A tinge of mod­esty would have helped

Financial Mail - Investors Monthly - - Editor’s Note - MARC HASENFUSS email Marc on hasen­fussm@times­me­dia.co.za

ISUSPECT THAT FOR many years in­vestors, when en­gag­ing on crazy val­u­a­tions, will be telling tales of the at­tempted and aborted list­ing of Sa­gar­matha Tech­nolo­gies on the JSE.

To par­tic­i­pate in the list­ing, in­vestors were re­quired to take an enor­mous leap of faith that the di­rec­tors of Sa­gar­matha could build rapidly on a small col­lec­tion of fledg­ling, loss-mak­ing op­er­a­tions.

Putting any­thing be­tween R3bn to R7.5bn into Sa­gar­matha would have given the di­rec­tors a huge li­cence for deal mak­ing — which, of course, comes with large ex­e­cu­tion risks in terms of over­pay­ing for as­sets in an ea­ger­ness to build cash flow­gen­er­a­tive plat­forms and op­er­a­tional scale.

To put it into some cap­i­tal-rais­ing con­text, African Rain­bow Cap­i­tal In­vest­ments (ARC) — which holds a sub­stan­tial port­fo­lio of in­vest­ments, in­clud­ing some promis­ing po­si­tions in the fi­nan­cial ser­vices and tele­coms sec­tors — raised R4.3bn when it listed on the JSE last year. Let’s be hon­est, it car­ries a good deal more tan­gi­ble value than Sa­gar­matha and, what’s more, its prime movers have out­stand­ing track records in value cre­ation and deal mak­ing.

In Sa­gar­matha’s case R3bn to R7.5bn is a heap of cap­i­tal to raise on iffy op­er­a­tional as­sets, and an in­or­di­nately large sum to fork out for an ex­ec­u­tive team that is by JSE in­vest­ment stan­dards untested.

One has only to look at the R2bn raised by Brian Joffe for his new in­vest­ment ven­ture Long4Life. Joffe — ar­guably the best deal maker on the JSE, with an im­pec­ca­ble track record of build­ing long-term value via ac­qui­si­tions — was jus­ti­fi­ably over­whelmed with in­vestor sup­port when Long4Life listed last year. He ef­fec­tively had only one deal (Sor­bet) in the bag. But that in­vest­ment was scal­able, op­er­at­ing in a de­fend­able niche and on a de­cent mar­gin, and it was cash-flow gen­er­a­tive. It was a solid enough plat­form from which to launch Long4Life’s ac­quis­i­tive thrust.

Sa­gar­matha is, by con­trast, gen­er­at­ing turnover of R283m to make an op­er­at­ing loss of R55m. And it wants to add the hugely un­prof­itable and heav­ily in­debted news­pa­per op­er­a­tions of Sekun­jalo In­de­pen­dent Me­dia.

Sa­gar­matha’s first list­ing ef­fort was as­tound­ingly brazen. If it’s true that R4bn in com­mit­ments were re­ceived from in­vestors, it should not be too long be­fore the group, which needs cap­i­tal to func­tion in the same way I need reg­u­lar caf­feine shots to get through the day, re­turns to the mar­ket. I trust its next at­tempt to float on the JSE will be tinged with mod­esty and of­fer a more hum­ble val­u­a­tion of as­sets and prospects.

More im­por­tantly, I would like to see the list­ing mech­a­nism not skewed to ben­e­fit ex­ist­ing share­hold­ers and of­fer­ing noth­ing more than high-risk blue sky to new share­hold­ers.

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