Post-Pepkor plunge fails to vex Brait boss
BRAIT’s shares were thoroughly mauled after Tuesday’s deal with Christo Wiese and Steinhoff, in which it will sell its entire Pepkor shareholding for R15-billion cash and 200 million Steinhoff shares. But Brait CEO John Gnodde is not bothered
ST: How do you feel about the savaging of Brait’s stock since you announced the deal? Clearly investors were unhappy
JG: I think the stock was trading at these levels — R67 — prior to the cautionary about six weeks ago. So really, post the cautionary it ran up, and obviously it’s come back off, so I look at it versus where it was prior to the cautionary.
But it seems that investors were rather expecting an unbundling of Pepkor, maybe a listing. Do you think this is really the best deal for Brait shareholders?
An unbundling or listing of Pepkor was never on the table. That was never an option…
Well, the market seemed to think it was.
We made it very clear from our standpoint that it was never an option. From a Brait shareholder perspective we think it’s a very good deal. The exit multiple is 18.4 times earnings before interest, tax, depreciation and amortisation (Ebitda) for the Brait transaction, which is a 37.5 times price: earnings ratio. It’s at a 37% premium to the Pepkor peer average today. If you look at Mr Price going back three years it’s at a premium of 24% to that, and on a peer average point of view going back three years it’s at a 51% premium. You can’t just look at everything in isolation; you’ve got to look at it over the duration. The internal rate of return (IRR) is 66%.
Is your intention to sell the Steinhoff shares?
Ja, we’ll look at it over time but we’re not restricted in any way and it’s got an underpin.
Was it always on the cards, to sell Pepkor?
We don’t have a focused exit strategy at the moment for our assets… We just focus on the underlying assets and try to drive value. Having said that, if someone arrives with a very attractive offer, you have to evaluate the offer. Part of your evaluation is to look at everything going forward and what the alternatives are, then you make a recommendation.
What are the alternatives now? You’ve got a huge kitty to do deals … will you look to businesses in a similar sector to Pepkor, or do you have carte blanche?
We do have the ability to go wider, but we want to invest the capital in the sectors we know and understand best; sectors that show the requisite growth profile, and there are opportunities. Obviously I can’t give you specifics, but we’re going to be looking in South Africa and Europe as well. We’ve been doing this for 18 years and our return profile over 18 years, in the private equity heritage and into the investment company model, has always been north of 25% IRR.
What is ‘the requisite growth profile’?
It’s double-digit growth at the Ebitda level, very high cash flow conversion.
Will you use all the cash for deals? Any plans to pay it out to investors?
I think shareholders — certainly the ones we’ve spoken to — would like us to deploy the cash because the returns are higher than sending the cash out.
How big is the risk of this deal not going through?
I can’t really comment on that because those risks are out of my control. It’s more on the other (Steinhoff) side.
How would you state the investment case for Brait to shareholders who think you’ve done something terrible selling Pepkor?
Our investment case has always been to provide access for shareholders to privately owned, market-leading, highgrowth, cash flow-generative businesses. We have a very attractive asset sitting in Premier (Foods) which really is performing well and certainly trading ahead of expectations — that’s got legs on it. And we’ve got to find others.
Are you being approached by lots of businesses?
Ja we do, hey. They like the model, they want an anchor shareholder, they like the way we work alongside the management team and help them execute on their growth ambitions.
How much shareholder support do you have so far?
I haven’t gone out and got irrevocables; I’ve met with shareholders and profiled the transaction to the five big shareholders and we had encouraging feedback but the vote is at the end of January.
Do you expect any resistance?
The feedback I’m getting is that people think the deal is very good.