Stel­lar un­der a fierce spot­light

There is still plenty of hope for this com­pany — though it is cer­tainly not one for granny’s port­fo­lio

Financial Mail - Investors Monthly - - Guest Column -

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

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