Rich pick­ings for AltX vul­tures

Finweek English Edition - - Cover -

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, 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

of value.

“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.

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