Brait and the burst-bubble club
Investment firm looks at options to unlock value after 90% slump in five years
● Brait SE, the investment company with billionaire Christo Wiese as its largest shareholder, is one of an unofficial club of JSE-listed companies that have made some investors extremely unhappy. As unhappy as a stock can make shareholders who have had to watch it plummet more than 90% from its peak.
This puts Brait in the league of Steinhoff International, Tongaat Hulett, ArcelorMittal SA, EOH Holdings and any number of construction companies that have all had to stomach a similar drop, though for different reasons.
Brait, which controls gym chain Virgin Active, food producer Premier and two British retailers, has a debt hangover from an acquisition spree half a decade ago.
Unfortunately for shareholders, some of these acquisitions were made at a bad time. When Brait bought British fashion retailer New Look — think of stores that look like bigger versions of Truworths or Foschini, but a bit more punky — it forked out R14bn.
But among emerging markets, SA and the rand have been among the most volatile, and that makes it tougher to time big decisions well, such as investing in new businesses abroad, said Nick Pitro, senior consultant at wealth management firm Austen Morris Associates.
The value of Brait’s investment in New Look has since been cut to zero, and its stake has dropped to less than 20% as part of a restructuring exercise at the retailer.
South African companies have in the past decade been overeager to invest overseas and have often gone too big too soon, said FNB Wealth and Investment’s Wayne McCurrie.
“They tend to buy things that need fixing and overpay in an environment they don’t know or understand,” said McCurrie.
This week, Brait announced restructuring plans of its own that could see it sell some of its assets, refinance its debt or recapitalise the group. Another option, the company said, is “potential equity-raising initiatives”. In simple terms, this means issuing more shares. Often, this is by asking existing shareholders to invest more.
But investors who bought the stock in December 2015 at R170 a share, and have since seen its value dwindle to about R15, might not be keen to throw good money after bad.
Wiese, who through private and familycontrolled companies owns 46% of Brait, remains committed as a long-term investor, according to Brait. The billionaire himself told Business Day this week that he is keeping his options open.
But Wiese, of course, did not invest in Brait at R170 — he came in much earlier when he flipped a part of Pepkor into the company and rejigged what had been a private equity firm into an investment group.
When Wiese later sold Pepkor to Steinhoff, he ended up with Steinhoff shares and Brait with a pile of cash. That cash went hunting for assets — Virgin Active was a good one, New Look was a lemon.
Now it is not clear which of these assets might be on the block.
When investors lose confidence, it is usually because the growth story they bought into no longer rings true. In New Look’s case, British consumers have migrated to online shopping in large numbers, and Britain’s messy exit plans from the EU have weighed on growth and confidence.
ArcelorMittal SA also announced this week that it was having a long, hard look at its portfolio of assets — and some plants will most likely be shut.
The steelmaker had positioned itself to supply a construction-hungry economy and its expanding mining and manufacturing sectors. But “regulated tariffs” — code for Eskom’s electricity prices — and an “extended period of economic weakness” made it tough for it to turn a profit, the company said. Add cheap imports from the likes of China to the mix and the result is a share that dropped from about R40 to R2 in the past five years.
“The outcome of the review may result in the closure of certain operating sites, individual plants and production areas, and the consequential concentration of operations at the remaining sites,” the company said.
McCurrie said the steel industry had been too protected for too many years and simply does not have the scale to compete with the likes of China.
In ArcelorMittal SA’s case, the decline was steady. Economic realities and a stifling regulatory environment — whether in the form of higher prices or stricter rules — often take years to squeeze a share by 90%.
Most of SA’s listed construction companies also disappeared or saw share price drops of a similar magnitude. This is the result of years of overexpansion in an economy that never delivered the growth that had been planned for, said McCurrie. This decline has also been gradual.
But when financial results get delayed due to what are called accounting problems by the company, investors fear fraud and head for the door immediately.
Global retailer Steinhoff, technology company EOH Holdings and sugar-maker Tongaat Hulett have all been on the receiving end of a rapid change in sentiment.
Wiese was also a big loser when Steinhoff’s share price collapsed late in 2017 with the resignation of long-time CEO Markus Jooste and the announcement of “accounting irregularities”. The billionaire is not pushing more money into Steinhoff. The question now is what he will do at Brait.
South African companies tend to buy things that need fixing and overpay in an environment they don’t know or understand
Wayne McCurrie FNB Wealth and Investment