JSE’s BAT handling confuses investors and its Yield-X/Besa dealings seem little better
MAYBE IT’S BEEN DISTRACTED by the international financial turmoil, but the usually impeccable image management of the JSE seems to have taken its eye off the ball recently. Take the case of British American Tobacco. Its short-lived appearance in the JSE Top 40 index may have been necessary for practical reasons but it was confusing to the layman and created considerable difficulties for index tracking funds.
While BAT’s initial market cap was reported as R568bn, against BHP Billiton’s R342bn and Anglo American’s R287bn, making it the biggest component of that index, if you read all the way through the small print of the JSE’s announcement that it would become a component of the index, there was an implication that it would only be temporary, until the conclusion of the various other complex transactions that accompanied the listing.
And many private investors may not have realised BAT is classified by the SA Reserve Bank as an “inward foreign listing” (See Finweek 12 June 2008). That means SA investors may buy the share only by using their foreign investment allowances.
While Satrix CEO Mike Brown tells me the information circulated to market participants was more detailed and reasonably clear, even the funds were left in some quandary, as the ratios at which various pieces of paper would be allocated hadn’t been finalised. And for Satrix, which as an exchange-traded fund has to match the index daily, there was the practical problem it had to liquidate its entire holding on one day. Other tracking funds may have more discretion but the process inevitably disrupted the market.
Still, the addition of an international share such as BAT to the SA market will bring long-term benefits more than compensating for those immediate hassles. But if the JSE can claim it played the BAT listing by the book, its bid for the bond exchange raises more intractable questions.
You can make a logical argument that one body should handle all securities trading. Efficiency, transparency, economies of scale and all that guff. The JSE implicitly adopted that view when it renamed itself from the Johannesburg Stock Exchange to the JSE, but in truth it’s never really broken into the bond market as it should. Its latest venture – Yield-X – really doesn’t seem to have done much to remedy that weakness.
While the Bond Exchange of SA (Besa) may not be perfect, it has developed and administers a credible, busy market. Theoretically, it would be logical to merge Yield-X with Besa and the logical course would be for the more successful operator (Besa) to be the acquisitor. However, for the considerations mentioned above – and no doubt corporate ego is also a factor – the JSE rather decided to bid for Besa.
There’s no firm bid yet, so detailed analysis would be premature. But I’m surprised at the half-baked approach of the JSE to date. It claimed to have approached holders of more than 60% of Besa’s equity and been favourably received: yet either it didn’t include Besa’s biggest shareholder – the New Zealand Stock Exchange – or it misinterpreted the response, as that body has said it opposes the bid. So does a smaller shareholder – Mark Barnes’s Purple Capital – who called the bid “a steal” when we spoke recently. Those two alone are enough to block the JSE from compulsory acquisition of 100%, so no wonder the JSE now says it may raise its bid.
Then there were the strange reported justifications offered for the bid. First, that the bid is a big premium to Besa’s net asset value. The basis of the calculation was promptly challenged – and indeed appears to be faulty. But in any event, NAV is an indicator of little value, or even relevance, for a service company such as Besa, whose main asset is its intellectual capital.
Moreover, it’s hardly an argument the JSE is in a position to use: its own latest reported NAV is around 1415c against a market price of 4000c. If we accept the thesis for Besa, it must logically follow the JSE itself is one of the most overpriced shares on the market.
There came a suggestion it was unreasonable to resist the bid because it was at a higher price than Besa’s recent rights issue. But a rights price bears no relation to a company’s intrinsic worth. If a company wants to raise, say, R500m, it makes absolutely no difference if it issues 100m shares at 500c or 500m shares at 100c. While companies usually issue rights shares at a discount to the market, because that penalises investors who don’t follow their rights, the only difference in the end is the number of shares in issue and their price: overall market cap and the value of the company are the same whatever the rights issue price.
The JSE’s initial announcement created the impression its bid was (more or less) friendly and would be well received. But clearly that was at the very least being economical with the truth. A body with the regulatory responsibility of the JSE needs to be Caesar’s wife in its conduct of its own affairs. (See story on page 30.)
MICHAEL COULSON firstname.lastname@example.org A steal. Mark Barnes