Can Phil Roux save Nampak?
It’s been crushed by a staggering debt bill, but the group may finally have found its turnaround guy
Interim CEO Phil Roux’s promise to “behave like we are owners and think like shareholders” could be just what Nampak needs to garner support for a muchneeded but unpopular rights issue.
Nampak’s shares spiked more than 20% last week during Roux’s presentation to shareholders, which included a plan to crack down on costs “as other players are trying to eat our lunch”. His candour was a welcome departure from previous investor interaction by Nampak executives.
But this week the shares are dribbling down, no doubt as the market comes to terms with a turnaround that could be a real grind; Nampak’s half-year losses, after all, were a cool R342m.
The company is now suggesting that a rights offer of up to R1bn will suffice to restore the balance sheet. While the quantum has halved it was pitched at R2bn earlier this year R1bn is still double Nampak’s present market cap (which is less than considerably smaller listed rivals Transpaco and Bowler Metcalf).
Still, the wording “up to” suggests that a lower figure might finally be settled on, depending on short-term cash flow and planned asset sales. But new debt terms are far more stringent, so perhaps that is an optimistic outcome. The R1bn figure might also have been pencilled in to ensure the rights offer did not trip debt covenants if not fully taken up by Nampak shareholders.
Roux was disarmingly frank about strategic stuff-ups at Nampak specifically poor capital allocation choices. “I’m not standing in judgment, because this organisation, like so many other South African companies, went on an African investment frenzy and many, if not all, have paid the price. Exacerbating our situation is that we overpaid, and we funded some acquisitions in dollars.”
He said Nampak was production-led rather than customer-centric, something he has been doing his utmost to rebalance in the past few weeks. Roux made it clear that for Nampak to become an investable stock again, margins need to improve and, in the case of loss-making food canning business
DivFood, “the interaction with the client needs to be
done on a commercially sustainable basis”.
DivFood has been chewing up working capital and some shareholders have been far less diplomatic than Roux about it.
“Nampak will have a balance sheet to combat competitive intensity, and we will invest for growth,” Roux said. “You will see a streamlined Nampak. We will fix, close or sell operations.”
One large shareholder tells the FM: “I believe there are huge cost savings to be made … much more than I initially thought. Even if executives get this half right then it will be great for Nampak.”
“Efficiencies” include a freeze on hiring and significant staff and payroll cuts. “Every single cash operating expense in the company is under review. That includes 421 mobile phones, most of which are sponsored for staff that spend 90% of their time at their desks,” Roux said.
Structurally, Nampak’s strongly performing drink-canning business Bevcan will be merged with underperforming DivFood to bring synergies and cost savings — as well as a “common shared service capability under single leadership”.
Yet these plans will take time to reflect in Nampak’s financial statements and may mean more pain for shareholders in the short term. Roux explained: “You incur more costs while you go through these processes, and then you wake up one day and the stuff starts to ratchet.”
He conceded Nampak might not get assets out of the portfolio as quickly as shareholders would like but said investors will give the executive team 24 months to get the business completely repositioned. The group appears to be on track to meet its lenders’ condition that R250m of assets be sold by year-end.
André van der Veen, managing partner of A2 Investment Partners and a Nampak nonexecutive director, maintains the group has a debt challenge, not a profitability problem. Van der Veen is a prime mover at another packaging (and printing) entity, Novus Holdings, so his opinion is well informed. “Customers are screaming for more cans … The underlying business is a good business. Phil is action orientated. We will find buyers for the assets for sale, and debt will come down.”
Van der Veen also praises Nampak’s lending group. “At times like this, lenders can often be difficult. But Nampak’s lending group has assisted in putting together a structure that gives us time to restructure our balance sheet in an orderly manner.”
There appears to be informal consensus among shareholders that debt at about R3.5bn is appropriate and workable. At the moment, however, Nampak is saddled with short-term debt of R1.4bn, and longerterm borrowings of R5.4bn. It means the company has an uncomfortable gearing ratio of 252% — and it paid an interest bill of R494m in the interim period.
Chris Logan, chief investment officer of Opportune Investments and a longtime Nampak critic, tells the FM: “While Phil gave a powerful diagnostic on what has led to the loss of shareholder and lender confidence, and presented a credible plan as to the way forward, a turnaround at Nampak remains a Herculean task.”
Logan points out that since Nampak’s 2018 year-end, NAV has fallen 78% from R15.73 a share to just 338c a share, while net debt has nearly doubled. “Net debt is now nearly three times reported shareholders equity of R2.1bn and since these numbers were struck on March 31 2023, interest rates and currencies have further moved against Nampak.”
Nampak’s restructured debt schedules are also more punitive: local ranges shift from interest rates of 11.38% to 13.25% and foreign ranges shift from 7.94% to 12%.
Logan says the harsh reality is that Nampak is heavily exposed to some of the most hostile business environments in the world. “No amount of business brilliance can totally negate doing business in countries like Nigeria and Zimbabwe.”
The hope is that Roux can defy Warren Buffett’s wisdom: “When a manager with a reputation for brilliance tackles a business with a reputation for bad economics, the reputation of the business remains intact.”