Suspicions mar ‘crafty’ bid to delist Howden
Shareholders miffed as five-year dividend fast fattens firm for the kill
● Minority shareholders in Howden Africa are casting a jaundiced eye over proposals to delist the perennially profitable and cashflush industrial services group from the JSE.
Howden Africa, which specialises in providing fans and heat exchangers as well as environmental controls to Eskom and the mining sector, has already caused much consternation among its minority shareholders by hoarding a huge cash pile and refusing to pay dividends.
It is, ironically, the dividend sacrifice made by shareholders over the past five years that will be effectively mobilised to execute the contentious delisting exercise.
Dividends were unceremoniously halted in 2013 after US industrial giant Colfax bought control of Howden Africa’s UK parent company, Howden Group. With the dividend taps turned off, Howden Africa’s strong operational cash flows rapidly topped up the group’s bank balance to more than R1.3bn.
At the end of June, Howden Africa’s cash pile represented a chunky 56% of the group’s R2.3bn market capitalisation — or more than R20 a share.
Late last month Howden proposed delisting the group from the JSE in a share buyback exercise — a move that has been described as “crafty”.
No details around a pricing range for the share buyback have been indicated yet. But following the route of a buyback — rather than the parent company pitching a buyout offer to minorities — means the company can conveniently use its accumulated cash pile to acquire shares from dividend-starved minorities. In fact, the cash pile is sufficient to fund the envisaged share buyback and still leave Howden Africa with sufficient leverage on its balance sheet for operational matters and strategic initiatives.
Howden Africa cited the shares’ relative lack of liquidity and poor analyst coverage as key reasons for seeking a delisting. The group also said it was unlikely to make use of the JSE for raising fresh capital, and that it would be easier to clinch a BEE transaction as an unlisted company.
Larger Howden Africa minority shareholders canvassed by Business Times were reluctant to comment on the record on the possible outcome of the delisting proposals before seeing an indicative price for the share buyback exercise. But there was consensus that only an offer at a considerable premium to the ruling share price would preclude vehement minority resistance to the delisting proposal. A price range of R55 a share to R60 a share was considered fair — but with some shareholders acknowledging that Howden Africa might have a ceiling price of R50 a share in mind.
Des Mayers, a senior analyst at Afrifocus Securities, said Howden Africa was a quality company that had performed stoutly over the long term, so “shareholders are unlikely to give up their shares at anything but a realistic price”.
Mayers said that Howden Africa’s determination not to pay dividends over the past five years had weighed heavily on the share price and market sentiment. “This used to be a group that endured good and bad times, always paying a dividend, and even paying out special distributions in the very good years. The last few years have been very frustrating for long-term shareholders.”
Other shareholders were more sceptical, claiming the holding back of dividends was a conscious effort at frustrating minority shareholders. One argued that the resumption of dividend payments would have seen a re-rating of the Howden share price.
Howden Africa initially signalled a pending BEE transaction as a prime reason for retaining cash, but hinted later at acquisitions. None of these transpired, with Howden Africa not even placing its shares under a cautionary notice.
Larger minority shareholders share the view that the references by executives to an empowerment transaction and acquisitions were merely excuses to build up the cash pile.
One shareholder confirmed there was a concerted effort to force Howden Africa executives to give a detailed explanation of the pros and cons of the dividend payment. “We put the heat on … but they dodged and weaved.”
Other shareholders were sceptical about the timing of Howden Africa’s share buyback proposal, which came only weeks after the group reported a muted interim performance.
The interim results to end-June showed revenue down 27% to R652m and operating profit dropping 40% to R78m. But cash flow from operating activities was R151m and net operating cash flow was R120m — equivalent to 228c a share and 151c a share respectively.
Looking ahead, Howden chairman Ian Brander wrote dourly that capital project spend within power generation, mining and general industry was expected to remain subdued.
However, the larger Howden Africa minority shareholders still maintain the group has huge potential upside over the long term — pointing out that key client Eskom is set to accelerate its maintenance spend in the medium term. Factors such as the Clean Air Act were also likely to benefit Howden Africa’s businesses positively.