Cash hides a lot of sins

Ac­tion cricket and suits but no as­set strip­ping

Finweek English Edition - - COMPANIES&MARKETS - MARC ASH­TON marca@fin­

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 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.


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