PSG says red tape curbs deal-making
Company sits on R2.6bn cash pile CEO points finger at JSE and government regulations
PSG Group, one of SA’s top investors with stakes in companies from investment to private education, has criticised the government for onerous regulations that complicate striking deals as it sits atop a R2.6bn cash pile.
“We are concerned about the ever-increasing red tape at a government level, but it is a worrying level of red tape that we now see at the JSE,” CEO Piet Mouton said.
Mouton’s comments cement other evidence that private sector investment is lagging in an economy that is bedevilled by policy uncertainty on a range of issues from energy to competition law.
Reserve Bank data showed that SA’s non-financial corporates are sitting on R1-trillion in cash, while fixed investment fell to 13.7% of GDP in 2020, the lowest since the mid-1990s and below the National Development Plan’s target of 30%.
Mouton, who was speaking to Business Day shortly after the company issued its half-year results, has complained that compliance regulations at the JSE have become intrusive, especially after a number of high-profile corporate scandals from Steinhoff to EOH put the bourse operator in the crosshairs of investors who accused it of overly soft-touch regulation.
Mouton said the government also needed to get its act together to foster a friendly environment for businesses like PSG to pump money into the economy, the fragile prospects of which took a pounding from pandemicinduced lockdown restrictions.
He cited as an example the Competition Commission’s initial recommendation that Grand Parade Investments’ sale of Burger King’s SA franchise to a US-based private equity outfit be blocked on the basis it would wipe out black ownership.
“This was a foreign private equity firm, with no existing presence in the SA fast-food market. That deal should have gone through in three seconds,” Mouton said.
Even though the commission’s primary role is to investigate antitrust issues in mergers & acquisitions, it also has a public interest mandate to advance BEE policy goals and freeze job cuts as conditions to approve deals.
Other reasons behind why
PSG is hoarding the R2.6bn war chest, which swells to R4bn if it were to take on debt, is that Mouton wants to have cash buffers to navigate challenges posed by a potential fourth wave of Covid-19 infections as the vast majority of South Africans remained unvaccinated.
It skipped dividend payouts as it reported on Thursday its sum-of-the-parts (SOTP) valuation rose 17% to R110.50 a share in the course of the six months to end-August.
Shares of PSG, with an asset base of R23.1bn, trade at a discount of about 30%. Discounts are an issue for investment holding companies in SA, which must consider whether the payoff from acquisitions will bring better returns than just buying back shares.
Mouton said share buybacks were not sufficiently effective, as a buyback of R1bn would only increase SOTP value by 2%, while using all the cash would only increase it by 6%.
Given that the discount makes tapping shareholders unattractive, the best thing to do is to retain cash to preserve flexibility, said Mouton.
“Obviously it has a shelf-life, so if we don’t find anything in the medium term, we will be obliged to return a big portion of this to shareholders, and they can go look for opportunities themselves,” he said.
Mouton added that the group had historically not struggled with a discount, but it began widening when Steinhoff began selling off its 25% stake in the group in 2017.
MD of Opportune Investments Chris Logan said PSG is justified in its approach to its cash, and while the sale of the Steinhoff shares was a catalyst, SA’s subsequent economic policies, as well as JSE red tape, worsened the issue of discounts.
“Once again this shows up in JSE companies being bought out or leaving the JSE despite the extraordinarily strong global listings bonanza taking place,” said Logan.
PSG’s biggest investment is financial services group PSG Konsult, which makes up 39% of the group’s R23.1bn asset base and which contributed a fairvalue gain of R1.85bn in the six months to end-August.
MOUTON’S COMMENTS CEMENT OTHER EVIDENCE THAT PRIVATE SECTOR INVESTMENT IS LAGGING IN THE ECONOMY