Rich pickings for AltX vultures
and – for a while – they conquered. But now the JSE’s ranks of newly listed companies have been scattered by imploding investment sentiment, with share prices rapidly retreating since mid-2008. Just how many of the plethora of companies listed over the past three years will make a stand? Will a good number simply surrender, preferring to bunker down as private companies after buying out minorities on the cheap?
In classic market parlance, new listing booms occur when there’s an opportunity for knowledgeable sellers (ie, the business owners/vendors) to peddle stock to less knowledgeable buyers (mostly often-excitable retail or ordinary investors). That means the buyers can pay a premium price to participate in a newly listed venture, allowing the sellers to either cash in part of their shareholdings or raise capital for their business.
That was the case between early 2006 and late 2007.
Conversely, a delistings boom takes place when knowledgeable buyers (ie, the controlling shareholders or company founders) have an opportunity to buy back the company’s shares from less knowledgeable buyers (ie, disgruntled, disillusioned or disappointed shareholders).
That’s very much the case now…
With share prices of newly listed companies smashed across the board, the market is perfectly set up for clinching the “old one-two” ploy. The “old one-two” sees a business sold into the market at a premium amid market euphoria and then bought back on the cheap when market conditions turn brittle.
Despite reassurances that the JSE’s latest listings boom would be different, history has an uncanny habit of repeating itself. Looking at the valuations of new listings on the JSE – where buying considerations for recent acquisitions are sometimes larger than the market capitalisation of the company that effected the acquisition – it seems reasonable to assume management buyouts will characterise the market over
the next 12 to 18 months. That would mean new market initiatives such as the AltX – the junior bourse for smaller and emerging companies – could be denuded of listings over the next couple of years.
Over the past few months we’ve seen three newer listed companies proposing to buy back their businesses from shareholders: modular accommodation specialist Kwikspace, cellular services company Celcom and building products supplier Kay-Dav. Venter Leisure and Commercial Trailers (Ventel), which listed in the early Nineties, has also opted to de-couple from the JSE.
In the case of Celcom and Kay-Dav the businesses are being bought back at a fraction of the price pitched to original investors ahead of the respective listings (see separate case study). If the Celcom and Kay-Dav transactions succeed, could it inspire a host of other new listings to follow suit? That’s precisely what transpired after the late-Nineties listings boom…
JSE business development manager Lauren Czepek draws a distinction between the current market environment and the late Nineties. “It’s much more difficult to list now than it was then, given the quality controls that are in place on the AltX.” In that regard, she highlights the role of the Designated Advisors, the AltX’s advisory committee, the JSE’s interaction with the companies pre-listing and postlisting, as well as the directors’ induction programme.
Czepek believes that for the astute investor there must be value in buying now. “We’re still holding our monthly showcases, which are very well attended.”
Still, Finweek – along with a few influential market watchers – believes the old “takeout” trend is bound to emerge. Readers may remember that the late Nineties listing boom saw a surfeit of small cap contenders rushing the JSE – a development that coincided with considerable hype around how the new South Africa had opened a multitude of opportunities for sharp entrepreneurs. So much so that there was even talk that the JSE’s “old faithfuls” – such as Rembrandt, Anglo American, SA Breweries, etc – were passé.
Of course, when market sentiment turned hostile – around the time of the emerging market crisis – the hot air that had buoyed so many of the new generation of late Nineties listings suddenly blew icy cold. The market quickly became less discerning about new listings and even the most promising companies saw their share prices dragged down, along with those of “lesser” contenders.
Sadly, it was often the most promising contenders – Gray Security, First LifeStyle Foods, Softline, Nando’s and Servest (to name a few) – that bought out minorities and scuttled off the JSE. The real dogs – and here we think of stocks such as Sweets from Heaven, Afribrand, Glotech, Maxtec, Cycad and Billboard – went traipsing down to pennystock levels before any action was taken.
Looking at the JSE today, it’s difficult to find more than a handful of new listings – and there have been nearly 100 since 2005 – that haven’t been badly ravaged over the past 12 months. It would be no exaggeration to suggest that around three-quarters of the companies that have listed over the past three years are now trading on the JSE at levels below that at which shares were initially placed in pre-listing public and private share placements.
While only a few years ago it was easy to motivate for a listing it’s now quite understandable for company management to cite several disadvantages of retaining a presence on the bourse. In fact, if companies can’t raise capital on the market or issue shares to settle acquisitions, what’s the point of forking out millions of rand in these tough times to maintain a JSE listing? Finweek has also noted a few newer listings citing the responsibilities of maintaining a listing as a reason why things may have stuttered operationally.
If indeed we’re going to see a repeat of what transpired in the late Nineties then minority shareholders should be wary. Owners and managers of companies tend to take advantage of depressed stock market valuations and buy back the business at levels regarded as cheap relative to not only the original listing price but also underlying fundamentals.
Vunani Corporate executive Esna Colyn says a key theme in 2009 and 2010 will be AltX sector consolidation. “We should see offers to minorities. However, those offers and subsequent delistings should be for the right reasons. If there are underlying problems within companies that were listed, those should first be addressed before an offer to minorities is considered.”
Colyn stresses that minority shareholders should consider whether management achieved its original forecasts as set out in the listing prospectus. She points out some companies were negatively affected by external factors outside the control of management – such as the increase in input costs such as fuel prices, the slowdown in residential property markets and increases in interest rates.
“If the company doesn’t obtain its required ‘re-rating’ after all issues have been addressed and the underlying business is performing well,
then we believe the timing is opportune for a management buyout and subsequent delisting.”
But as with all parts of cycles, there are some encouraging signs and possible opportunities. The encouraging part of what could be the beginnings of a delistings trend on the JSE is that history shows that development is often an indicator of the bottom of the cycle (touch wood, again).
Clearly, opportunities exist for shrewd investors able to identify potential future “owner buyout situations”. If those investors get their timing right in buying in at low share prices there’s ample opportunity to make quick returns when owners dangle a premium over the depressed to buy out minorities.
In a report in fund manager RE:CM’s fourth quarter investment views titled “Who is the idiot?” (see www.RECM.co.za), analyst Wilhelm Hertzog uses Celcom to illustrate how some “insiders in some smaller companies are also seeing value in the price being offered to them by the market”. His conclusion is that “if the Celcom transaction becomes a trend” it’s one of the signs that define a market bottom.
But what about the bum deal for minorities who bought in at Celcom’s listing? “They did make an investment decision based on their own free will. What’s happening now, I believe, is the pessimistic part of the cycle where investors sometimes make irrational decisions,” Hertzog says.
So, hypothetically (RE:CM wasn’t an investor in Celcom), if Hertzog were a shareholder in Celcom what would he do? “It would all depend on what I thought the company was worth. I haven’t analysed it closely, but if I thought the owners were offering less than the company was worth, I wouldn’t accept the offer.”
But he concedes in such situations you’re often at the mercy of other minority shareholders and if there’s 90% acceptance of the offer you have to take it. “What I’d probably do is try and make my objections public so other minorities could consider the offer,” says Hertzog.
Shawn Stockigt, director at Achelon Investment Capital, says it certainly won’t hurt to keep an eye on what “the smart money – the so-called insiders – are doing”. He agrees that in the past it’s been seen that once management start looking to buy out companies it “generally is a sign we’re at the bottom of the downward trend”. However, Stockigt cautions that doesn’t mean the market will suddenly re-rate significantly. But it is an indicator
“From 2000 to around the end of 2005 the number of companies leaving the market exceeded those coming on to the market and in 2006 and 2007 we saw the trend reverse.” Stockigt says that was also a time when the market rallied significantly and reached all-time highs. “For 2008 the number of new listings was 23 – still outweighing the 20 delistings. But what’s of interest is that the gap of listings relative to delistings has reversed significantly on the 2006/2007 listings boom.”
Sasfin Securities analyst Mohil Bandulal says the emerging trend of company buyouts is an example of “vulture capitalism”. “Management and owners know what the business is worth. They’re taking advantage of market perceptions. It’s good business strategy.” And minorities? “Investors made the decisions. At the end of the day they bought to share in the risks and rewards of the business,” he says.
Stockigt is more sympathetic to minorities. “They made the investment choice – but unlike the owners they don’t get the benefit when management decides to take the company out.”
Hertzog believes what’s being seen now is the early stages of company buyouts. “So far the companies are small. It was the same in the last cycle, starting in 2002. The larger companies tend to follow. The classic example last time of a company being bought out cheaply was Amalgamated Beverage Industries (ABI).”
ABI, which listed on the JSE in 1989, was bought out through an offer to minorities by what was then SA Breweries in 2004. It was a great acquisition for the beer maker, with ABI now operating as the soft drink division of SABMiller. It remains one of the largest producers and distributors of the Coca-Cola brand in the southern hemisphere.
But how can investors score from the buyout trend? “I’d start by looking at those companies whose share prices have been hit the hardest,” says Stockigt. He adds the ideal candidates would be companies without excessive debt, as credit is drying up and the company might need to raise finance to buy out minorities.
chairman David Sylvester echoes that sentiment, noting that having listed and raised capital a company may find it has adequate capital but feels that costs of being a listed public company are too onerous. “It can also happen that the company doesn’t achieve a share price the vendors are happy with and they find themselves in a position to repurchase the shares and delist the company at a very advantageous discount to the listing price. In the argy-bargy of the market, who can blame them for taking the gap? After all, it was there for the taking by other investors.”
The JSE, who could stand to lose business if the delisting trend takes hold, remains philosophical. Czepek says the bourse will always be sad to see companies delist. “However, it’s cyclical and depending on the markets, companies will come and companies will go. If it makes sense for management to buy back their shares and delist we have to support that, in the future – depending on their strategy – they may one day come back and list.”
Czepek reckons the rationale for listing in the first place should be examined. “Perhaps the reasons were not that sound up front, in which case those companies would be better served in the unlisted environment. Our advice to companies is to focus on that which they can control and the share price will look after itself over the long term.”
Minorities don’t get the benefit when management decides to take the company out.
Can’t blame them for taking the gap.