SPACS A PUNCH
Capprec & Hulisani are ready to rumble
Capital Appreciation and Hulisani, two very different companies, have one thing in common: they started off as special purpose acquisition companies (Spacs). This is a sector IM thinks is well worth investigating.
First authorised by the JSE in 2013, Spacs come to market as cash shell companies whose management teams are entrusted by shareholders to undertake yet-to-be found acquisitions. To its credit, the JSE put in place strict rules under which Spacs function. Among these are that all shareholder capital must be paid into an account managed by an escrow agent. If no investment is made within 24 months of listing, the agent must repay the capital to the shareholders.
“It makes it crucial for a Spac to have a strong management team with sector expertise and a track record of deal making,” says Georg Kahle, a Norton Rose Fulbright director.
Capital Appreciation (Capprec) met the criteria to a T when it went to the market in October 2015 to raise R500m, the minimum required for a JSE main board listing.
It went on to raise R1bn, including R250m from the Public Investment Corp. In addition, Capprec’s three founders pumped in R390m of their own money. The founders present an impressive line-up. They are Motty Sacks, cofounder of Netcare; Alan Salomon, a former Bidvest vet- eran; and Michael Pimstein, former Macsteel CEO. Salomon is chief financial officer.
In February, Capprec announced three acquisitions valued at a combined R928m in the financial technology (fintech) space. Having made an acquisition, Capprec will cease being a Spac. It is heading to the computer tech sector, says Bradley Sacks, joint CEO of Capprec with Pimstein.
In its choice of fintech acquisitions Capprec opted for businesses serving financial services providers.
“They have deep pockets,” says Bradley Sacks. “Standard Bank, FNB, Nedbank and Absa last year spent R30bn on their tech requirements.”
Of the three acquisitions being undertaken the largest is African Resonance
Of the three acquisitions being undertaken by Capprec the largest is African Resonance. It will come aboard at a cost of R525m — R295m to be settled in cash and R230m through the issue of 230m new Capprec shares.
It places an historical valuation of about a 10.3 p:e on African Resonance.
The second-biggest acquisition, Rinwell, comes with a price tag of R225m payable in cash. Rinwell delivered a taxed loss of R5.3m in the six months to June 2016.
The third acquisition is specialist financial services software developer Synthesis, at a cost of R142.3m — R82.3m to be settled in cash and R60m through the issue of 60m new Capprec shares. It places an historical valuation of about a 7.4 p:e on Synthesis.
Capprec intends to take its newly acquired trio international. African Resonance has already made a move in this direction through the establishment of Resonance Australia, in which Capprec has bought a 17.45% stake for R36m.
Reaction to Capprec’s deals has been positive, with the market lifting its share price 10% since they were announced, to 88c.
How much more of the same there is to come in the short term is a hard call. But one thing is certain: expect more action from Capprec. “We are very growth oriented,” says Bradley Sacks. “We still have R450m cash and will use gearing or even go to the market for more capital if needed.”
For investors with a far lower appetite for risk but wanting to achieve solid income returns Hulisani is worth a close look.
Listed in April 2016 after raising R500m, renewable energy-focused Hulisani earned itself a permanent place on the JSE in February through the R142.5m acquisition of 100% of Redcap and Eurocape, owners of a combined 6.67% stake in the operational 80MW Kouga Wind Farm in the Eastern Cape. Hulisani followed this up in the same month with an R88.9m deal that will give it an indirect 66% stake in the operational 7 MW Rustmo1 Solar Farm in North West.
For investors Hulisani’s big attraction is the low-risk, annuity nature of its income from 20-year agreements to supply electricity to Eskom.
“The contracts have yields of 6%-8%,” says Asanda Notshe, a portfolio manager at Manzi Capital. Payments are adjusted in line with inflation and come with a government guarantee.
It makes Hulisani a strong contender for cash that investors may be considering putting into inflation-linked bonds (linkers).
The difference is that a 20year linker comes with a yield of around only 2%.