Building unlisted appeal
Dimension Data arrangement suggests further unbundling exercises
PERHAPS it’s understandable that certain investment commentators have perceived the proposed merger between Stellenbosch-based investment groups Remgro and VenFin as a defensive play. Some – including colleague Vic de Klerk (see accompanying report) – suggest the transaction lacks imagination, while others regard the proposed merger simply as a bulking up exercise for Remgro after the unbundling of British American Tobacco in late 2008.
But transactions initiated by the Rupert family – who control both Remgro and VenFin – are best looked at with a longterm view. In that regard the Rupert family’s track record of creating and unlocking value for shareholders over six decades can’t be questioned.
Personally speaking – as a Remgro and VenFin shareholder – the merger offers plenty food for thought about new-look Remgro’s intentions in unlocking value for shareholders, succession planning and new deal flows.
As regards future unlocking of value, I think the fact that VenFin’s 25% stake in technology giant Dimension Data is excluded from the merger is highly significant. Initially, the proposal to create a new holding company for the Didata stake looked cumbersome. But my guess would be that it’s a temporary arrangement and the Didata stake will, over time, be unbundled to shareholders in the holding company.
I’d presume tax considerations about unbundling shares from an unlisted company precluded VenFin initiating such an exercise ahead of its merger with Remgro. In that regard you might even expect the newly created holding company to seek a reverse listing as an interim measure before considering an unbundling of the Didata stake.
Didata was probably excluded from merger proposals because of pricing considerations, knowing that VenFin thinks Didata’s current share price (despite the recent rally) doesn’t nearly reflect the company’s underlying value.
But did Remgro really need a R3bn stake in a listed company in its portfolio – which already comprises around 70% of listed investments? If Remgro is to be perceived as a compelling investment option rather than a value play where listed companies – RMB/ FirstRand, Medi-Clinic, Distell, Impala Platinum, Nampak and Rainbow Chicken – can be bought at a discount, then it needs to offer compelling investments that aren’t readily available to mainstream investors.
Remgro already holds a handful of attractive unlisted investments: brands such as Unilever, black empowerment investor Kagiso Trust Investments, gas specialist Air Products, sugar group TSB, energy group Total SA, glass supplier PG Industries, building products supplier Wispeco and small business financier Business Partners. However, you could argue that Remgro’s share price – which can reach a discount of 25% – is discounting (or mostly disregarding) those unlisted gems.
VenFin’s R4,5bn portfolio (stripping out the R3bn holding in Didata) almost entirely comprises investments. There’s no doubt those investments – and here we count stakes in television broadcaster e.tv, vehicle recovery specialists Tracker, undersea cable group Seacom, Nasdaq-listed Chinese media group Vision China Media and sports brand developer SAIL – will enhance Remgro’s “unlisted appeal”.
After the merger of VenFin, Remgro’s unlisted portfolio portion will grow to around R16bn – which could represent as much as 35% of the total portfolio (including the substantial cash pile).
Naturally, Remgro’s appeal as an entry point to a sizeable unlisted portfolio will increase if listed investments are gradually unbundled or delisted.
Admittedly, it’s unlikely investments such as Distell (which is so illiquid it may as well be unlisted), Rainbow Chicken and MediClinic would be unbundled. It isn’t inconceivable that that trio may well, over time, be subject to minority offers and delistings from the JSE.
But what happens to Remgro’s passive investments in RMB/FirstRand, Implats and Nampak? Perhaps those smaller stakes (in percentage terms) will be unbundling candidates over the longer term?
As regards deal flow, I reckon having VenFin – which had run down its cash flow after substantial recent investments (most notably, Didata and Seacom) – as part of Remgro will allow the enlarged group to pursue attractive tech-aligned investment using some of Remgro’s large cash pile.
VenFin – under CEO Jannie Durand – has secured considerably more new deals over the past few years than Remgro, and the Rupert family has a predilection for owning cutting-edge technology.
If new-look Remgro is to take on a more exciting hue with regard to deal flow then you also have to examine whether the merger proposals also acknowledge succession planning. Perhaps VenFin’s Durand is being lined up to eventually take the reins from longserving Remgro CEO Thys Visser?