Im­age tar­nished

JSE’s BAT han­dling con­fuses in­vestors and its Yield-X/Besa deal­ings seem lit­tle bet­ter

Finweek English Edition - - Portfolio Punts -

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 coul­sonmh@gmail.com A steal. Mark Barnes

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