Sunday Times

Sus­pi­cions mar ‘crafty’ bid to delist How­den

Share­hold­ers miffed as five-year div­i­dend fast fat­tens firm for the kill

- By MARC HASENFUSS hasen­fussm@ti­soblack­ Business · Investing · Africa · Eskom · United States of America · United Kingdom · Howden · Colfax

● Mi­nor­ity share­hold­ers in How­den Africa are cast­ing a jaun­diced eye over pro­pos­als to delist the peren­ni­ally prof­itable and cash­flush in­dus­trial ser­vices group from the JSE.

How­den Africa, which spe­cialises in pro­vid­ing fans and heat ex­chang­ers as well as en­vi­ron­men­tal con­trols to Eskom and the min­ing sec­tor, has al­ready caused much con­ster­na­tion among its mi­nor­ity share­hold­ers by hoard­ing a huge cash pile and re­fus­ing to pay div­i­dends.

It is, iron­i­cally, the div­i­dend sac­ri­fice made by share­hold­ers over the past five years that will be ef­fec­tively mo­bilised to ex­e­cute the contentiou­s delist­ing ex­er­cise.

Div­i­dends were un­cer­e­mo­ni­ously halted in 2013 af­ter US in­dus­trial gi­ant Col­fax bought con­trol of How­den Africa’s UK parent com­pany, How­den Group. With the div­i­dend taps turned off, How­den Africa’s strong oper­a­tional cash flows rapidly topped up the group’s bank bal­ance to more than R1.3bn.

At the end of June, How­den Africa’s cash pile rep­re­sented a chunky 56% of the group’s R2.3bn mar­ket cap­i­tal­i­sa­tion — or more than R20 a share.

Late last month How­den pro­posed delist­ing the group from the JSE in a share buy­back ex­er­cise — a move that has been de­scribed as “crafty”.

No de­tails around a pric­ing range for the share buy­back have been in­di­cated yet. But fol­low­ing the route of a buy­back — rather than the parent com­pany pitch­ing a buy­out of­fer to mi­nori­ties — means the com­pany can con­ve­niently use its ac­cu­mu­lated cash pile to ac­quire shares from div­i­dend-starved mi­nori­ties. In fact, the cash pile is suf­fi­cient to fund the en­vis­aged share buy­back and still leave How­den Africa with suf­fi­cient lever­age on its bal­ance sheet for oper­a­tional mat­ters and strate­gic ini­tia­tives.

How­den Africa cited the shares’ rel­a­tive lack of liq­uid­ity and poor an­a­lyst cov­er­age as key rea­sons for seek­ing a delist­ing. The group also said it was un­likely to make use of the JSE for rais­ing fresh cap­i­tal, and that it would be eas­ier to clinch a BEE trans­ac­tion as an un­listed com­pany.

Larger How­den Africa mi­nor­ity share­hold­ers can­vassed by Busi­ness Times were re­luc­tant to com­ment on the record on the pos­si­ble out­come of the delist­ing pro­pos­als be­fore see­ing an in­dica­tive price for the share buy­back ex­er­cise. But there was con­sen­sus that only an of­fer at a con­sid­er­able pre­mium to the rul­ing share price would pre­clude ve­he­ment mi­nor­ity re­sis­tance to the delist­ing pro­posal. A price range of R55 a share to R60 a share was con­sid­ered fair — but with some share­hold­ers ac­knowl­edg­ing that How­den Africa might have a ceil­ing price of R50 a share in mind.

Des May­ers, a se­nior an­a­lyst at Afrifo­cus Se­cu­ri­ties, said How­den Africa was a qual­ity com­pany that had per­formed stoutly over the long term, so “share­hold­ers are un­likely to give up their shares at any­thing but a re­al­is­tic price”.

May­ers said that How­den Africa’s de­ter­mi­na­tion not to pay div­i­dends over the past five years had weighed heav­ily on the share price and mar­ket sen­ti­ment. “This used to be a group that en­dured good and bad times, al­ways pay­ing a div­i­dend, and even pay­ing out spe­cial dis­tri­bu­tions in the very good years. The last few years have been very frus­trat­ing for long-term share­hold­ers.”

Other share­hold­ers were more scep­ti­cal, claim­ing the hold­ing back of div­i­dends was a con­scious ef­fort at frus­trat­ing mi­nor­ity share­hold­ers. One ar­gued that the re­sump­tion of div­i­dend pay­ments would have seen a re-rat­ing of the How­den share price.

How­den Africa ini­tially sig­nalled a pend­ing BEE trans­ac­tion as a prime rea­son for re­tain­ing cash, but hinted later at ac­qui­si­tions. None of these tran­spired, with How­den Africa not even plac­ing its shares un­der a cau­tion­ary no­tice.

Larger mi­nor­ity share­hold­ers share the view that the ref­er­ences by ex­ec­u­tives to an em­pow­er­ment trans­ac­tion and ac­qui­si­tions were merely ex­cuses to build up the cash pile.

One share­holder con­firmed there was a con­certed ef­fort to force How­den Africa ex­ec­u­tives to give a de­tailed ex­pla­na­tion of the pros and cons of the div­i­dend pay­ment. “We put the heat on … but they dodged and weaved.”

Other share­hold­ers were scep­ti­cal about the tim­ing of How­den Africa’s share buy­back pro­posal, which came only weeks af­ter the group re­ported a muted in­terim per­for­mance.

The in­terim re­sults to end-June showed rev­enue down 27% to R652m and op­er­at­ing profit drop­ping 40% to R78m. But cash flow from op­er­at­ing ac­tiv­i­ties was R151m and net op­er­at­ing cash flow was R120m — equiv­a­lent to 228c a share and 151c a share re­spec­tively.

Look­ing ahead, How­den chair­man Ian Bran­der wrote dourly that cap­i­tal project spend within power gen­er­a­tion, min­ing and gen­eral in­dus­try was ex­pected to re­main sub­dued.

How­ever, the larger How­den Africa mi­nor­ity share­hold­ers still main­tain the group has huge po­ten­tial up­side over the long term — point­ing out that key client Eskom is set to ac­cel­er­ate its main­te­nance spend in the medium term. Fac­tors such as the Clean Air Act were also likely to ben­e­fit How­den Africa’s busi­nesses pos­i­tively.

 ?? Pic­ture: Waldo Swiegers ?? How­den Africa pro­vides en­vi­ron­men­tal con­trols to power sta­tions such as Eskom’s Du­vha, out­side eMalahleni in Mpumalanga.
Pic­ture: Waldo Swiegers How­den Africa pro­vides en­vi­ron­men­tal con­trols to power sta­tions such as Eskom’s Du­vha, out­side eMalahleni in Mpumalanga.
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