A LES­SON TO MI­NORI­TIES

Finweek English Edition - - Cover -

the most con­tro­ver­sial mi­nor­ity buy­out and delist­ing in the wake of the late Nineties list­ings boom was ex­e­cuted by cat­a­logue re­tailer HomeChoice in 2003. Be­tween 2000 and 2003 there were a great num­ber of mi­nor­ity buy­outs and delist­ings, mostly pitched at prices that heav­ily dis­counted the in­trin­sic value of the re­spec­tive busi­nesses.

Those would in­clude Aba­cus Tech­nol­ogy, Gray Se­cu­rity, Maca­dams Bak­ery Sup­plies (which, iron­i­cally, has now re-listed as part of Uni­ver­sal In­dus­tries), First Life­style Hold­ings, Soft­line, Ser­vest, MDM Growth In­vest­ments, MB Tech­nolo­gies, Smac­soft, Ar­cay, Ch­ester, Car­son, Fedics, Wescape, Alacrity, More­s­port, Max­tec and Forza.

But HomeChoice was the stand­out buy­out in terms of pure gall and un­bri­dled op­por­tunism. Ba­si­cally, HomeChoice CEO Rick Gar­ratt pitched – via a fam­ily trust – a con­tro­ver­sial 18c/share buy­out of­fer to mi­nori­ties in late 2002 when the group’s per­for­mance was suf­fer­ing from the gen­eral de­te­ri­o­ra­tion of the mass credit en­vi­ron­ment.

The 18c/share buy­out of­fer val­ued HomeChoice at just R25m when a num­ber of pro­fes­sional in­vestors reck­oned the group was worth five times that. There was even talk that around 100c/share in value could be se­cured if HomeChoice sim­ply col­lected its debtors book.

There was a good deal of re­sis­tance from share­hold­ers – both re­tail and in­sti­tu­tional – to the buy­out of­fer. But re­sis­tance was fu­tile, be­cause the Se­cu­ri­ties Reg­u­la­tion Panel (SRP) al­lowed Gar­ratt – who was ef­fec­tively steer­ing the buy­out of­fer – to vote on the scheme of ar­range­ment. The one con­ces­sion was that mi­nor­ity share­hold­ers were given the op­tion of stay­ing on board the un­listed HomeChoice. Nat­u­rally, in­sti­tu­tions that man­aged money on be­half of third par­ties (Corona­tion be­ing the most prom­i­nent) were forced to bail out at 18c, which meant only a few die-hard mi­nori­ties opted to re­main on board the listed ve­hi­cle.

But then any doubts that HomeChoice rep­re­sented sig­nif­i­cantly more than the buy­out of­fer were con­firmed when RMB’s Eq­uity Cap­i­tal snapped up a 27% stake in HomeChoice by buy­ing shares on the open mar­ket at a size­able pre­mium to Gar­ratt’s buy­out of­fer price.

Roughly two years later, Eq­uity Cap­i­tal made a nice turn when they sold back their shares to HomeChoice for around 180c/share as part of a share buy­back ex­er­cise.

An­other star­tling statis­tic is that the R56m spent by HomeChoice in 2005 on buy­ing back shares was twice the mar­ket cap­i­tal­i­sa­tion of the com­pany at the time of delist­ing.

Fin­week has a copy of HomeChoice’s most re­cent au­dited fi­nan­cial state­ments (to endDe­cem­ber 2007) and they con­firm just how well the Gar­ratt fam­ily has been re­warded for its op­por­tunis­tic ef­fort. Bear­ing in mind the Gar­ratt fam­ily’s buy­out of­fer val­ued HomeChoice at R25m (18c/share) in 2003 it’s fas­ci­nat­ing to note div­i­dends de­clared since delist­ing from the JSE al­ready to­tal 16c/share.

Tan­gi­ble net as­set value has grown from 136c/share in 2003 to more than 400c/share, while the bal­ance sheet car­ries no gear­ing. Turnover is now well clear of the R400m mark and well clear of the R273m notched up in fi­nan­cial 2003.

Since 2003, HomeChoice has gen­er­ated more than R340m in earn­ings. Not bad for a busi­ness sup­pos­edly worth R25m. How­ever, most im­pres­sive are the cash flows gen­er­ated since 2003, top­ping R64m at the end of 2007. HomeChoice’s cash bal­ances at end-2007 stood at a re­as­sur­ing R74m (equiv­a­lent to more than 70c/share).

Per­haps when HomeChoice, which has been buy­ing back its own shares, has shed the last of its pesky mi­nor­ity share­hold­ers there will be a bumper div­i­dend pay­out?

Mean­while, Fin­week notes cash-flush HomeChoice has paid R28m for an of­fice build­ing that will be re­de­vel­oped as a new head of­fice for the group.

A nice busi­ness… if you can get it!

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