HCI set to bask in the Sun with SAB’s exit
Copelyn smiling from beer to beer with inevitable sale
IT WAS always inevitable that one day, brewing giant SABMiller would sell its 40% stake in Tsogo Sun.
Since transferring its primary listing to London in 1999, SABMiller has described Tsogo Sun as a noncore operation.
So perhaps it was just as inevitable that Johnny Copelyn, executive chairman of HCI, which holds 41% of Tsogo, would have a particularly clever proposal ready for that day.
Copelyn’s reputation as a shrewd dealer will certainly be enhanced by a transaction that will result in HCI increasing its stake in Tsogo from 41% to 47% without paying one cent.
All with a little help from the British taxpayer, or wherever SABMiller is resident for tax purposes.
It is a winner for Copelyn, and will surely enhance HCI’s allure for local investors — who have already seen their fortunes swell as HCI’s stock price has shot up 34% over the past year.
Tsogo has grown to become a heavyweight in the leisure sector since it emerged from the Southern Sun empire, and now controls 92 hotels, 14 gambling venues including Gold Reef City casino, and 250 conference facilities, including the Sandton Convention Centre.
The mechanics of the proposed transaction are that SABMiller sells its 435 million Tsogo shares in a deal that has an estimated value of R11.7-billion.
About 300 million of the shares will be sold to institutional investors in South Africa and across the world, 5 million will be sold to Tsogo management and 130 million will be repurchased by Tsogo.
These repurchased shares — equal to 11% of Tsogo — will then be immediately cancelled, increasing HCI’s effective interest.
A key aspect of Tsogo’s repurchase of the 130 million shares is that it will be done at an 18% discount to whatever price the institutional investors are prepared to pay for the 300 million shares.
That price will be set later this week after a road show by Tsogo management and a book-build exercise by the banks advising on the deal.
This discount is made possible because the proceeds from the share repurchase will be treated as a dividend in SABMiller’s hands.
“A dividend has a different tax treatment compared with a sale of shares in a placing, which would be subject to capital gains tax,” said a SABMiller spokesman.
The bottom line is that the net proceeds that SABMiller will make from selling the shares back to Tsogo will be in line with what’s received per share from the placing.
While the financial effect for SABMiller is neutral, the repurchase does have the advantage of providing certainty over the disposal of about 30% of its Tsogo stake. It was expected “to enhance the prospects of placing the balance of our shares in the market with potential benefits on the pricing”, said the SABMiller spokesman.
Tsogo CEO Marcel von Aulock said the company would use debt to fund R2.4-billion of the estimated R3-billion price tag for the repurchase of the 130 million shares from SABMiller.
Von Aulock said he was comfortable with this level of debt — equivalent to 2.5 times its earn- ings before interest, tax and amortisation.
Von Aulock said the repurchase would have a positive effect on Tsogo’s earnings per share, increasing it by 0.9%.
Von Aulock is holding meetings in the UK with institutional investors, having spent the earlier part of last week meeting South African institutional investors.
“I suspect the vast majority of shares will be taken up by South Africans. They know the company well, and in the past have been discouraged from buying by the lack of tradeability in the share,” said Von Aulock.
This is no exaggeration. Until now, 90% of Tsogo Sun’s shares have been held by four shareholders, led by HCI.
Although there is greater familiarity among local investors, Aulock said international investors “do know us and they understand South Africa and with a market capitalisation of $3-billion we are a meaningful player in global terms”.
The deal will be finalised only when the book-build exercise is completed and the price investors are prepared to pay is known.
“The clearing price and the ultimate number of shares to be sold will only be determined at the end of the bookbuild,” said the SABMiller spokesman.
Although Tsogo’s share price has vaulted 63% over the past three years, the stock is still cheaper than that of its rival Sun International. Tsogo’s shares trade on a price-to-earnings ratio of about 15, compared with Sun International’s 17.