Chair­ing a dud deal?

Finweek English Edition - - Cover Cover - BY shaun har­ris

Sappi CEO Ralph Boëttger

IT WOULD BE an ex­ag­ger­a­tion to say that big tree Sappi – South Africa’s largest fine pa­per and pulp pro­ducer with a ma­jor pres­ence in Europe – is about to come crash­ing down. But it’s no ex­ag­ger­a­tion that Sappi is prob­a­bly tak­ing the big­gest risk in its his­tory with its planned ac­qui­si­tion of Fin­nish coated graphic pa­per pro­ducer M-real for €750m, al­most R9bn at the cur­rent ex­change rate.

An in­di­ca­tion of the risk was made pub­lic last Fri­day, when Sappi re­leased de­tails of its rights of­fer to raise €450m (around R5,8bn) to help fund the ac­qui­si­tion. First sur­prise – shock, to some mi­nor­ity share­hold­ers such as Theo Botha – was that Sappi would be is­su­ing 286,9m new shares, more than dou­bling the 239m shares al­ready in is­sue.

Sec­ond shock was that the rea­son for is­su­ing so many new shares was be­cause Sappi was of­fer­ing them, at a ra­tio of six new shares for ev­ery five Sappi shares held, at 2027c/ share – a huge dis­count of 65,2% to the clos­ing price of Sappi on 6 Novem­ber of 5825c/share.

Sappi’s price has since fallen to 5400c/share (last Wed­nes­day), a sign per­haps that the mar­ket isn’t en­am­oured with de­tails of its rights is­sue.

CEO Ralph Boëttger says he re­alises the of­fer may be con­fus­ing some peo­ple, but says the dis­count “isn’t far off where re­cent rights is­sues have been. We needed to achieve what we wanted now. Fi­nal de­tails of the rights of­fer were only worked out shortly be­fore we pub­lished the an­nounce­ment”.

Botha isn’t con­vinced: “There’s been a lack of trans­parency that’s mis­led mi­nor­ity share­hold­ers. It’s to­tally wrong we were asked to sup­port a rights is­sue with no in­di­ca­tion of the dis­count. In my opin­ion Al­lan Gray and RMB (the two largest share­hold­ers in Sappi) had an in­side track on this deal.”

Boëttger de­nies that. “Al­lan Gray and RMB didn’t know the dis­count. But maybe they worked it out for them­selves.” He adds share­hold­ers should have had some idea of the num­ber of shares be­ing is­sued when asked, at the re­cent AGM, to place 1bn new shares un­der the con­trol of direc­tors.

But the rights is­sue does have a sense of des­per­a­tion about it. This isn’t an easy mar­ket to raise eq­uity fi­nance in but, in ef­fect, Sappi is de­valu­ing the group by of­fer­ing new shares at such a large dis­count.

“That’s con­fus­ing,” con­cedes Boëttger. “If we is­sued shares on the open mar­ket at R21 that would be steal­ing from our share­hold­ers. We ex­pect the share to trade at about R36 af­ter the rights is­sue. We’re set­ting a new base for Sappi’s share price.”

He in­sists the rights is­sue is eco­nom­i­cally neu­tral for ex­ist­ing share­hold­ers. “There will be no di­lu­tion for ex­ist­ing share­hold­ers who fol­low their rights. Though the share price will have a new base, in the­ory the value of the group goes up by as much as the cap­i­tal we raise. The think­ing be­hind the rights is­sue has al­ways been that we don’t prej­u­dice share­hold­ers.”

In the­ory, yes. The price new shares are of­fered at should be neu­tral – if the price be­haves the way it’s ex­pected to af­ter the new shares are is­sued. But there’s far more at stake here than the large dis­count. Is Sappi mak­ing a good in­vest­ment in Europe? When the deal was first an­nounced, Fin­week asked how Sappi planned to make a busi­ness prof­itable that’s been run­ning at a loss for its past two fi­nan­cial years?

That also con­cerns Botha. “They’re pay­ing R9bn for a loss-mak­ing op­er­a­tion with the hold­ing com­pany hav­ing a mar­ket cap­i­tal­i­sa­tion of R5bn. Nowhere in the cir­cu­lar does it show how they ar­rived at the R9bn val­u­a­tion of the busi­ness. They’re ac­tu­ally buy­ing four mills – but there’s no val­u­a­tion of the mills or in­for­ma­tion about them,

THE MAR KET ’S NOT IM­P­RESE forec>com­pany an­a­lysts' ast

Source: McGre­gor BFA

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