Offshore is often not so rosy a proposition
ON MY DESK is a statement that has been submitted to the Zondo Commission that details how money was allegedly ”laundered” to Jersey Island in the UK through a fake loan, circumventing our foreign exchange regulations.
Without going into the specifics of the case, it does speak to the sometimes great lengths that South African’s will go to, to get their money offshore. Individuals have not been alone in this desire.
Countless South African corporates have taken flight in the past few decades in an apparent drive to grow their businesses offshore, as they tried to fit in with the growth paths of other massive global multinationals.
The philosophy seemed simple... why sell here and earn in rands when we can do the same thing overseas and earn in dollars, and the markets are bigger there, right? Wrong!
South African companies have lost billions and billions of rands through their failed offshore investments. The announcements of losses to shareholders through these offshore ventures literally come in week by week. Take this past week, for instance. WBHO, a construction company, warned headline earnings per share could fall between 30 percent and 40 percent in the year to June 30 after under-estimating the costs at a roads upgrade project in Melbourne, Australia. The earnings decline is not a major setback for a sector where some of the biggest companies have gone into liquidation and WBHO’s share price held steady at around R107 last week.
Admittedly, shareholders knew since February about possible writedowns from the Australian project.
But it does represent a stain on the management’s performance, never mind the potential for further money outflows to Australia.
Another company to burn its fingers in Australia is small Western Cape-based Adrenna Property Group, which said last week that it wished to delist.
Its management complained of onerous listing requirements as well as the costs involved in the making of a loan to “diversify”, and invest in a day clinic in Australia.
Adrenna’s chief executive
was already a minority shareholder in the facility, which was in financial difficulties. Adrenna management disagreed with their auditors on whether the loan should have been impaired. The relatively attractive offer to minorities is a good option in the circumstances.
Also this week, Sasol shares sank to 10- year lows after it warned that the publication of its annual results will be delayed due to the ongoing problems at its ethane cracker project in Louisiana, US.
The cost of this big project has risen 45 percent from initial estimates of $8.9 billion (R135.7bn) in 2014 to $12.9bn and it’s still not operational.
In South Africa we spend much time bemoaning the cost overruns at projects managed by the government, but it appears Sasol management also need to sharpen their project management skills. The problems have been at the expense of shareholders.
Some analysts predict the final dividend may be cancelled, some assets may need to be sold, shares might have to be issued as a discount to raise cash, and it may get downgraded to junk status.
Its share price was trading at around R280.50 late last week, off a 10 year-low of R265 a week before, but the price is still more than a quarter lower since June, and it may get worse when the results come out.
The court-room drama between Old Mutual’s (OM) chairman and chief executive continues, and the group warned last week of a 31percent to 35 percent decline in interim headline earnings per share, mainly due to the results not including Nedbank, and Quilter in the UK, which were spun off after OM returned to South Africa last year. The share price continues to drift lower.
It is hard to judge whether OM was successful overseas. But if you consider SABMiller moved to London the same year as OM, and you had a choice between 100 OM shares or 100 Anheuser-Busch InBev shares, what would you take?
In a completely different scenario, Afrimat last month called off a seemingly profitable coal mining acquisition in Australia, citing the size of the purchase among other reasons.
Its share price shot up by nearly 15 percent the next day. The market had known beforehand that Afrimat was probably considering taking on too much,
Expanding offshore is dangerous as it immediately exposes companies to additional currency risk, and it exposes the company to risks in markets where management are not well versed.
It also draws management attention away from core operations, and too often, the competition is underestiimated.
In many cases, it is also based on an assumption that there is no more viable market to cultivate in South Africa, or in Africa. Really?