - - Companies & markets - ANA MON­TEIRO

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.

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