Raining on Grand Parade
Analysis and coverage of SA's top companies and investments - the guide to where your money should be Despite the commission’s refusal, Burger King’s would-be buyers are still keen. It’s up to the tribunal to salvage a deal
ý The Competition Commission’s relish in upholding black ownership at fast-food chain Burger King could leave investors — local and foreign — with serious indigestion.
And its assertions that Emerging Capital Partners (ECP), which wanted to buy the assets from Grand Parade Investments (GPI), wasn’t prepared to make concessions simply aren’t true.
ECP MD Paul Maasdorp says the proposed transaction would have resulted in R700m in foreign direct investment into SA over the next five years.
That’s over and above the R550m in payment proceeds to GPI’s mostly black shareholders, 96% of whom voted in favour of the deal.
Maasdorp adds that ECP was poised to grow Burger King SA substantially by increasing the number of stores by more than 50%. “In addition to our funds flowing to GPI and its shareholders, ECP made a formal commitment to the Competition Commission to, over the next five years, create 1,250 jobs, increase payroll by over R120m, increase supply chain purchases from historically disadvantaged entities by R230m, and implement a BBBEE [broad-based BEE] ownership structure or employee stock ownership plan for 5%.”
But it wasn’t good enough for the commission, which said the merger “cannot be justified on substantial public interest grounds”.
Its main beef was that the deal would cut Burger King’s 68% black ownership to zero.
On paper, the commission’s decision in precluding a marked dilution in Burger King’s black ownership may be noble. This might have been less conspicuous if Burger King was being bought by Famous Brands or Spur Corp, where some genuine competition issues might have arisen.
But a fixation with the nature of ownership at Burger King, in the FM’s view, does not take cognisance of a number of harsh business realities.
For one thing, it could seriously stifle foreign investors’ appetite for promising local businesses by adding a slab of additional costs to secure acceptable black ownership to dealmaking efforts.
For another, investment companies, particularly those with structural issues (like gaping discounts to underlying value) or excessive debt, could be robbed of essential flexibility in shuffling their portfolios by selling assets to unlock value.
A corporate adviser, who asked not to be named, reckons that if such a “built-in” cost is always insisted on when assets change ownership or control, it would surely affect the premium paid by the acquiring company.
“The value of a takeover might never be the same again … You put off foreign investors if you meddle too much in deals. Foreign entities will only pay a control premium price for a local business if they are able to unlock the envisaged synergies.”
Merger parties need certainty on deal-making, and the authorities should not harm the very interests they are required to protect and arguably promote
Robert Wilson and Shawn van der Meulen
There is no doubt other investment companies will be watching GPI’s progress with the competition authorities.
Hosken Consolidated Investments (HCI) CEO Johnny Copelyn is also critical of the commission’s ruling on the Burger King sale. “This could mean no control premiums being achieved by black-controlled companies wanting to sell assets,” he tells the FM.
GPI, which was formed in the mid-1990s, has been trying to sell its majority stake in Burger King since early 2020, when an initial deal worth about R700m was struck with ECP. About a year later the proposed sale price was knocked down markedly, and there were fears the deal would falter again when Covid took hold of the local economy.
The sale would have seen GPI — which also owns valuable gaming assets (most notably stakes in the GrandWest Casino and Sun Slots) — finally unlock value and ease the frustration of investors, who’ve been stuck in a share that has traded at a 40%-50% discount to its underlying assets for many years.
The group’s venture into Burger King — by buying the master franchise agreement for SA in 2012 — has been costly and a tad underwhelming.
Most importantly, it has detracted from the value locked up in the cash-spinning gaming assets. The development costs to build about
100 Burger King stores have topped R700m, and will probably stretch to well over R1bn when operating losses are factored in. It has not been a tasty investment at all.
GPI has also fallen behind in its store rollout.
The required rate — as agreed with Burger King Europe — is five stores a year at present. But
GPI does not have the financial muscle to increase the rollout pace to reach a critical mass, which would generate profits that justify the investments made so far.
Understandably, Burger King Europe might be much more comfortable with the financially muscular ECP holding the master franchise, and most likely increasing the pace of Burger King outlet openings. The more stores that are trading, the more royalties for Burger King Europe.
Paul Whitburn, a portfolio manager at Rozendal Partners and shareholder in GPI, believes Burger King Europe might have preferred 15 to 20 new store openings a year in SA, compared with the current five a year.
“The issue now is for GPI to make sure
Burger King: A big hit when it first opened in SA
Burger King funds itself. It does look like it might be holding that asset for a whole lot longer.”
Sans Burger King, GPI would have a balance sheet that could accommodate steady dividends to its shareholders over the longer term, once the gaming assets recover fully from lockdowns. The operational risk is also removed, and GPI could even contemplate gradually broadening its portfolio with selected new opportunities as a passive investment vehicle.
With Burger King still on the plate, GPI will have to stump up much more in capital expenditure.
But its heavily discounted share price precludes raising fresh capital from the market, probably meaning a long and arduous grind for the group.
In essence, the commission could be crushing an enduring empowerment entity by insisting that new black shareholders should participate in the Burger King transaction.
GPI CEO Mohsin Tajbhai won’t disclose whether his company will appeal against the commission’s ruling, other than to say “we are still weighing up our options”.
GPI’s predicament aside, it will also be interesting to see how the commission approaches the proposed sale of certain of liquor group Distell’s assets to beer giant Heineken.
That deal — which would involve Remgro and the Public Investment Corp as major shareholders — might have to be tagged to a spirited empowerment structure.
You probably also need to ponder whether other potential transactions in the future could get stifled. What if HCI wanted to sell its hotel assets to an international operator, or if Brimstone was bid by a global seafood enterprise for its stake in fishing group Oceana (which holds both domestic and international assets)?
Robert Wilson and Shawn van der Meulen, partners at law firm Webber Wentzel, feel the recommendation by the Competition Commission on Burger King will have severe consequences for the future of mergers & acquisitions and investment into SA.
“Merger parties need certainty on deal-making, and the authorities should not harm the very interests they are required to protect and arguably promote,” they say.
They also question whether competition law is the right tool to advance the country’s transformation agenda.
Wilson and Van der Meulen say it’s now up to the Competition Tribunal to “provide guidance on how the competition authorities should pursue their public interest mandate”.
The PepsiCo/Pioneer Foods merger was the first significant transaction where promoting a greater spread of ownership in firms was a central issue. After engaging the competition authorities, the merger parties agreed to implement a BBBEE ownership plan that saw 12,000 workers receive a stake in the merged entity. ECP had agreed to similar concessions.
Yet the Competition Commission’s Tembinkosi Bonakele argued that the commission had no choice but to block the takeover, and stressed it had done its job of enforcing the provisions of the Competition Act.
Bonakele has said it is up to the merger parties to challenge the commission’s interpretation of the law.
Wilson warns that if the tribunal also prohibits the merger, “the commission’s approach will potentially make it difficult for existing historically disadvantaged shareholders to obtain real value for their interests”.
For GPI shareholders (and investors in general), hopes will be pinned on ECP convincing the competition authorities that its planned investment will be empowering on a broader scale — which may require some horse-trading around job creation and the quantum of the workers’ share scheme.
This could take some time, though the one positive is that it does seem ECP is still keen on clinching a deal.
Burger King, the FM understands, has already undergone network upgrades, software upgrades and point-of-sale upgrades in anticipation of new impetus being brought by a new investor.
Still, a prolonged stalling of the Burger King deal could send ECP packing. And there aren’t too many empowered investment companies on the JSE these days with cash to burn on their balance sheets.
The FM knows that another private equity offer by an SA-based entity came in at about 50% lower than the original ECP bid, and that investors have found the travails of Famous Brands and Spur Corp through Covid difficult to stomach.
restrictions imposed in the CEE region.
Within 18 months, most of the company’s assets in the UK, Germany and Switzerland have been sold at or above book value, taking the initial Western European portfolio from more than €450m to less than €150m. Negotiations for the sale of the remainder of these assets are under way.
The thinking was that Eastern European countries offer much better growth potential, and the barrage of sales means that MAS now boasts one of the lowest loan-to-value ratios in SA’s listed property sector.
In fact, as Slabbert puts it: “We are in the unique position where we have more cash on our balance sheet than debt, so we actually have a negative gearing.”
This has allowed Slabbert to pour money into the CEE development pipeline.
So it pushed ahead with construction on two new malls last year, which were completed in August and March respectively: the Dambovita Mall (31,200m²), which opened in Romania’s Targoviste with a high 92% occupancy, and the 17,000m² Sepsi Value Centre in Sfantu Gheorghe, the capital of Romania’s Hungariandominated Covasna county.
The new additions bring MAS’s interest in completed retail properties across Romania, Bulgaria and Poland to 19. Construction on another two retail developments resumed in April.
Slabbert says the CEE retail portfolio is fully operational, with sales and foot count already close to pre-Covid levels. In fact, trading density (sales per m²) at the company’s 14 open-air and strip malls are well above 2019 levels.
Open-air centres range in size from 17,000m² to 28,000m² and are typically anchored by a large hypermarket adjoined by a small-format mall.
Slabbert says the open-air model has proved hugely successful as 80% of the tenant base comprises national anchors, including fast food restaurants, convenience retailers and a large leisure component.
“Open-air malls offer easy access to stores straight from the car park. And they’re not dependent on office workers like their city centre counterparts, which are taking longer to recover.” He adds: “As soon as you build bigger than 30,000m², the open-air format becomes too cumbersome for shoppers to navigate. Given that larger, enclosed malls are typically more
reliant on smaller tenants than open-air malls, they are the first to suffer in a downturn.” In 2019, MAS also entered the residential development sector and now has two residential projects under way in the Romanian capital of Bucharest. Slabbert says MAS is the only real estate developer to offer First World standards at midmarket prices. Until now, Romanians had little choice other than high rise, drab blocks of flats that were built pre-1989 during the communist era.
Slabbert has also streamlined operations by bringing previously outsourced functions in-house: from architecture, engineering and construction to leasing, property management and marketing. “When we accepted the mandate to turn the company into a CEE-focused business, MAS had about 30 employees and everything was outsourced. So there was no real platform for growth. We now have more than 200 employees and can integrate all our earnings into one business,” he says.
Slabbert is confident that MAS will be able to double its assets from the current €900m to
€1.8bn over the next four years, and he is banking on strong retail sales growth in the region. He refers to recent economists’ forecasts that consumption will grow by 80% in Romania over the next 10 years. “It will be difficult to find another country that offers that sort of growth potential,” says Slabbert.
What’s more, the region is still relatively undersupplied in terms of retail space.
For example, a mature Western European market like France has 380m² of retail space per 1,000 people, while Romania and Bulgaria are only at 182m² and 134m² per 1,000 people respectively. Poland on the other hand is closing the gap, at 320m² per 1,000 people.
Slabbert and Semionov’s progress hasn’t gone unnoticed among cash-flush investors looking for high-growth opportunities.
Earlier this year, SA’s ultra-wealthy Oppenheimer family bought R500m worth of shares in MAS in an off-market trade.
Rafael Eliasov, a director of Joburg-based private investment fund Stockdale Street, which guided the MAS share purchase, says they see “huge” value in MAS, driven by the company’s strategy to benefit from Romania’s high consumption growth story.
He also likes the fact that management is a large shareholder in MAS and has continued to buy its shares during the pandemic.
Fund managers, including Prudential, Meago and Sesfikile Capital also recently increased their weighting to MAS by snapping up shares from SA-based developer Attacq, which cut its stake in a bid to lower debt and fund its