Investment scene shift
HOLDING COMPANIES: THREE MAY DISAPPEAR FROM MARKET IN 2022
Firms trading to sum-of-parts in 40%-46% range in past three years.
By the end of this year – if all goes according to plan – as many as three JSE-listed investment holding companies will be no more. PSG Group surprised the market on 1 March with the announcement that it would unbundle all its holdings (save for Zeder and a portion of its stake in Stadio) to shareholders and take what remains private.
The pre-eminent investment holding company of the JSE in the past two decades would no longer be listed. It has brought a number of quality businesses to the equity market – dwarfed by the blowout success of Capitec – and this truly represents the end of an era.
But it’s not only PSG Group that is fading from public view.
RMI Holdings
In September, RMI Holdings said it would unbundle its stakes in Discovery (24.8%) and Momentum Metropolitan (26.8%) to shareholders. This would’ve left it with two core assets: an 89% stake of OUTsurance and 30% of the UK’s Hastings.
It has since accepted a R14.6 billion offer for the Hastings stake from its partner Sampo, which means the only remaining asset will be OUTsurance.
It says it will still proceed with the “restructure” (read: unbundling), but will no longer need to undertake a rights issue to settle debt at the centre.
A week ago, it said the board had decided “not to continue with the active investment strategy as previously outlined to RMI shareholders and has therefore decided to embark on an orderly and managed transition to a structure that represents an effective listing of OUTsurance”. No more RMI, just a pure short-term insurer.
Brait
And in November, Brait spelt out that its post-Covid focus would be to “monetise New Look and Consol” as well as “target [an] IPO for Premier”. It has achieved the sale of Consol. If market conditions are conducive, it says Premier will list as soon as this year.
That would leave Virgin Active as the only material asset in the listed Brait entity (presuming the partners at Ethos manage to find a buyer or solution to the New Look investment).
In practice, it is slightly more complicated, as there is debt at the centre and the small matters of a convertible bond and the new exchangeable bond (both due in 2024). An IPO of Premier (valued at R8.4 billion) would go some way to solving Brait’s debt problem (R6.8 billion). It effectively has to get the timing spot on for the sale of the New Look holding as well as a Premier IPO and at the same time ensure that what’s left – i.e. Virgin Active – is growing.
When Ethos took over the management of the listed Brait entity in 2019, it said that strategies would be reset to ensure core assets were “exit ready in three to five years”. The clock is ticking.
Problematic …
At the time of its announcement, PSG Group shared a slide that compared the discounts at which six investment holding companies on the JSE were trading to their sum-of-the-parts. Discounts in the last three years have been in the 40% to 46% range, com pared with average discounts of 25% and 22% in full-year 2016 and 2017. You can see the problem.
Investment holding companies are out of vogue. And this is not just a South African problem. If this trend continues there will soon be precious few listed holding companies on the market.
Aside from the many reasons highlighted by PSG Group in recent years as to why investment holding companies are trading at large discounts to NAV, CEO Piet Mouton also presented a new one: the so-called “tax trap”.
If PSG had to sell all its investments and distribute cash to shareholders, the capital gains tax payable would be about R3.3 billion, representing a 13% reduction to the sum-of-the-parts. After CGT and dividend-withholding tax, the net cash dividend to PSG shareholders would be about R85 a share, roughly where the group had been trading prior to the unbundling announcement.