Build­ing un­listed ap­peal

Di­men­sion Data ar­range­ment sug­gests fur­ther un­bundling ex­er­cises

Finweek English Edition - - Openers - MARC HASEN­FUSS march@fin­

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, 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?

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