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Who’s doing what this week in the South African M&A space?

Marylou Greig
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Who’s doing what this week in the South African M&A space?

Exchange-Listed Companies

Following the detailed cautionary in June, the Alviva Board has received a firm intention offer to acquire all the issued shares in the company not already owned by the Consortium (Tham Investments, P Ramasamy, Day One Asset Management and certain members of the management team). The proposed transaction is a cash offer of up to R2,56 billion for a purchase consideration of R28.00 per Alviva share, representing a 45% premium to the 30-day VWAP of R19.29. The transaction will result in Alviva becoming a majority black-owned privately held company. Shareholders can expect to receive a circular around December 23, 2022.

African Equity Empowerment Investments (AEEI) has made a firm intention announcement to acquire the 6.14% equity stake (15,976,380 shares) in Premier Fishing and Brands (PFB) held by minority shareholders. The stake represents the outstanding shares in PFB not held by AEEI excluding the 37.63% stake held by Sekunjalo Investments (3,57%) and 3Laws Capital South Africa (34.06%). AEEI which currently has a 56.23% stake will acquire the scheme shares for R1.60 per share and will delist PFB from the JSE, citing illiquidity and low free float as reasons.

PBT Group has disposed of its entire investment in preference shares held in Yonex Investments (a B-BBEE company) to Sanlam Investment Management for R53,3 million. PBT intends to distribute R31,5 million of the disposal consideration by way of a special distribution to shareholders.

Northam Platinum has increased the maximum cash component consideration in relation to its offer to shareholders in Royal Bafokeng Platinum from R10 billion to R17 billion. The offer price remains at R172,70 per share (R180,50 less dividend paid), substantially higher than Impala Platinum’s offer made in December 2021 to RBPlat shareholders of R150 per share – R90 in cash and 0.300 ordinary Impala Platinum shares per RBPlat share (R60).

Hybrid Equity, a division of Old Mutual Alternative Investments (Old Mutual), has invested a further R420 million to increase its stake in Mulilo. Hybrid Equity made its first investment in 2015 when it invested R120 million in the South African renewable energy developer.

The results of the general offer by Heriot REIT to purchase Safari Investments RSA shares has closed with acceptances from shareholders holding 23,664,848 Safari shares representing 7.6% of the total shares in issue. Following the closing, Heriot and concert parties hold 40.7% of the total share in issue.

Delta Property Fund continued with its disposal programme, selling the property situated at 28 Central Road in Kimberley. Known as Beconsfield, the property was acquired by Dino & Lambro Investments for R22,1 million. The proceeds will be utilised in the reduction of debt.

Shoprite has informed shareholders that following the Competition Tribunal’s findings, the August 2021 acquisition by the company of Massmart stores has been approved with certain conditions to address competition and public interest concerns. The ruling sees the exclusion of 15 stores, the majority of which are to be separately divest of by Massmart to small or medium-sized businesses. The final transaction which will be effective on 9 January 2023 will include 42 Cambridge Food and Rhino Cash and Carry stores (including adjacent liquor stores), two Fruitspot facilities, the Massfresh Meat business and 12 Masscash Cash and Carry stores.

Despite best efforts on the part of Adcorp management to dispose of AllaboutXpert Australia for a fair and reasonable price, the Australian subsidiary has been placed in voluntary administration. The business, on a consolidated basis, contributed less than 1.7% of the group’s revenue for the six months ended 31 August 2022.

Unlisted Companies

Epiroc, a Swedish productivity and sustainability partner for the mining and infrastructure industries, is to acquire Pretoria headquartered Mernok Elektronik. Mernok designs and produces proximity detection technologies and collision avoidance systems for customers based primarily in Africa. The acquisition is expected to be completed in the first quarter of 2023.

Tabono Investments, an investment company in Africa with experience in mining, logistics and recycling, and ACE Green Recycling, a US-based recycling platform for battery materials, are to form a joint venture to build and operate two environmentally sustainable battery recycling facilities in South Africa.

BOS Brands has secured an undisclosed sum of additional growth equity from an investment consortium to fund the expansion of the BOS Ice Tea brand into the UK from its established base in Europe. The consortium includes Siya Kolisi, his wife Rachel Kolisi, the Banducci family and a follow-on investment by the Ferguson family in the UK.

DealMakers is SA’s M&A publication
www.dealmakerssouthafrica.com

Weekly corporate finance activity by SA exchange-listed companies

Marylou Greig
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Weekly corporate finance activity by SA exchange-listed companies

Mantengu Mining has completed a rights offer raising R15 million. Of the 15 million offer shares, shareholders subscribed for 22.31% with the remaining 77.69% of the rights offer shares allocated to the underwriters.

As part of its capital optimisation strategy, Investec Ltd acquired on the open market a further 2,437,853 Investec Plc shares at an average price of 483 pence per share (LSE and BATS Europe) and 1,584,603 Investec Plc shares at an average price of R101.62 per share (JSE). Since October 3rd the company has purchased 16,6 million shares.

Shareholders of Fortress REIT have approved the change of name of the company to Fortress Real Estate Investments. The counter will trade under its new name from 4th January 2023.

Recently unbundled to Barloworld shareholders on a 1 for 1 basis, Zeda which houses the car rental and vehicle leasing brands Avis and Budget, listed on the JSE this week. The share opened at R18 but closed its first day of trade at R16.70 giving the company a market capitalisation of R3,17 billion.

The termination of the listing of Nutritional Holdings has been formally advised by the JSE and the company will become an unlisted company from December 19, 2022.

A number of companies listed on one of South Africa’s Stock Exchanges have initiated share buyback programmes and each week update shareholders. They are:

Glencore this week repurchased 10,980,000 shares for a total consideration of £59,64 million. The share repurchases form part of the second phase of the company’s existing buy-back programme which is expected to be completed by February 2023.

South32 has this week repurchased a further 1,297,187 shares at an aggregate cost of A$5,38 million.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 5 to 9 December, 2022, a further 3,231,452 Prosus shares were repurchased for an aggregate €206,89 million and a further 591,745 Naspers shares for a total consideration of R1,62 billion.

British American Tobacco repurchased a further 1,838,550 shares this week for a total of £60,45 million.

Two companies issued profit warnings this week: Randgold & Exploration and Ellies.

Eight companies issued or withdrew cautionary notices. The companies were: AfroCentric Investment, Trustco, Premier Fishing and Brands, African Equity Empowerment, Luxe, Afristrat Investment, Nutritional Holdings and Alviva.

DealMakers is SA’s M&A publication
www.dealmakerssouthafrica.com

Who’s doing what in the African M&A space?

Marylou Greig
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Who’s doing what in the African M&A space?

DealMakers AFRICA

Savannah Energy PLC, the British energy company focused on projects in Africa, is to acquire Petronas International’s entire oil and gas business in South Sudan through the acquisition of Petronas Carigali Nile for a cash purchase consideration of up to US$1,25 billion.

PTS Investments, a US-based provider of x-tech solutions, has acquired a stake in EDAM Healthcare Services, a healthtech startup for an undisclosed sum. The investment will accelerate growth plans, supporting the development of EDAM digital platform with the company hoping to reach 2,5 million users by the end of 2023.

Two foodtech startups, Saudi-based Jumlaty and Egypt-based Appetito, have announced their intention to merge to create a new company NOMU. The aim is to become MENA’s leading foodtech supply chain platform. Financial details were not disclosed.

Legendary Foods Africa, a Ghanaian food-tech business producing a cost-effective, nutritious, resource-efficient and accessible form of protein, has received a growth equity investment from Baylis Emerging Markets. The growth capital is needed to accelerate expansion plans which include enhanced data-collection and production capacity and the extension of the product line and distribution channels.

Ascent Capital’s acquisition of a 75% stake in East African plastic manufacturer Acme Containers has been approved by the Competition Authority of Kenya.

Lagos-based furniture e-commerce startup Taeillo has raised US$2,5 million from Aruwa Capital a Nigerian early-stage growth equity and gender-lens fund. The funds will be used to scale its “Pay with Flexi” product, reduce delivery times by pre-manufacturing some of its product and increase market share.

Justyol, a Morocco-based e-commerce startup has raised US$350,000 in a pre-seed round from Earn Rocket Investment. A cross-border marketplace connecting the Turkish fashion market with MENA markets, Justyol will use the funding to invest in technical development, scale its marketing efforts and expand in the region.

Bitcoin mining company Gritless, which assists in bringing new energy generation to rural communities in East Africa, has secured a US$2 million seed investment in a round led by Stillmark and Block. Gritless designs, builds and operates bitcoin mining sites alongside small-scale renewable energy producers in rural Africa where excess energy is not utilised.

DealMakers AFRICA is the Continent’s M&A publication
www.dealmakersafrica.com

Appropriate regulation is needed to help address SA’s power crisis

Mzukisi Kota and Jason Van Der Poel
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Appropriate regulation is needed to help address SA’s power crisis

Action is urgently needed to create enabling policies and regulations to liberalise South Africa’s energy market and kickstart major investment.

Over the next eight to 12 years, it is estimated that South Africa will have to build between 50 and 60 gigawatts (GW) of new energy capacity to replace its retiring coal-fired fleet, to meet forecast growth and demand. This will require investment of an estimated R1,8 to R3trn, without factoring in the cost of expanding the transmission infrastructure.

As advisers to government on various Independent Power Producers Procurement Programmes, and to the private sector on many private generation power projects, Webber Wentzel is well-versed in some of the structural issues that will have to be resolved if there is to be any hope of solving the power crisis.

  1. COHERENT POLICY AND IMPLEMENTATION

Although South Africa has published two iterations of the Integrated Resource Plan (IRP), setting out expected demand and the ideal energy mix for the future, these plans have not been accompanied by a coherent overarching energy policy, nor have they been implemented at the required pace to avoid the current supply gap. South Africa’s main source of power remains Eskom, a vertically integrated monopoly with mainly coal assets. The IRP needs to be urgently updated to increase the proportion of other forms of energy, such as renewables, storage and gas in the mix.

On a pro bono basis, Webber Wentzel has advised Business Unity SA in its review of the Electricity Regulation Act Amendment Bill, which was expected to come into force by the end of this year – a deadline which is looking increasingly unlikely to be met. The Bill will restructure the electricity supply industry in some fundamental and necessary ways. It takes the transmission function out of Eskom and into a separate entity, the Transmission System Operator (SOC) Ltd, which will set up a central purchasing agency to buy and sell power to customers under contracts.

This will create a step change in electricity regulation in SA. It will decentralise and liberalise the market to bring more private power onto the grid, together with whatever Eskom has to offer.

  1. CONTINUE TO LIBERALISE THE ENERGY MARKET

Despite interventions in the last two to three years, steps taken to liberalise South Africa’s electricity supply have been too small and too reluctant. Caps on the size of exempted private generation plants were gradually lifted, but the focus was on retaining central government planning. Even with the latest touted measures to completely remove the caps in respect of private parties, municipalities still need ministerial determinations and feasibility studies in order to directly procure generation capacity.

It should be possible for a municipality that can secure project finance to procure its own power, without having to overcome further regulatory hurdles. If municipalities were enabled to get utility-scale power directly, it would help to tackle the power crisis.

For the private sector, renewable energy ticks all the boxes: it helps businesses to decarbonise, shows that they are good corporate citizens, and helps them to manage cost and security of supply.

As the private sector seizes the opportunity to generate its own power, Webber Wentzel is advising on some of the biggest projects currently under way, like Anglo American’s joint venture, Envusa Energy, with EDF Renewables. Envusa will procure about 600MW of solar and wind power for Anglo and De Beers sites in Southern Africa.

Webber Wentzel is also acting for Sasol in the procurement of about 900MW of renewable energy from independent power producers, as well as advising Exxaro Coal on its procurement of 80MW of solar power for its Grootegeluk Mine; Coca-Cola on its procurement of rooftop renewable energy at sites elsewhere in Africa; and MTN on its carbon neutrality strategy, including rooftop, ground mounted and wheeled renewable energy generation.

A lot of our work at present is advising on private power deals and assisting bidders involved in the REIPPP Programme.

On the just energy transition, we are advising on new regulations and assisting parties involved in the energy procurement plans of some of the larger municipalities.

  1. RESOLVE TRANSMISSION BOTTLENECKS

One of the criticisms of the REIPP Programme was that it did not limit or otherwise delineate where projects could be situated – this was a missed opportunity. We still need to address issues like re-using the infrastructure around obsolete coal-fired power stations, as South Africa moves to net zero and faces bottlenecks in transmitting power from grid constrained areas in the country, such as the Northern Cape (solar) and the Eastern Cape (wind).

Regulatory change is needed as a matter of urgency, to address municipal wheeling rules and tariffs. A number of projects in the pipeline may not happen in the near future because they need to be wheeled through municipal distribution infrastructure, and there are no clear and consistent rules on wheeling at this level. Nersa needs to develop a coherent, consistent set of rules that allow for transparency on tariffs, and in a way that is economic for end-users. Under the Constitution, national government has powers to “impinge” on some municipal competencies when required in the national interest. Under the ERA Amendment Bill, the transmission system operator (TSO) will be in charge of grid development and has proactive obligations to ensure that the grid works as well as possible.

Mzukisi Kota and Jason Van Der Poel are Partners |Webber Wentzel

This article first appeared in the DealMakers’ Renewable Energy 2022 Feature

DealMakers is SA’s M&A publication
www.dealmakerssouthafrica.com

Thorts: Corporate governance considerations for Boards of Directors overseeing entities outside of South Africa

Janke Strydom and Jacques Marais
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Thorts: Corporate governance considerations for Boards of Directors overseeing entities outside of South Africa

Financial assistance resolutions remain the cause of many sleepless nights for attorneys
and their clients.

The much written on Trevo Capital Ltd and others v Steinhoff International Holdings (Pty) Ltd and others (2833/2021) [2021] ZAWCHC 123 (Trevo Capital) decision has taught us valuable lessons on financial assistance to related companies. In this article, we discuss this case in relation to aspects that have not been highlighted much in previous reports of the case, and which we believe are important for the boards of directors overseeing related and inter-related entities incorporated outside of South Africa.

In this case, the third respondents are the financial creditors of Steinhoff International Holdings Proprietary Limited (SIHPL, previously SIHL) and the investors in a convertible bond (2021 Bond) issued by another company in the Steinhoff Group, namely Steinhoff Finance Holdings GmbH (SFHG), an Austrian entity. SIHPL guaranteed the obligations under the 2021 Bond, in terms of a guarantee (2014 Guarantee).

Following the discovery of accounting irregularities in the Steinhoff Group in 2017, Steinhoff was forced to restructure its debt in the European Union to avoid liquidation. Steinhoff proposed a compromise of its financial obligations to three classes of creditors, including the so-called financial creditors.

The proposed compromise required SIHPL to restructure its debt, and included a contingent payment undertaking (CPU) to the second respondent (an agent for the financial creditors).

Under the CPU, the SFHG debt in respect of the 2021 Bond was restated by way of bondholders providing cashless loans to Lux Finco 1, incorporated in Luxembourg, and on lending the cashless proceeds to SFHG, pursuant to an inter-company loan, to discharge its obligations under existing SFHG debt. The CPU recognises that SIHPL assumes the role of guarantor in respect of obligations originally owed by SFHG under the 2021 Bond, and later to Lux Finco 1.

The board of SIHL took steps to comply with section 45(3) of the Companies Act, 71 of 2008 (Companies Act) in respect of the 2014 Guarantee, but failed to comply with s45(3) in respect of the CPU and the resulting obligations to Lux Finco 1.

Financial Assistance to Related Foreign Companies

In Trevo Capital, the respondents argued that the applicants have no standing and that s45 is not applicable, since the financial assistance was advanced to a foreign company, namely SFGH. This raised the question of whether s45 applies to financial assistance provided to a foreign company.

To answer this question, the Court followed a contextual method of interpretation by referring to the text of s45 and other provisions of the Companies Act, and to the context and apparent purpose of the financial assistance provisions. The Court found that –
i. s45 did not expressly refer to a “foreign company” (a defined term in s1 of the Companies Act), but that this did not exclude foreign companies, and that foreign companies fell within the corporation category. As a reminder, the term corporation is referred to in s45(2) in the following context, “the board may authorise the company to provide direct or indirect financial assistance to … a related or inter-related company or corporation, or to a member of a related or inter-related corporation, or to a person related to any such company, corporation…”; the purpose of the financial assistance provisions is to prevent the abuse of the company’s directors’ powers by advancing financial assistance to foreign entities without safeguarding the shareholders’ and the company’s creditors’ interests;

ii. a generous interpretation of s45, to include financial assistance given by a South African entity to foreign recipients, was in line with the purpose of the provision and, in the court’s view, intended by the legislature; and that

iii. SIHL had given financial assistance to a foreign entity and had to comply with s45.

Applying the Solvency and Liquidity Test

The applicants contended that –
i. when the board approved the 2014 Guarantee, SIHL was factually and materially insolvent as a result of the overstatement of its assets and the inclusion of misleading information in its financial statements. Therefore, the board could not reasonably find that SIHPL would be solvent and liquid following the conclusion of the 2014 Guarantee; and that

ii. the board had to investigate and interrogate the financial statements before reaching a conclusion.

The Court –
i. accepted that the requirement in s45(3)(b) of the Companies Act that the “board is satisfied” is not a purely subjective test and that the board must take reasonably foreseeable circumstances into account; and

ii. noted that SIHL’s board took steps to comply with the requirements of s45 and considered fair and reasonable opinions prepared by reputable auditing and law firms before concluding that the conditions of s45(3) were met.

Thus, the applicant’s retrospective analysis of SIHL’s financial position, following the discovery of accounting irregularities in 2017, did not convince the court that the board had violated the requirements of s45 of the Companies Act when it approved the 2014 Guarantee.

Restructure of Debt – New Financial Assistance

The applicants argued that the CPU amounted to a new loan granted by financial creditors to Lux Finco 1, and that SIHPL’s guarantee of this loan amounted to financial assistance to a related company.

The respondents and the financial creditors argued that the CPU was not a new debt, but merely a restatement of an existing debt under the 2021 Bond and 2014 Guarantee, which
was approved by the board. As such, SIHPL did not provide further financial assistance.

The Court disagreed and found that the restatement or restructuring of debt on new terms and owing to a new party amounted to a new debt for the purposes of s45.

The fact that the quantum of the debt remained the same was irrelevant, as SIHPL’s board had to consider the revised terms of the restated debt, including the recipient of payment, and in so doing, the board had to comply with s45.

Conclusion

Trevo Capital has reminded us of three valuable principles relating to financial assistance. Firstly, financial assistance to a related foreign entity falls within the scope of s45 of the Companies Act. It is imperative to bear this in mind when group companies include companies incorporated outside of South Africa. Secondly, when applying the solvency and liquidity and fair and reasonable tests, the board must take reasonable, foreseeable circumstances into account. Thus, if the board is aware of any circumstances that could impact on the solvency and liquidity of the company (which may not be reflected in the company’s financial statements), it must take this into account when complying with s45(3). Lastly, restructured debt on new terms, which includes new counterparties, will require new financial assistance resolutions, even if the quantum of the debt has not changed.

Janke Strydom is a Partner and Jacques Marais a Senior Associate | Fasken.

This article first appeared in DealMakers, SA’s quarterly M&A publication

DealMakers is SA’s M&A publication
www.dealmakerssouthafrica.com

Food for thought: SAFEs and regulatory aspects

Njeri Wagacha and Rizichi Kashero-Ondego
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Food for thought: SAFEs and regulatory aspects

When we consider the modern venture capital (VC) space, the first instrument that comes to mind is a simple agreement for future equity (SAFE). SAFEs were introduced in 2013, by the American start-up accelerator, Y Combinator, and are essentially a financing document based on US law. The premise is relatively easy and attractive: (i) they are simple (as they adopt a standard form); (ii) they have low transaction costs (as they are barely negotiated); and (iii) they contain founder-friendly terms (as they are used to promote start-ups in their seed financing rounds).

To add to this, they have been adaptable for local jurisdictions. In the UK, the SAFE is known as an advance subscription agreement (ASA), and the main difference is that rather than an investor agreeing on a conversion to equity, it is for a subscription to shares.

In Austria, SAFEs are required to be executed in the form of a notarial deed, as is required for any agreement on the transfer of shares of a limited liability company.

In Sweden, the notion that a SAFE can convert into equity without the involvement of the shareholders, i.e. pre-emption rights, only applies if the SAFE is structured as a convertible instrument – the concept of conversion to equity is one that has to be negotiated amongst the parties.

Aside from the nascent risk that the start-up fails and the investment is not realised, one has to understand that there are risks that may outweigh the benefits of using SAFEs or ASAs. Indeed, we need to be aware that the enforceability of the SAFE may soon become an issue to consider.

COMPETITION ASPECTS

The nature of SAFEs is that promised equity and other rights are only available to an investor on the occurrence of a triggering event. The equity, depending on the structure of the agreement, could be pre-determined in the case of a post-money valuation. Further, other rights could also be granted, which include board seats, board observer seats, participation in future SAFEs rights, and information rights, to name a few. Some of these rights, such as board seat and board observer seat rights, may even be granted before the conversion of the SAFE to equity.

Using Kenya as an example, a merger is defined in the Competition Authority Act No. 12 of 2010 (Competition Act) as an “acquisition of shares, business or other assets, whether inside or outside Kenya, resulting in the change of control of a business, part of a business or an asset of a business in Kenya in any manner and includes a takeover” (our emphasis). Further, the Consolidated Guidelines on the Substantive Assessment of Mergers under the Competition Act provide that the competition authority of Kenya will analyse the relationship between the parties on a case by case basis. Some of the factors that they will take into consideration are the ability to appoint, or to veto the appointment of a majority of the directors, or to materially influence the policy of the company in a manner comparable to a person who, in ordinary commercial practice, can exercise an element of control. Based on the definition, we can surmise that in some instances, parties will have to obtain consent from the competition authority for the grant of certain rights to an investor.

However, the question that arises is, should competition clearance be obtained and, if so, when? At the point of entering the SAFE? Or at the point of conversion? Further, is there a risk if local competition authorities refuse to grant approval or, instead, require onerous conditions to be fulfilled before approvals are granted? The greater question then arises as to what happens to the funds that have already been deployed? It is advisable that mechanisms be placed in a SAFE if the rights or equity being promised to the investor change the control of the business (as applicable to the jurisdiction). One may make it a condition to obtain approval from the competition authority before the conversion takes place and, in an instance where approval is not obtained, mechanisms may be included to ensure the ability to unwind the transaction, or to require that the investment converts to debt.

Reassuringly, in most jurisdictions, including Kenya, financial thresholds apply when seeking competition clearance and, in the case of start-ups, these may not be met. However, as an investor, it is important to consider the particular jurisdiction involved, the stage in which you are making your investment, the target’s current cap-table, its turnover, and the number of other SAFEs that may have been issued, prior to making the decision to seek competition clearance.

OTHER REGULATORY APPROVALS

In addition to the competition approvals, one also has to consider whether, with respect to a business, the SAFE is in a regulated industry such as insurance, oil and gas and digital lending. Depending on the regulatory authority, a regulated business may be required to notify a regulator or obtain consent before a new shareholder acquires a certain threshold of equity. In this case, one should consider implementing a mechanism to notify or obtain consent from the regulator before the conversion is finalised.

Local content requirements in specific jurisdictions should also be considered. In Kenya, for example, the insurance industry restricts foreign ownership: at least one third of the shares in an insurance company must be owned by a local. It is, therefore, prudent to ensure before investing in a regulated business that the shareholders maintain local shareholding requirements throughout the seed fundraising process to conversion into equity.

Further, it may be an additional obligation for a director to be deemed fit and proper by the regulatory authority before they take on the position as a board member. This may be of specific concern, especially where the investor obtains a board seat before the conversion to equity. In this case, one must obtain the required consent from the regulator. In the alternative, it may be beneficial for the investor to obtain information rights, giving them the right to receive all information from the board, instead of acquiring a board seat. However, this may not give the element of control that most investors are looking to obtain.

PRE-EMPTION RIGHTS

Similar to Sweden and the UK, Kenya provides for mandatory pre-emption rights in its company law. Therefore, the aspect of automatic conversion to equity will need to be carefully considered, depending on the governing law of the SAFE. It may be a requirement for a waiver to be obtained from shareholders before the conversion to equity. One might, therefore, need to consider whether it is permissible under local law to obtain consent before entering the SAFE.

CONCLUSION

In conclusion, entering into a SAFE, while relatively simple on the face of it, requires much more long-term thinking to ensure that both founder and investor are protected. As practitioners, we need to constantly analyse SAFE documentation to ensure compliance with local laws, to guarantee that our clients effectively reap its benefits. Regulatory and practical aspects need to be considered when one is trying to conclude a SAFE quickly. If acting for an investor, we must advise them that as the SAFE develops, caution needs to be exercised to ensure that their investment is protected.

Njeri Wagacha is a Partner and Rizichi Kashero-Ondego an Associate | CDH Kenya

This article first appeared in DealMakers AFRICA, the continent’s quarterly M&A publication.

DealMakers AFRICA is a quarterly M&A publication
www.dealmakersafrica.com

No relaxing into the holidays

The Finance Ghost
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No relaxing into the holidays

Andre Botha of TreasuryONE reminds us that even if some people are already on the beach, our currency certainly isn’t.

Economic news and events that could affect the rand and the market are continuing as we approach the end of the year. But, before we delve into the events of the week, it is probably an opportune time to take a look back at some of the early-year events that are still affecting the market.

First, there is inflation, which has been on the rise all across the world as central banks struggle to combat the scourge. We have seen unprecedented hikes, with many countries on the verge of hiking themselves into a recession. Given that the majority of the world is anticipated to enter a recession, this is what we anticipate will be the base play of 2023. With the Fed leading the way in the initial part of hiking rates, we saw a rampant US dollar, and risky currencies like the rand were under pressure in the back half of the year.

US dollar rollercoaster for the year:

Second, the aftermath of the conflict between Russia and Ukraine continues to affect the Eurozone, where there have been – and will certainly be – further energy crises because of the reliance on Russian gas. Recent months have seen an increase in gas costs in the UK and the Eurozone due to the anticipated colder winter. This could fuel the inflation monster further in those countries that are most affected by the energy crisis.

Locally, there is the Phala Phala scandal and the possibility of a presidential resignation. Even though the President did not resign, the news surrounding the Presidency has caused the market to experience some volatility. We have the ANC elective conference at the end of the week, but we do not anticipate any significant deviations from the norm. However, stranger things have happened, and any deviation from the narrative could send the markets into a frenzy.

This brings us to this week, where a lot will happen in a very short amount of time. First, we have the US CPI number on Tuesday, where last week’s higher-than-expected PPI number caused some market participants to anticipate a higher-than-expected CPI number following several months of lower-than-expected inflation. Should the number print higher, we can expect the rand and other risky assets to run with it, but with the risk premium already built in, should the number print lower, we can expect a swift reverse in risky assets.

Inflation spike in the US:

On Wednesday, we have the FOMC meeting, where we expect the Fed to hike by 50 basis points. Looking at the US dollar and its performance of late, we expect that lower rate hikes have been priced in, and thus the rally in the US dollar has run out of steam a little. The key will be the press conference after the announcement where the thinking of the Fed will be revealed as well as what the new CPI number will have changed their thinking.

On Thursday we have the ECB interest rate decision and we also expect that the ECB will hike rates by 50 basis points. The ECB are in a bit of a tight spot as they are behind the curve and also hiking into an anaemic economy across the board. It will also be insightful as to where the thinking of the ECB is and how they propose to tackle inflation and interest rates going forward.

We are in for a busy week in the market, before the calm of the December holidays hits us. 

To learn more about how TreasuryONE can help you navigate the markets and manage risk in your business, visit the website.

Ghost Bites (Barloworld | Gold Fields | Nutritional Holdings | Orion Minerals | RMB Holdings | Vodacom)

The Finance Ghost
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Ghost Bites (Barloworld | Gold Fields | Nutritional Holdings | Orion Minerals | RMB Holdings | Vodacom)

Barloworld shareholder? Don’t panic!

The huge drop in the share price isn’t anything sinister

I must say, I had lost track of the date of the Zeda spin-off. While reading about the exchange control approval that has been obtained for Barloworld’s special dividend of 550 cents, I noticed that the share price had fallen 17%.

Having questioned my sanity for a moment, I realised that Zeda made its debut on the market on Tuesday. It lives and breathes, trading under the ticker JSE:ZZD.

As for Barloworld, the reason for the drop is that the group is essentially significantly smaller now, as Zeda has been unbundled to its shareholders. If you add up the value of your shiny new shares in Zeda and the shares that you still have in Barloworld, it will make a lot more sense.

Change of guard at Gold Fields

Chris Griffith steps down after the Yamana transaction failed

We will never know what the boardroom conversations sounded like, but we do know that Chris Griffith has stepped down as CEO of Gold Fields. The announcement doesn’t even attempt the niceties of “seeking new opportunities” or “broadening his horizons” – instead, it thanks him for his leadership and then reminds everyone that the Yamana deal failed.

The next man in this (particularly) hot seat is Martin Preece, EVP of Gold Fields South Africa, who has been appointed as interim CEO. Preece has been with the company for six years.

It looks like Griffith and Preece have a busy December ahead, as the official handover date is 31 December.

Ouch.

Less comedy (and tragedy) ahead on the JSE

Finally, the listing of Nutritional Holdings is being terminated

In a move that is very long overdue, the JSE is terminating the listing of Nutritional Holdings with effect from 19 December. This mess of a group has delivered comedy and tragedy in almost equal measure, stumbling from one crisis to the next.

This doesn’t give the current shareholders a solution. In fact, it makes the situation even worse, as JSE regulations will no longer apply. Nutritional Holdings will be a public unlisted company, which means it is still regulated by the Companies Act but not by any stock exchange.

The lucky shareholders now hold unlisted shares in a company that can barely string together enough financial information to complete the audits for recent financial years.

With liquidation hearings scheduled for January and February 2023, there might be a short and painful ending to this story anyway.

Orion Minerals secures $87 million funding package

Definitive agreements signed with subsidiaries of Triple Flag Precious Metals Corp

In a major step for Orion, $80 million worth of funding has been raised against the delivery of 87% of future gold and silver by-product production, with the stream rate reducing to 50% after certain milestones. This shows you how specialised junior mining funding is. At the time of delivery, Orion will receive payments of 10% of the delivered value at spot prices.

There’s another $7 million to be advanced against 0.8% of gross revenue from future mineral sales.

This comes after the news of a R250 million convertible loan with the IDC, which is currently at the stage of definitive agreements being drafted and negotiated.

The two sources of funding will be used to complete a feasibility study for early mining at Prieska and enable commencement of mine dewatering.

RMB Holdings updates the market on its value unlock

With interim results now available, value investors got their calculators out

The devil is most certainly in the detail, but orderly wind-downs can offer delicious returns. Anyone who bought shares in Etion at the right time will confirm this. With a drop in the share price of over 10% in response to results, it’s not clear that the market is seeing a juicy outcome for RMB Holdings.

Are they missing a trick?

To help you decide, there are brand new results available. They highlight that since September 2020, a shareholder return of 46.5% has been delivered. That’s way above the market return available over a two-year period but also isn’t lifechanging stuff.

To demonstrate the power of closing the discount to net asset value (NAV), the NAV per share is down 10% over the past year and the share price is up 33%. I must highlight that the NAV includes a huge special dividend of 147.1 cents paid after the end of the reporting period.

If we adjust for that, the “current” NAV is 96.9 cents and the share price is 52 cents.

Herman Bosman has moved on as CEO and financial director, with Brian Roberts (the current CEO of RMH Property) stepping up to the top job. This tells you where the bulk of the remaining value lies: the property portfolio.

Not a pyramid scheme

Vodacom has closed the deal for a 55% interest in Vodafone Egypt

If my own experience with my local Vodacom tower is anything to go by, load shedding is causing a lot of pain to the network. I’m sure Vodacom’s board is only too happy to be taking a 55% stake in Vodafone Egypt, where they hopefully have a lot more electricity than we do.

With the seller of the stake in Egypt being wholly-owned subsidiaries of Vodafone Group Plc, that company’s stake in Vodacom has increased from 60.5% to 65.1%. There was also a cash portion to the deal worth R10.8 billion.

A trading update from Vodacom is expected at the end of January, which will include an update on the medium-term growth outlook.

Little Bites:

  • Director dealings:
    • The Mouton family (across several trusts etc.) have loaded up on Curro shares worth nearly R7 million
    • You know it’s getting bad when several Nampak directors have headed for the exit with parts of their shareholdings. From the CEO’s sale of R985k down to much smaller sales by prescribed officers, it really isn’t looking good for this company.
    • The CEO of FirstRand has put a collar structure in place over R50.3 million worth of shares, with a put strike price of R55.82, a call strike price of R75.06 and an expiry date in December 2023. The current traded price of FirstRand shares is just over R61.
    • A prescribed officer of Impala Platinum has disposed of shares worth R1.05 million
    • A director of Raubex has bought shares worth R247k
    • The CEO of Calgro M3 has bought shares worth R353k
    • Via their shared investment vehicle, key directors of Ninety One have acquired shares worth £31.3k
  • Merafe has announced the European benchmark ferrochrome price for the first quarter of 2023. At 149 US cents per pound, this price is a rollover from the fourth quarter of 2022.
  • Delta Property Fund has announced an agreement to sell the Beaconsfield property in Kimberly for R22.1 million. This will reduce the loan-to-value by just 10 basis to 58.1%, so there isn’t much to get excited about here.
  • The shareholders of RCL Foods voted almost unanimously in favour of the resolutions required to unwind the B-BBEE Structure.
  • Glen Anil Development Corporation has agreed a deal with an associate of a director of Purple Group. The deal is complicated enough that I didn’t just box it under the other director dealings, as the director of Purple only holds an 18.1% stake in Serialong Financial Investments, the company selling the shares. The initial deal is worth R24.3 million and increases Glen Anil’s stake in Purple to 1.2%. The price of 202.08 cents per share is significantly higher than the closing price of 170 cents. The parties have also entered into option agreements that give Glen Anil the ability to buy another 31 million shares over the next few years at strike prices ranging from 175 cents to 310 cents.
  • Allan Gray is trying hard to get out of the way of Nampak, but it still owns a whopping 16.44% in the company. The share price has nearly halved in the past month on news of the pending rights offer.

Going direct: building a direct-to-consumer retail business

The Finance Ghost
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Going direct: building a direct-to-consumer retail business

Featuring two special guests who bring loads of real-world experience to the table in this industry, our latest bizval webinar was packed with insights into the world of online retail.

In this webinar, we featured two pioneers in the direct-to-consumer retail space. Michael Dixon from Desray Fashions and Justin Blake of Silvery shared their unique insights into how they built their successful businesses.

Ghost Bites (Aspen | Ellies | Northam Platinum – Royal Bafokeng Platinum | PBT Group | Shoprite – Massmart)

The Finance Ghost
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Ghost Bites (Aspen | Ellies | Northam Platinum – Royal Bafokeng Platinum | PBT Group | Shoprite – Massmart)

Aspen takes a big step for vaccines in Africa

This deal includes the receipt of $30 million in funding

Back in August, Aspen announced an agreement with the Serum Institute of India that would allow Aspen to manufacture, market and distribute four routine vaccines in Africa under license from Serum.

Before you wonder about whether this is a Covid product long after Covid has gone away, you can feel better about the fact that these are Pneumococcal, Rotavirus, Polyvalent Meningococcal and Hexavalent vaccines.

I’m no doctor, but ctrl-F “Covid” in the announcement yields no results, so that’s good news.

To help fund this 10-year deal with Serum, Aspen had been negotiating for funding with the Bill & Melinda Gates Foundation and the Coalition for Epidemic Preparedness Innovations (CEPI).

The exciting news is that $30 million in funding will be received ($15 million from each of those parties), which supports this initiative and creating regional vaccine manufacturing capacity that would put Africa in a better position going forward for future public health emergencies.

The restructuring of Ellies is an expensive process

There are glimmers of hope in the operations, although they are still making losses

Ellies has released a trading statement for the six months ended October. The headline loss per share is expected to be between -4.17 cents and -4.99 cents, which gives an interesting range vs. the loss of -4.36 cents in the comparable period.

The restructure process has had an impact of R18 million, which equates to -2.24 cents per share. This suggests that things are looking better at operational level, albeit still a loss-making reality.

This is confirmed by the further commentary, which notes revenue up by 5.6% and gross profit marginally higher than the comparable period. Operating costs (excluding retrenchment costs) have been contained below inflation.

Ellies has signed a term sheet with its bankers to restructure the working capital facilities. There are other negotiations to “support the business” in areas of substantial growth for products and services, which probably means the introduction of strategic partners – we can’t be sure until any proper details are announced though.

Interim results are expected to be released on 14 December.

The share price has been ugly this year, losing half its value in largely one-way traffic:

Northam juices up the Royal Bafokeng offer

Cash is king and Northam is putting more of it on the table

NB: this is not an increase to the offer price for Royal Bafokeng Platinum. Instead, Northam Platinum is increasing the cash element of the offer and reducing the share-based element accordingly.

The overall impact is that the cash portion of the offer has increased from R10 billion to R17 billion. Expressed on a per-share basis, the cash consideration is now between R92.48 and R172.70 per share, depending on the level of acceptances.

The total offer price is R172.70, which is unchanged as highlighted above.

The trick here is that if Impala Platinum doesn’t accept the offer for its current shareholding in the company of 40.71%, then all other shareholders that accept would be paid R172.70 in cash.

Northam is trying hard to outfox Impala Platinum in this deal and a greater cash component is another step in that direction.

PBT pulls off a smart deal with Sanlam

The keys to the B-BBEE funding structure have been passed to the right place

PBT Group is a successful tech consulting company that should be running a tight balance sheet, as this is essentially a management consulting model that focuses on selling time.

Despite this, the need to have the right empowerment credentials is a reality in the South African business landscape, so investors have been forgiving of a preference share funding structure that saw PBT Group providing funding to Yonex Investments (a B-BBEE investment entity).

In a smart move, PBT Group has managed to offload this preference share to Sanlam Investment Management for R53.3 million. This is a perfect example of capital allocation discipline, as PBT Group should be chasing a return on capital that is much higher than the yield on the preference share. In contrast, Sanlam Investment Management is looking for yield instruments that offer diversified exposure.

In other words, the deal makes sense for all involved, as Sanlam is a far better owner of these preference shares.

Prior to the disposal, PBT will receive a dividend of R1.4 million on the preference shares. A special distribution of R31.5 million will be paid to PBT shareholders after this deal closes. If you’re wondering where the rest of the money went, it’s important to note that a prior special dividend was higher than the value of non-core asset disposals that had been achieved by that time. There’s effectively a catch-up process underway here.

Importantly, PBT Group still holds R133.1 million in non-core assets. With a market cap of under R1 billion, that’s a substantial special dividend if PBT can get the remaining assets sold.

The Competition Commission has ruled on Shoprite – Massmart

Shoprite can buy most of the intended stores, but not all of them

In an important step for Massmart’s balance sheet, Shoprite has been given the green light to acquire most of the stores that were part of the initial proposed transaction to acquire the heavily loss-making cash and carry business from Massmart.

The competition authorities determined that 15 stores should be excluded from the deal, so Massmart will need to try and sell them off separately.

Shoprite is allowed to acquire 42 Cambridge Food and Rhino Cash and Carry stores, two Fruitspot facilities, the Massfresh Meat business and 12 Masscash Cash and Carry stores.

The effective date of the transaction is 9 January 2023.

I remain a bit skeptical of this deal from a Shoprite perspective. The stores will obviously be renovated and rebranded as Shoprite (and probably Usave) stores, so this was really a process of just securing the sites. Still, it seems like an expensive exercise just for that, as the stores would’ve likely gone bankrupt anyway and the space would’ve become available for “free” from a Shoprite perspective.

Little Bites

  • Director dealings:
    • An executive of Gold Fields sold shares worth a meaty R9.6 million.
    • A director of Stor-Age has acquired shares worth R116k.
    • Althea Grewar sold shares in Luxe Holdings worth R12 million and we have to assume that the buyer is Mohamed Holdings, which now owns 34.99% of the company.
    • A director of Sable Exploration and Mining has sold shares worth R808k, with PBNJ Trading and Consulting having increased its stake in the company to 38.4% and having triggered a mandatory offer a well. We can’t be sure if PBNJ bought the shares sold by this director but it seems likely.
  • Marshall Monteagle PLC released results for the six months to September 2022, reflecting an increase in revenue of 53% and a jump in profit before tax on trading and property operations of 77%. Net of revaluations and other moves, the group is in a loss-making position. The headline loss per share of $0.069 is down from the profit of $0.01 per share in the comparable period. Despite this, there’s a dividend of $0.019 per share.
  • The general offer by Heriot to purchase Safari shares was accepted by holders of 7.6% of Safari shares in issue. Heriot and its concert parties now hold 40.7% of total Safari shares in issue.
  • Tharisa released the results of the private placement of bonds related to the Karo Platinum Project. The company was looking to raise $25 million and managed to attract applications of $31.8 million for the bonds being listed on the Victoria Falls Stock Exchange. This is a great result in the strategy to fund this open-pit PGM asset located in the Great Dyke in Zimbabwe.
  • After announcing that current CFO Charl de Villiers will be taking the top job at Libstar as CEO from January, Terri Ladbrooke as been appointed as interim CFO. This is an internal appointment.
  • In anticipation of the potential loss of REIT status, Fortress REIT Limited has changed its name to Fortress Real Estate Investments Limited
  • Mantengu Mining has concluded its rights offer to raise R15 million, with 77.69% of the new shares being allocated to the underwriters. This means that other shareholders didn’t exactly fight each other to get to the front of the queue, with applications for only 22.31% of the available shares.
  • In a role that might not be the easiest to fill based on everything going on with the company, Conduit Capital is looking for a new non-executive director and Chairperson of the Audit and Risk Committee, after Nonzukiso Siyotula resigned from the role.
  • Rodger Walters has been appointed as an independent non-executive director of RECM and Calibre Limited and as the chairman of the Audit and Risk Committee. He is currently the CFO of ASISA (the Association for Savings and Investment South Africa).
  • Luxe Holdings renewed the cautionary announcement related to a potential disposal of assets to Go Dutch in a cash deal.
  • Another company that renewed its cautionary is Afristrat, which is currently in a fight for its life with its balance sheet. I can’t give you the website because it appears to have been hacked and redirected.
  • Sebata Holdings released results for the six months to September. Revenue is up 26% and the headline loss per share improved from -132.25 cents to -5.27 cents. The website hasn’t worked for as long as I can remember.
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