At a key junc­tion

Which track does So­lethu take?

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

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?

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