Cash hides a lot of sins
Action cricket and suits but no asset stripping
THERE’S BEEN no shortage of excitement in South African capital markets over the past few weeks and the recent announcement by little-known Capitau to launch a takeover bid – in conjunction with RMB – for the assets of media group Avusa has resulted in a lively couple of days in financial reporting.
The conspiracy theories have been flying backwards and forwards. Such as: Capitau is really doing the bidding for Tokyo Sexwale and his Mvelaphanda Group in seeking control of South Africa’s media.
While speculation has been rife in the media, one aspect that seems to have been ignored is answering the question: Just who the hell is Capitau and what does it actually do?
Finweek arrived at the offices of the private equity firm in Bedfordview, east of Johannesburg, to find Capitau works from a converted house. Without question it’s an upmarket property but certainly no more glamorous than any corporate headquarters in Sandton. Apparently the net on the tennis court had been taken down as the firm and their clients were playing action cricket under the floodlights the previous evening.
CEO David Field takes us around its offices, explaining that Capitau is a play on the words “capital” and “tau” – for lion. Hence the walls are hung with a number of pictures of the big cat.
The message seems to be that while the media has painted Capitau as a corporate raider of sorts, they’re just ordinary guys working in an environment they feel comfortable in. But you don’t launch a multi-billion rand deal for one of SA’s premier media groups by just being a bunch of nice guys operating out of a house and “having fun”.
The core of Capitau’s team has its roots in private equity behemoth Brait. Field – along with fellow directors Cornelius Cronjé and Shane Thompson – were all senior members of the Brait team until they left in 2007 to start the new company. These guys are heavy hitters and their track record is impressive. Capitau has raised more than R24bn in capital over the past four years and has been involved in a number of deals, including Foodcorp, which recently won Catalyst Private Equity Deal of the Year at the recent Dealmaker event. It’s also been involved in big name deals involving glass giant Consol, media group Primedia, casino group Peermont and the metals firm New Reclamation Group.
Field concedes he’s more comfortable in shorts and T-shirt than the suit and tie he’s dressed up in to meet the media. However, his team needs to mix it up with the big names in corporate finance as they’re well connected. “Our phones don’t ring – we originate our own deals,” says Field.
Feedback from industry would appear to support that.
“As a team they’ve demonstrated the ability to do large transactions, raise significant amounts of capital and – without any capital support behind them – have been involved in significant and complicated transactions,” says David Polkinghorne, CEO of Grindrod Bank, which has recently launched a R200m mezzanine debt fund in conjunction with Capitau that they aim to grow to in excess of R1bn.
The potential political nature of the Avusa deal aside, what could appeal to a private equity investor about a South African media group that’s built up a dominant position countrywide. Is it just an asset strip waiting to happen?
“Asset stripping is an old private equity model and I’m actually trying to think of a recent deal in recent history that’s gone that route,” says Field. “First, as I’ve said, we’re not planning to asset strip; and, second, we aren’t anticipating retrenchments.”
Did Capitau get involved in such a high profile deal simply to grab the headlines and put itself on the map? Field points to the swimming pool, tennis court, pool table and their internal Super 15 rugby trophy, which is up for grabs for the staff member who can most accurately predict where teams are going to finish each year in the tournament, and says: “This is a lifestyle choice, I don’t want to get any bigger.”
What’s his response to Capitau being just a front for Mvelaphanda or the political elite?
“The first time we met the Mvelaphanda guys was when we approached them earlier in the year,” says Field, putting paid to the theory Sexwale’s empowerment group was pulling the strings in this deal.
What then is the appeal with regards to the Avusa transaction?
“High yield debt funding is potent,” says Field, adding that banks in SA aren’t always the most conducive to dealmaking. In other words, the deal could be done using debt raised in Europe at competitive rates – a strategy that worked very successfully in the case of the Foodcorp transaction.
“In SA you tend to be at the mercy of the big five banks, but the reality is that local companies are geographically insulated, have good management teams and the profit margins are a lot better than what’s on offer in Europe,” Field says. In short, this is an investment decision and not one done to satisfy egos.
Sasha Naryshkine, of asset management firm Vestact, says it’s difficult to compare the investment rationale for SA’s two biggest media groups. Naspers (owner of
Finweek) – which was recently included in the Vestact model portfolio – trades on an earnings multiple of 33, while Avusa trades on a multiple of 15 times historical earnings but was trading at around 12 times prior to the announcement of the potential deal.
“For us, Naspers is a mixture of part net asset value and part earnings potential,” says Naryshkine, adding that much of the appeal of the group is its offshore investments in the likes of Chinese Internet giant Tencent and Russian Internet and email operator Mail.ru rather than its businesses in SA. That’s not to say the South African media environment isn’t potentially lucrative, Naryshkine says, pointing out Naspers made almost R896m from its local print media operations in 2010.
Field is reluctant to talk too much about the Avusa transaction at the moment, saying so far it’s just an expression of interest that’s been made and it wouldn’t be right to talk about potential strategies until the deal is confirmed. However, he did say he believed management would benefit from being out of the spotlight as well as being “properly incentivised”.
Asked what skills or value they bring to the party, Field says: “We bring finance and acquisition skills to the party” – perhaps giving a hint that instead of asset stripping it may look to bulk itself up over the next few years. That train of thought is given further fuel when Field says “cash hides a multitude of sins”.
With Avusa sitting on around R500m in cash in the bank and generating roughly R325m in cash flow from operations in its previous financial year, we can assume the strategy going forward will be acquisitive, especially if shareholders aren’t clamouring for dividends over the near term.
The obvious next question is what kind of assets would appeal to Capitau? Field identifies the September 2010 acquisition of Universal Print Group and Hirt & Carter from UHC Communications as the deal that was the “catalyst” for them to become involved in the Avusa transaction. That saw UHC take an effective 16,5% stake in Avusa and receive a cash consideration of R462,5m in return for the assets.
It’s no secret radio assets are widely prized in SA and if Finweek had to put on its speculator’s cap it might venture that with Capitau’s intimate knowledge of Primedia and its funding structures it might not be too far off to suggest some kind of tie up there.