At a key junction
Which track does Solethu take?
EMPOWERMENT group Solethu – as predicted by Finweek in early June – has grabbed the wheel at rail and engineering specialists RACEC after underwriting a R10m rights issue. Solethu, which was already a strategic equity partner in RACEC, snaffled almost all the 25m shares on offer in the AltX engineering group’s rights issue. The empowerment company’s stake in RACEC now increases to 34,7% – just below the level that would have triggered a mandatory offer to minority shareholders.
With RACEC’s shares trading at below the rights issue price of 40c for most of the rights offer period – and management agreeing not to participate in the fund-raising exercise – Solethu was really the only serious participant. In fact, only 135 000 shares were subscribed for by minority shareholders.
Solethu’s willingness to participate further at RACEC – especially the fact the fresh capital allows it to pursue two large Cape Town electrical contracts worth R140m – has warmed up sentiment somewhat. RACEC’s price has bounced off a 25c low in May and settled at a more encouraging 45c/share.
While RACEC’s fundamentals do look markedly better for the second half of the year to end-September 2010, we wonder whether the market isn’t catching the whiff of possible corporate action. The pertinent question is what Solethu intends doing at RACEC? Is the empowerment company going to patiently wait for a turnaround at RACEC or will it take the initiative in restoring the value of its investment?
In June last year Solethu made its first foray into RACEC, paying 130c/share (or R45m) to secure a 25% stake in the company. Though participation in the rights offer allowed Solethu to bring down the cost of its investment there’s still a long way to go before the empowerment company is back in the money.
It would make financial sense for Solethu – presuming it has the capital available – to bid for outright control of RACEC via an offer to all shareholders. Such an exercise would cost around R60m – factoring in a decent buyout premium to its market price. But while minorities might be tempted to take the money and run, RACEC’s management – which retain a significant collective stake in the business – may be less inclined to bail at this trough in the business cycle.
Solethu would presumably also want to retain the key management of RACEC, with specialised engineering skills not that easy to come by these days. So if a buyout offer excluded management’s shares, then Solethu would have to fork out considerably less to take out minorities and delist the company.
Probably more than 80% of RACEC’s issued shares are now held between Solethu and management, a situation that does look ripe for a minority offer. Of course, a more intriguing option would see Solethu mobilising its other rail investment – a 50% stake in rail services company RRL Gindrod Holdings – for inclusion in the RACEC listing.
Bulking up and diversifying the RACEC listing can’t be a bad thing – especially if such a development generates more market interest in the share. But would shipping giant Grindrod – which owns the other 50% interest in RRL Grindrod – be keen for a merger?