Financial Mail - Investors Monthly
WHO’S NEXT?
The next big deal(s) on the JSE
Mining counters aside — and particularly the precious metal counters — the JSE has had a pretty dismal time since the euphoric days of “Ramaphoria” 18 months ago.
Investors soon realised there was no quick fix to the damage the “lost decade” had wrought on the economy and its finances. A lack of bold initiatives from President Cyril Ramaphosa and factional infighting in the ANC have not helped. It was thus with some surprise that one read of PepsiCo’s R24.4bn bid for Pioneer Foods (PFG) late last month — a 56% premium to the last traded price of PFG ahead of deal speculation.
Value investors were quick to chalk up a victory, as were supporters of the president, the latter citing this as “clear evidence” of confidence returning to the country under his administration. The cynical might dismiss the former as premature and trite.
First we need the local economy and broader region to start to grow meaningfully and sustainably, with a concomitant increase in company earnings. To date there is little evidence
of life in either the SA economy or the region, with immediate prospects not looking good. While the PepsiCo investment is to be welcomed, further meaningful investment is needed before chalking up one deal as a triumph.
As things stand, there is one irrefutable fact — historically, SA Inc assets are as cheap as they have been in at least a decade.
But there is a caveat. Is SA a structural or cyclical problem? If the former, cheap may become cheaper — if the latter, then Syd Vianello, a shrewd independent analyst, may well be right when he said recently: “Don’t be surprised if more clever foreigners buy SA assets on the cheap.”
IM has heard via scuttlebutt that there may be further deals being considered. Assuming the rumour mill is correct, IM felt an article speculating on some possible deals would be of interest, and forge some healthy debate in the investment community.
Before allowing the mind to wander, a brief look at the PFG deal might be instructive and allow one to narrow the field of possibilities. Zeder holds a 27% stake in PFG; a large anchor shareholder makes an acquirer’s life easier. Second, PFG has strong brands — Weet-Bix and Ceres, to name but two. Third, PepsiCo views the deal as one of growth, providing it with a base from which it can expand into Sub-Saharan Africa. Finally, the investment is in a “necessity industry” — food.
Armed with the toolkit (at least one big shareholder, strong brands, decent footprint and a basic industry) let us cast the net for some possibilities.
The first that comes to mind is diversified retailer Massmart. Walmart already owns 52% of the shares, having paid R148 a share for its initial stake in 2010. The price is now R46.67. Walmart’s initial investment of $2.3bn is now worth less than $700m — a book loss of more than $1.5bn.
Yes, that is small change for the Walton family, but it remains a sizeable loss.
Its recent trading statement indicated interim earnings will fall by as much as 50% — perhaps a reflection of the economy alone or some “kitchen sinking” ahead of Walmart heavy-hitter Mitch Slape taking the reins later this year.
IM would not be surprised to see Walmart make an offer to minorities once Slape has assessed the domestic landscape, both economic and political.
The second is grocery giant Pick n Pay (PIK). The Ackerman family hold more than 25% of the shares in issue. CEO Richard Brasher has done a good job of tidying up the group over the past few years, with a concomitant improvement in the operating metrics. A crude metric IM looked at is that of p:e multiple/return on assets managed, and on that score PIK is cheaper than both Shoprite and Spar at current prices and rolling 12-month earnings.
PIK is a strong brand and does provide an investor with a good domestic retail footprint, and a more limited one in the rest of Africa.
Shoprite Holdings (SHP) is also an interesting one. The capital structure consists of two classes of share — ordinary shares and deferred shares. The latter are held exclusively by Thibault Square Financial Services (serial risk-taker Christo Wiese) and carry 32.3% of the voting rights of SHP, but no economic rights. Earlier this year SHP shareholders were asked to pay Thibault R3.5bn to unwind this structure. A sufficient number of shareholders did not approve the plan, and the idea has been shelved. But matters have perhaps not been satisfactorily resolved.
In addition to the deferred shares, Wiese holds about 14% of the ordinary shares. Again SHP ticks the boxes, with Wiese and the PIC jointly holding more than 20% of the ordinary shares. It remains a strong brand, with a large retail footprint in SA and a larger African exposure than PIK. We may not have heard the last of the deferred shares and the disparate views of the investment community and their owner.
Debt-laden investment company Brait holds more than 90% of Premier Foods, an unlisted food producer with some strong brands including Snowflake, Iwisa No 1 and Blue Ribbon. Premier sells more than 500-million bread loaves annually, and has a significant exposure in the informal market (where it accounts for more than 60% of all bread sold).
Brait has a pressing need to raise cash, and the deep discount to NAV and scepticism over the quality of the advisory team render a rights issue
unlikely.
Asset sales seems to be the remaining option. Rumours suggest advisers have already been appointed by Brait to look into disposing of a minority stake in Virgin Active. This may not be the last of the assets to be disposed of by Brait. Premier is an attractive asset and would make a good fit with a number of businesses.
Rounding out the speculative list of food producers and retailers is Kaap Agri (KAL). Zeder owns 40% of KAL. Should the PepsiCo deal go through, Zeder will be flush with cash — leaving it with several options. Zeder can pay down debt, pay a special dividend and possibly take out more KAL minorities to secure control of the retailer’s business, strategy and cash flows. The share is trading on an undemanding single-digit earnings multiple.
Rumours have also abounded for some time that foreign investors have coveted certain of SA’s education assets. There is no denying that the quality of education in the country needs to be addressed as a matter of urgency. There is also no denying that some of the listed education corporates on the JSE would deliver a significantly better outcome if given the amount the state spends on education — which is not an inconsequential percentage of total state spend.
The major listed education groups have a large anchor shareholder — PSG in the case of Curro and Stadio, and Coronation Fund Managers in the case of AdvTech. In principle there is much to commend the state and private sector working together in certain areas to deliver a better outcome than is the case at present. Education is a case in point, with a welleducated workforce being vital to the future success of the country.
Of course, the key to this article remains the question posed earlier: is SA a structural or cyclical problem? If it is structural, then buyers — be they domestic or foreign — will be scared off despite the current low multiples of many SA Inc shares. Locals holding a large rand asset base will be hoping there are other investors like PepsiCo which believe the opposite.
IM is not about to foist its opinion on readers, preferring them to decide for themselves after looking at the facts. Still, PepsiCo has given investors something to ponder. The big question is whether the Pioneer deal — if consummated — will be the catalyst to breathe some life back into domestic counters.