CASE STUD­IES

CEL­COM AND KAY-DAV

Finweek English Edition - - Cover -

THE PRO­POSED buy­outs of the op­er­at­ing as­sets in cel­lu­lar ser­vices busi­ness Cel­com and wood boards dis­trib­u­tor KayDav Group il­lus­trate won­der­fully the op­por­tu­nity for con­trol­ling ex­ec­u­tives to score from both the up­side and down­side of the JSE. It also – un­for­tu­nately – de­picts just how mi­nor­ity share­hold­ers can get hor­ri­bly screwed. Not only are the ex­ec­u­tives be­hind the con­sor­tiums buy­ing out the re­spec­tive op­er­at­ing as­sets get­ting a great deal in terms of value, they were also able to make use of funds pro­vided at list­ing by share­hold­ers will­ing to pay what now seems in­flated is­sue prices.

The statis­tics are rather re­veal­ing. Cel­com raised R23m be­fore list­ing in Novem­ber 2006, when the com­pany held a mar­ket cap­i­tal­i­sa­tion of R206m at a price of 100c/share. The buy­out and delist­ing pro­posal sees mi­nor­ity share­hold­ers be­ing of­fered 50c/share to bail.

Af­ter Cel­com’s (dare we say) “con­ve­niently dour” trad­ing up­date last week, the of­fer may well seem at­trac­tive. But Cel­com’s price had dipped (at the time of writ­ing) to un­der 30c/ share, which ei­ther rep­re­sents a great job­bing op­por­tu­nity or re­flects con­sid­er­able doubt the pro­posed buy­out will ac­tu­ally ma­te­ri­alise.

Al­though the buy­out of­fer rep­re­sents a con­sid­er­able 56% pre­mium on the share price be­fore the scheme of ar­range­ment was pro­posed, you have to con­sider the fu­ture po­ten­tial of Cel­com. For an ef­fec­tive price of R75m (R49m in cash, the bal­ance in a share re-pur­chase), Cel­com’s main ex­ec­u­tives will take back a group ca­pa­ble of gen­er­at­ing R1bn in turnover at a fairly de­cent mar­gin – with, as direc­tors put it, “a strong bal­ance sheet with lit­tle gear­ing, which would fa­cil­i­tate fu­ture growth”.

Easy money over the long term, it would seem…

In the case of KayDav, a con­sor­tium led by CEO Gary David­son will pay R112m to ac­quire the main op­er­at­ing as­sets of the group in a deal to be set­tled by a share re-pur­chase (R28m), cash R38m and a R26m loan. The bot­tom line is that share­hold­ers will ef­fec­tively be of­fered a cash exit pay­out equiv­a­lent to 38c/share – but at the same time be of­fered a “sweet­ener” to re­main on board, as the listed ve­hi­cle is set to fa­cil­i­tate a re­verse list­ing of the Abalen­gani Group (with a R3bn prop­erty port­fo­lio).

Ig­nor­ing for a minute the mer­its of the mooted Abalen­gani trans­ac­tion, the 38c/share of­fered for the KayDav busi­ness by the con­sor­tium is a far cry from the 100c/share pitched to new share­hold­ers ahead of the group’s list­ing in Novem­ber 2007. The fact that the funds raised from share­hold­ers at list­ing – a chunky R40m – rep­re­sents more than 35% of the buy­out of­fer should raise eye­brows. KayDav also pro­duced 3,4c/share (roughly R10m) in in­terim earn­ings – but the group does earn more prof­its in its sec­ond half.

But be­fore share­hold­ers board up the KayDav busi­ness and open their arms to Abalen­gani, per­haps scru­ti­n­is­ing the full-year re­sults to end-De­cem­ber 2008 (which should be pub­lished be­fore end-March) is a good idea.

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