Take it easy
Don’t read too much into unbundling
ANY POTENTIAL short-term profit still to be made out of the formal unbundling of Remgro into Reinet and British American Tobacco is being significantly blown up by the rand exchange rate, which weakened dramatically last week in particular. The most important assets – in fact, the only asset in the unbundling of Remgro – is the group’s 10,7% interest in BAT, which has long been listed on the London Stock Exchange.
Over the past few weeks, along with the world’s financial credit crisis, BAT’s London price weakened from £19,30 to £17,05 at the time of writing. That would have meant a loss of R14,50 in Remgro’s asset value if the rand exchange rate had remained unchanged from the level of £1/R14 in mid-September. That fall in the price of BAT would have eroded the major portion of the possible R15 profit from the closing of the discount on Remgro’s asset value we expected in the Finweek of 9 October 2008.
Luckily for Remgro investors, the rand recently weakened substantially and was trading at around £1/R18,00 at the time of going to press. That fall in the value of the rand more than compensates Remgro shareholders for the fall in BAT’s share price.
Calculations therefore show if the discount on Remgro’s other assets fall somewhat from the current 30% plus there may be another R10 to R15 of extra value in Remgro, thanks to the unbundling.
However, investors are urged to exercise
caution and to remember the attitude to Remgro and Richemont and all the publicity surrounding the unbundling can easily weaken to disappointment of “buy the rumour, sell the fact” after the unbundling.
There are several warnings about that. First, the current price of R177 for Remgro is partly justified by the extremely weak rand due to the ongoing sharp fall in the share prices of JSE-listed mining giants. That could again be attributed to the credit crisis that just refuses to disappear, despite all the fuss by the world’s finance ministers and reserve banks.
If things perhaps recover later, the rand will also strengthen: and remember that both BAT and Reinet’s share prices will be closely linked to the fluctuations in the rand’s value.
The next danger is the big fuss now being made around the Rupert name, as if especially Johann Rupert thought up the whole unbundling of Remgro himself. Remember, it’s the planned change in legislation of Section 1929 companies in Luxembourg, where R&R Holdings SA, the vehicle through which Remgro and Richemont hold their interests in BAT, which virtually forced the unbundling on Stellenbosch. Don’t give too much credit where none is due.
Naturally, everyone makes investment mistakes – even the famous Warren Buffett is human. For example, Remgro decided last year to exchange its allocation of 27m Discovery shares – which it received from its direct interest in FirstRand after it had unbundled Discovery – for 21m RMBH shares.
Meanwhile, Discovery’s price fell from R26,77 to the current R24/share, but RMBH’s share price is down from R33,94 (at which Remgro did the swap deal) to R23,30.
Investors must be especially cautious about the excessive optimism surrounding Reinet. The investment group is kicking off with a large interest in BAT and a lot of positive hype about the quality of the investment’s management. That’s all good and well. However, bigger names than Rupert, or even Buffett, in golfing terms recently missed sinking short “investment putts”.
Give Reinet a miss if its share price cooks up too much over the next few days. Remember, for the short term BAT is now merely a bet against the rand exchange rate. And a final word of advice: don’t forget BHP Billiton is now trading at 50% lower than its highest level. BAT has only fallen by 11%.