Stellar under a fierce spotlight
There is still plenty of hope for this company — though it is certainly not one for granny’s portfolio
Back in 2013, the former technology laggard ConvergeNet became the darling of the stock market when it became the second small-cap stock to catch the dealmaking eye of youthful corporate financier Charles Pettit and his team at AfrAsia.
A year ago, it rebranded as Stellar Capital, a name which was meant to capture its newfound dynamism and, hopefully, its trajectory too. Its prospects obviously weren’t harmed when legendary local investor and multibillionaire Christo Wiese emerged as a major shareholder, and it seemed Stellar was rocketing to success.
That ride has come crashing down to earth in recent months.
To understand why, a bit of history helps.
Pettit and AfrAsia cut their teeth in the JSE-listed space by acquiring control of loss-making crane business SA French. Largely through a slew of paper-based transactions, the team transformed the business into a stock which I likened at the time to a “baby Invicta”.
That company became Torre Industries, a stock that Pettit rode from a share price of just 30c to a boom-time high of 550c. It has since halved.
Torre was a classic roll-up conglomerate. It used its highly rated paper to buy old-world heavy industry businesses, which were turned around through chainsaw cuts in costs and improvements in business basics.
As a result, Torre became a market darling. Investors saw Torre’s success as a taste of what could happen to ConvergeNet under Pettit’s stewardship.
Initially, it seemed like a wise bet. ConvergeNet followed the typical path of a counter under Pettit’s mantle: it was stealthily acquired, costs were immediately and ruthlessly cut, and superfluous units were sold, often for a quick buck.
What was left was basically a shell company which nonetheless carried an allure of potential grandeur, particularly as whispers of imminent deals floated in the air.
From a market value of R100m when Pettit bought it, ConvergeNet had a meteoric rise to R700m as investors, smelling the “next big thing”, piled in to the stock as if there was no tomorrow. As you can imagine, this suited the new owners as they could use their highly rated stock to acquire new assets.
The real kicker came when Wiese took a sizeable stake in the business. Wiese’s name carries plenty of currency in the investment world, so a flurry of share-buying lifted the counter to 350c.
Many of Wiese’s rag-tag assets were then flipped into the renamed Stellar Capital — including stakes in Goliath Gold, DigiCore and Mine Rehabilitation — in exchange for paper issued to Wiese at 200c per share.
Of course, many of these early assets are now gone as Pettit and his team re-engineered Stellar into a business focused on industrial holdings, financial services and technology. If you’re looking for a comparison, it’s probably closer to a “mini Brait” than anything else.
And there were big deals aplenty — the first was when Torre’s founding shareholders flipped their stake into Stellar in exchange for paper. In the end, Stellar ended up owning 34% of Torre, where Pettit was the CEO, prime dealmaker and significant shareholder. After the Stellar transaction, Pettit also become Stellar’s CEO into the bargain.
By late last year, Stellar was seemingly unstoppable. It had stakes in Torre, Cadiz and Tellumat, alongside a fat R1.15bn war chest from institutional investors, and the corporate finance team behind Stellar was voraciously on the hunt for deals.
But by December, the wheels started to come off. A wider stock market rout (courtesy of Jacob Zuma) meant that riskier shares like Stellar and Torre began to look relatively less attractive.
Their lofty p:e ratio, which had been driven by acquisitions, meant they both became less alluring to risk-averse investors.
A bigger rout was awaiting Stellar, however, when it released interim results in February this year. These results revealed that Stellar had used an inflated R900m “acquisition” valuation for its investment into Torre,
Pettit and AfrAsia cut their teeth in the JSE-listed space by acquiring control of crane business SA French