Welcome to Ghost Wrap. It’s fast. It’s fun. It’s informative.
In this week’s episode of Ghost Wrap, we cover:
A smell at Spar that is worse than the polony
Equites’ latest property deal with Shoprite in their joint venture
Absa’s impressive update with ROE running ahead of Nedbank and Standard Bank
Italtile’s insights into the state of South African consumers
How it is all going down to the wire at Fortress
Sanlam’s mixed bag of results for the 10 months to October
Transnet’s negative impact on Thungela and Kumba
A record year for Gemfields
The Ghost Wrap podcast is proudly brought to you by Mazars, a leading international audit, tax and advisory firm with a national footprint within South Africa. Visit the Mazars website for more information.
Production is lower in 2022, with Quellaveco still in ramp-up phase
Anglo American is an interesting, complicated group that has exposure to a variety of commodities including PGMs, iron ore, nickel and copper. Don’t forget that De Beers (the diamond giant) is in there as well. The management team talks about the group being a “resilient business through the cycle” – a clear nod to diversification.
In the latest update, Anglo American has advised that production should be down around 3% this year, with unit costs up by 16%. That’s an unhappy story as input cost pressures combine with production decreases to create a nasty outcome.
The situation should improve in 2023, with production expected to increase by 5% and unit costs expected to increase by only 3%. Capital expenditure is anticipated to be around $0.8 billion higher than in 2022 as the Woodsmith project picks up.
In 2024, production is expected to increase by 5% and capex would return to current levels. The expectation for 2025 is flat production (i.e. similar to 2024) and ditto for capex.
Woodsmith is the group’s next major greenfield project after Quellaveco, bringing a diversified source of income in the production of Poly4, the low carbon fertiliser. Speaking of copper project Quellaveco, that operation increases Anglo’s global production base by 10% and is expected to be highly margin accretive over the next decade.
Other than the immediate pressures, the group sounds bullish about its prospects.
Anglo American Platinum faces operational pressures
2022 production is expected to be within guidance, but beyond that looks tricky
At Anglo American Platinum, the good news for 2022 is that refined PGM production is 3.8 million ounces, smack in the middle of the guided range of 3.7 million to 3.9 million. The bad news is that because of inflationary pressures, the unit cost of R15,300 per ounce is higher than the guidance of R14,000 to R15,000.
There is a build up in work-in-progress inventory because of loadshedding and the delay in the Polokwane smelter rebuild. This inventory will be refined in 2023, which will give some benefit to the next financial year and 2024 as well.
Looking at the medium-term guidance (2023 – 2025), the business is clearly under pressure. Drilling initiatives have reflected a reduction in higher-grade ore volumes at Mogalakwena. There are also lower volumes expected from Amandelbult, with infrastructure closures, challenging geological ground conditions and the pending end to the life-of-mine of the current opencast operations. The company also expects to receive lower purchase-of-concentrate volumes than previously anticipated.
The production forecast for 2023 and 2024 is 3.6 million to 4.0 million ounces. It was previously between 3.8 and 4.2 million ounces for 2023 and between 4.1 and 4.5 million ounces for 2024, so this is a significant drop. It gets worse in 2025 (a new forecast), with production estimated at 3.3 million to 3.7 million ounces.
With ongoing inflationary pressures on top of production challenges, the unit cost guidance for 2023 is between R16,000 and R17,800 per PGM ounce.
This isn’t great news for shareholders at all, with a 7.3% drop in the share price on Friday as a result.
ARC gives an update on its investments
With investments like rain and TymeBank, this is always worth a read
The updates on each underlying company don’t go into much detail, but there’s enough to get a good sense of how the portfolio is doing.
African Rainbow Capital Investments (ARC) is split into a diversified investments portfolio and a financial services portfolio, so I’ll stick to that approach for this update.
Before going into the portfolio updates, take note that the lower management and performance fees for the fund were approved by shareholders in November. Although I still don’t like the structure, it’s better than it used to be.
Diversified investments
The only comment on rain is that the business is performing well and the additional spectrum is expected to positively impact the valuation.
At phosphate business Kropz, the Elandsfontein phosphate plant has suffered several setbacks to its commissioning. This caused operational cash shortfalls and ARC increased the convertible loan facility by R550 million as a result, of which R247.5 million has been drawn.
The last of the Afrimat stake was sold in November, generating an internal rate of return (IRR) of 21.72% on that investment. Another disposal of a public company was the 3.2% stake in Capital Appreciation, with an IRR of 12%.
Most of the assets in the ARC Services group of company are being disposed of in line with the carrying value of R291 million.
Bluespec is performing in line with expectations and meeting profit targets. Weelee, the online vehicle bidding platform, is also growing in line with the business plan.
The disposal of Humanstate and Payprop SA for R496 million has been concluded. The IRR on disposal was 20%, excluding any earn-out structures. There is the potential to receive another R52 million over 30 months.
Fledge Capital is in an acquisition phase, having sold its remaining investment in WeBuyCars earlier in the year.
Linebooker is enjoying strong month-on-month volume growth in the online booking platform and the management team is exploring options beyond South Africa.
Financial services
Alexforbes is a publicly listed company and ARC doesn’t go into any details beyond what the company already discloses in its own reporting.
TymeBank always gets a lot of focus and deservedly so, as this is a significant and interesting investment. October saw 228,000 new customers onboarded, a record month for the bank and vastly higher than 130,000 to 140,000 customers per month in the first half of 2022. With the acquisition of Retail Capital, TymeBank is looking to enhance its offering to its business banking clients. Retail Capital is a large SME funder that has disbursed over R5.5 billion to more than 43,000 business owners in the past decade. Notably, Tyme Global has launched GOtyme in the Phillipines.
Crossfin has increased the number of merchants utilising its services and has achieved revenue and EBITDA growth on a year-on-year basis.
In Sanlam, the deal with Absa Investments to create one of South Africa’s largest black-owned asset managers has been concluded. Also related to Sanlam, ARC highlights that Sanlam is looking to take a controlling stake in Afrocentric.
Rubies are red, Gemfields is green
After some major scares this year, Gemfields is at a 52-week high
There’s been no news for a while on the insurgency in Mozambique that got dangerously close to Gemfields’ Montepuez ruby mine. The army was sent in to stabilise the situation and it seems to have worked. Although the risks aren’t gone by any means, the market seems to have relaxed after seeing support from government to protect the mine.
In the latest ruby auction, the company achieved auction revenues of $66.8 million after selling 94% of the lots offered for sale. Over the full year, the 2021 auction revenue record for Montepuez rubies ($147.4 million) was smashed with a performance of $166.7 million.
Looking at the broader group (i.e. including the Kagem emerald mine in Zambia), Gemfields’ auction revenues of $316 million have set a new annual record, up 32% from 2021.
It’s been a year of immense volatility and huge opportunities for traders:
Italtile hints at its performance
Revenue is higher, but retail volumes are surely down
Italtile has updated the market on its sales for the five months to November.
It’s important to understand that the group has manufacturing operations (Ceramic Industries and Ezee Tile Adhesive Manufacturers) as well as retail operations (CTM, Italtile Retail, TopT and U-Light). The integrated supply chain import businesses are Cedar Point, International Tap Distributors and Distribution Centre.
The businesses continue to face serious macroeconomic headwinds. Under considerable pressure from interest rates and inflation, consumers are deferring or scaling down on renovations and new build projects. To make it worse, loadshedding is causing a lot of pain for Italtile in the manufacturing division.
Although the update doesn’t give the percentage increases in selling price inflation, we can safely assume that a 2.3% increase in sales in the Retail division means that volumes are down. This is the case where inflation is higher than the percentage increase in sales. I have the same concern about the integrated supply chain businesses, which are up just 3%.
The Manufacturing division is up 7.8%, a performance that is “primarily due to price increases” (which implies some volume growth at least).
The company expects difficult conditions to persist for the rest of the year and no specific earnings guidance has been given due to the uncertain operating conditions.
Kumba updates production guidance
With issues at Transnet, you can guess in which direction the guidance went
After a tricky first half of the year for Kumba, matters were made more difficult by a two-week strike at Transnet in October. This has a negative effect on throughput, which in turn leads to a build-up of iron ore stockpiles at the mines.
Something has to give somewhere, in this case in the form of lower production due to the lack of storage space. Thankfully, the group has managed to maintain its unit cost guidance for the year despite lower production.
For 2023, production is expected to be 35 – 37Mt, down from 39 – 41Mt. The unit cost is $44 per tonne, achieved through lower anticipated diesel prices and currency depreciation. Of course, if the macroeconomic picture works out differently, then things could get ugly.
There is some light at the end of this railway tunnel. Kumba highlights various steps being taken by Transnet to improve matters, including a major maintenance programme, an extra set of trains, the removal of speed restrictions and the implementation of weather-related mitigations. This supports a production outlook of 37 – 39Mt in 2024 and 39 – 41Mt in 2025.
Still, that’s well down from the 41 – 43Mt previously guided for 2024. Our infrastructure challenges are throttling our economy.
Spar responds to media allegations
The share price is quickly becoming the least of the problems
In an explosive recent piece by Ann Crotty of the Financial Mail, a number of allegations were put forward about governance at Spar. It also highlighted the legal proceedings by the Giannacopoulous Group, which owns 45 Spar stores.
In this edition of My Big Fat Greek Dispute, the article sets out a long-standing dispute between Spar and the Giannacopoulous Group with respect to its guild membership, a prerequisite for owning a Spar store (you need to remember that they are franchises).
A very embarrassing court judgement is quoted, in which high court judge Judy Kollapen talked about a “spectacular failure on the part of the Spar Group” – not what shareholders (or others for that matter) want to read.
The family is now claiming R2.1 billion in damages. That’s a lot. There is also a criminal proceeding underway, with the backing of AfriForum. This is getting very ugly, very quickly.
The governance concerns go deeper than just a legal dispute that hasn’t been given much attention in the company disclosure. There are allegations of fictitious loans and major question marks around Graham O’Connor’s independence as chairman. He was the previous CEO and his family appears to have various commercial interests with Spar.
I won’t reveal more of Ann Crotty’s excellent work in Financial Mail. Being a subscriber to the publication is a worthwhile investment and you can read it there (along with my weekly column in the magazine if you so desire).
On Friday, the retailer responded to the media allegations, the summary being as follows:
The “fictitious and fraudulent loan allegations” relate to what Spar describes as an “isolated matter” – that’s not a great sign
The company refutes allegations of discrimination against retailers based on race or store location, noting that “perfection” (a process of taking legal ownership under a bond i.e. Spar Group taking ownership of a franchise store) is only a method of last resort to protect Spar as a creditor
O’Connor was appointed as chairman after serving as CEO because the board felt this was in the best interest of the company, with a lead independent director appointed to balance this as is suggested under the King Code
Amidst the allegations, O’Connor has stepped down as chairperson of the board and will remain a director. Andrew Waller, the current lead independent director, will serve as interim chairperson.
The share price tells the story here:
Little Bites:
Director dealings:
Having banked a juicy allocation of shares after the Avito disposal, Prosus and Naspers CEO Bob van Dijk exercised his options and disposed of all the shares. CFO Basil Sgourdos sold the shares required to cover the taxes and kept the rest.
A director of Afrimat has sold shares worth around R4.5m
A director of Sea Harvest has acquired shares worth R466k
The chairman of Hulamin has bought shares worth R203k
African Equity Empowerment Investments has provided Premier Fishing and Brands with notice of a firm intention to make an offer to acquire 6.14% of shares in the company. Premier would subsequently delist from the exchange if this scheme of arrangement is approved by shareholders. The offer price is R1.60 per share. In case you’re wondering about that shareholding, AEEI already holds 56.23% in Premier, 34.06% is held by 3Laws Capital and 3.57% is held by Sekunjalo. The 6.14% is therefore held by the general public. With such a tiny free float, there’s really no point in being listed.
Equites has announced the development of a logistics campus for Shoprite, with this particular property being built in the joint venture that the company has with Shoprite (50.1% – 49.9% in favour of Equites). The structure is that the joint venture will acquire an existing warehouse from Shoprite for R90 million and extension land for R75.6 million. This is minor in the context of the development cost, which is over R1 billion! With a 20-year lease and three rights to renew for 10 years each, this substantially increases the weighted average lease expiry period of the portfolio. The initial yield is 7.8% and rentals will escalate at 5%. Equites recently joined us on Unlock the Stock to talk about the strategy and performance, with the recording available for you to watch here:
SA Corporate Real Estate released a pre-close investor presentation. The portfolio has delivered like-for-like net property income growth of 7.3% with the office portfolio as the (predictable) ugly duckling. The vacancy rate in that part of the portfolio is over 20%, expected to reduce to below 17% by the end of December. The negative reversion in the office portfolio is huge at -27.6%! The Industrial portfolio has a vacancy rate of 0.82% and negative reversions of -5%. The retail portfolio has a 3.9% vacancy rate and although there is a slight negative reversion for the year thus far, this is expected to turn positive by December.
After an oversubscribed bookbuild for sustainability-linked notes, Pan African Resources will issue notes to the value of R800 million. Pan African is the first mining company to issue a sustainability-linked bond in the South African market.
Salungano Group released interim results for the six months to September. With the hilariously named Vanggatfontein on care and maintenance and lower demand from Eskom, the company hasn’t put in a good performance. Revenue fell by 13% and the group swung from an operating profit of R190 million to an operating loss of R16 million. The headline loss per share of 19.64 cents is ugly vs. HEPS of 20.69 cents in the comparable period.
Delta Property Fund just can’t catch a break, with an embarrassing announcement that the interim results for the period ended August included an error. These aren’t small errors either, with some line items in the cash flow statement being wrong by over 30%. This shouldn’t be happening in a listed company.
Trustco has renewed the cautionary announcements related to the management agreement and the resources transaction, both of which are making progress.
The JSE has appointed Ms Fawzia Suliman as its group CFO. Many people forget that the JSE is a company that is listed on the JSE! This always confuses newcomers to the market. One is a corporate entity and the other is an exchange, so the company effectively uses its own product in order to be listed.
Ascendis announced that Ms Bharti Harie has been appointed as chairman of the board.
There are wholesale changes to the Grindrod Shipping board as part of the transaction with Taylor Maritime Investments. There are five new appointments to replace the two directors who have stepped down as part of the agreement with Taylor.
Luxe Holdings doesn’t exactly have the best reputation in the market, so the news of the independent non-executive director resigning isn’t promising. He is also the Chairperson of the Audit and Risk Committee, so there’s another red flag for you.
PBNJ Trading and Consulting has acquired 38.4% of the shares in Sable Exploration and Mining Limited, which means that there is now a mandatory offer process underway. A mandatory offer to all remaining shareholders is triggered whenever a company acquires a stake of more than 35% in a regulated company. At a price of R1 per share (the current market price), this gives shareholders a liquidity mechanism in this incredibly obscure company.
It’s been…a year, hasn’t it? The team from TreasuryONE kicked off December by recapping the major recent moves in the market and the macroeconomic data that makes all the difference. Of course, we looked to the future as well.
In this interactive session, attendees had some really interesting questions that included a few that I needed to answer about equity strategies.
It was a brilliant webinar that I highly recommend making time to watch:
To learn more about how TreasuryONE can help your business navigate these conditions, visit their website.
British American Tobacco: can smokers still afford it?
Big on trademarked ESG-friendly terms, low on volumes
I never cease to be amazed by British American Tobacco’s public relations onslaught. The website looks like a tech company or a special needs school that promises a brighter future:
Of course, this is a cigarette company that is trying hard to figure out how else to make a profit. Because ESG index inclusion is all about intent and meeting rules, rather than a company’s actual value to society, British American Tobacco is a favourite. This is why most of the ESG industry is just window dressing of the worst kind.
The New Category business (vapes etc.) has 21.5 million customers and is still loss-making, with a plan to be profitable by 2025 when the target of £5 billion revenue is met.
The cigarettes make the money, though industry volumes are under pressure because of macroeconomic factors and post-Covid normalisation of consumption. With a core business that is essentially a sunset industry, there’s a major focus on cost savings (£1.5 billion annualised savings by the end of 2022) and pricing initiatives to recover inflationary pressures.
Investors treat British American Tobacco as a cash cow. It manages to grow revenue slightly each year and converts over 90% of adjusted profit from operations into cash.
With a market cap of R1.75 trillion, British American Tobacco is an absolute monster and is used as a defensive stock because the customers are, shall we say, rather sticky. Here’s what that looks like in a tricky market:
Rebosis business rescue update
To meet JSE requirements, a quarterly update on the process is required
The Rebosis business rescue plan was supposed to be released on 1 December, but the practitioners have requested an extension to 20 January. That’s the boring news.
The financial statements are a sticking point, as the annual financials for the year ended August can’t be released until the auditors can make a reliable assessment of the company’s ability to continue as a going concern. That isn’t going to happen until the business rescue plan is approved and the valuations of the properties are completed.
The company also released an operational update that reflects vacancies of 11.8% in the R5.3bn retail portfolio and 26.2% in the R5.9bn office portfolio. The negative reversions on the office portfolio are quite spectacular at -29%.
Government tenants are clearly hard negotiators.
Transnet keeps letting Thungela down
And not just Thungela, but all of us in South Africa who depend on the economy
If it was possible to win a FIFA World Cup through scoring economic own goals, South Africa would put any of the big names to shame. We might even be granted a Cricket World Cup as an adjacent prize, just to make sure we eventually get one of those trophies.
These sporting fairy tales are about as likely as Transnet sorting out its rail business or Eskom keeping the lights on. The frustrations are immense, as we are a resource-rich country at a point in the cycle where it should be our turn to shine.
Instead, the only thing shining is my rechargeable light while I write Ghost Bites late at night.
The pain is made clear by Thungela, our coal superstar that is losing out on exporting coal because of poor rail performance by Transnet Fright Rail. A strike in October by Transnet employees certainly didn’t help either. Because South Africa appears to have angered the ancestors, we also had a derailment on the coal corridor in November that took 10 days to clear.
Mitigating actions included a focus on railing higher-grade products to ports and using trucks to supplement that supply. That’s not cheap when the price of diesel is so high. In the final cruel irony, the price of diesel is partly being driven by demand from Eskom.
Truly, it’s a mess.
Against this delightful backdrop, Thungela’s pre-close statement paints a picture for the year ended December 2022 that remains lucrative. As a regular flick of your light switch will no doubt remind you, there is an energy crisis and we aren’t the only country dealing with it.
This crisis comes through in demand and hence the price for export coal, which has increased from $103.82/tonne to $236.11/tonne. You don’t need your calculator to figure out that this is a big jump. Sadly, thanks to Transnet, export saleable production at 12.8Mt is lower than the revised range of 13.0Mt to 13.6Mt issued in August and 15% lower than the 2021 number.
Lower production has a direct impact on costs per tonne, with the FOB cost per export tonne (excluding royalties) expected to be around R955/tonne (4% higher than the revised range issued in August and 21.7% higher than in FY21). Included in this number is a non-cash charge of R85/tonne related to an increase in environment provisions based on closure estimates.
Including royalties, the cost is expected to be R1,106/tonne vs. R812/tonne last year.
Despite this, Thungela is a cash machine of note, boasting a ridiculous net cash position of R19.8 billion on 30 November compared to R8 billion a year ago. It won’t improve in December because of operational disruptions, which shows how costly the strikes and derailments are.
South Africa desperately needs Thungela, with the company expected to pay taxes and royalties of R4 billion this year.
Headline earnings per share (HEPS) is expected to be at least 97% higher than last year, coming in at a minimum of R131 per share. This is a good time to remind you that Anglo gifted this company to the market at a price of R25 per share in June 2021.
With perfect hindsight of course, that was a forward P/E multiple of 0.2x.
Incredible.
Little Bites:
Director dealings:
One must be careful with reading too much into directors selling off their shares received under performance awards, but I did note that a few Transaction Capital directors didn’t hold on to any of their shares
A prescribed officer of Nedbank and the company secretary have collectively sold shares worth just over R3 million
In a reminder of how much your bank balance sucks in comparison to some of the directors on the JSE, the CEO of Omnia has sold shares worth R15.3 million just to cover the tax on a performance award
There’s always a bigger fish, with Stephen Koseff of Investec fame selling shares worth around R155 million
Sanlam has released the circular for the Afrocentric deal that would see Sanlam taking a stake of between 55% and 64.45% in the company. This is being executed through a partial offer at R6.00 per share. You’ll find the circular here.
Transpaco is executing a specific repurchase of shares worth R42.9 million from a related party to the company’s CEO. As the price has been set at the 30-day volume weighted average price (VWAP), no fairness opinion is necessary. This represents 4.95% of the issued shares of Transpaco.
Old Mutual has seen value in Spar despite a horrible year and no shortage of bad press, taking the stake to 5.23% despite a share price chart that reminds me of last week’s polony that fell down the back of the shelf:
Spear REIT announced that the sale of 15 on Orange for R246 million has received approval from the Competition Commission, which means the disposal has met all outstanding conditions and can go ahead.
Sebata Holdings has released a trading statement for the six months ended September, with the headline loss per share improving substantially to between 5.25 cents and 5.36 cents (vs. 132.25 cents last year). I would love to hyperlink it, but the website doesn’t work.
Nictus released its financial statements for the six months ended September, with revenue down by 1.34% to R18.8 million (this company is tiny) and a headline loss of 2.03 cents, which is at least better than a loss of 2.94 cents in the comparable period
Randgold & Exploration Co released a trading statement for the year ended December 2022, in which the loss per share has more than doubled because of further operating expenditure incurred by the company.
Anglo American is to go ahead with a deal first disclosed in June which will see the miner combine its nuGen™ Zero Emissions Haulage Solution (ZEHS) with US specialist engineering company First Mode (the company that partnered with Anglo to develop ZEHS). In addition, Anglo will provide equity funding of US$200 million into First Mode which will accelerate the development and commercialisation of ZEHS. On completion of the transaction, the business will be valued at US$1,5 billion and Anglo American’s stake in First Mode will increase from 10% to a majority shareholding.
Jasco Electronics is in discussions with its major shareholder, Community Holdings No 1 (CIH) with regards to its intention to make a general offer to minorities to acquire the remaining shares in Jasco. The purchase offer per share of 16 cents represents a 4% premium on the 30-day VWAP of Jasco shares on 2 December 2022.
Sabvest Capital has acquired a 39.3% equity interest in Valemount Trading, a manufacturer and distributor of products for the local pet market, from R & K Trust. The equity purchase consideration will be determined in accordance with an earnings and cash/debt formula calculated on 28 February 2023.
The Premier board and its shareholders (Brait) have decided not to proceed with the initial public offer and listing of the company on the JSE due to current unfavourable capital market conditions. Rather, as noted in the pre-listing statement, Titan and RMB will, in specified proportions, acquire the unlisted ordinary shares in Premier from Brait for an aggregated consideration of R3,5 billion by way of a private sale of shares.
The deal between Murray & Roberts and Webuild announced in early November has been terminated. M&R was to dispose of its interest in Clough Australia. In terms of the deal Webuild would inject A$30 million into cash strapped Clough to avoid placing the company under voluntary administration. The implementation of the loan did not take place resulting in Clough being placed into voluntary administration.
Unlisted Companies
Montfort Group, a global commodity trading and related-asset investment company, has entered the local energy market with the acquisition of a 49% stake in New Age Energy, a B-BBEE company focused on the reliable import, export and distribution of safe and high-quality energy products. The new partnership will see Montfort introduce its brand, products and services to the South Africa market.
CodiumX, an IT investment group headquartered in Johannesburg, has acquired a stake in local data analytics company Intellinexus. The deal will help the company achieve its ambitious target of five to 10 times growth over the next two years through organic growth and acquisitions.
Swiss media group Ringier is to acquire almost all outstanding shares in Cape-headquartered Ringier One Africa Media (ROAM) from co-shareholders SEEK, and minority shareholders Jabavu and Ceatonia. The deal strengthens Ringier’s long-term investment in certain digital marketplaces in sub-Saharan Africa
Connect, a UK cloud communications expert has acquired Pivotal Data and illation as it seeks to increase its presence in the South African market. Financial details were undisclosed.
Atlantis Foods, SA’s frozen seafood distribution company, has acquired Snoek Wholesalers in a deal which will scale the company’s operations and revenue. Snoek Wholesalers represents global brands such as Marfrio and Leroy in SA and sources fish from Peru and China for processing.
Host Africa, the Cape-based hosting business leading in Cloud Server solutions in South Africa, has acquired Kenyan hosting company EAC directory. Financial details were not disclosed.
Automation startup Synatic has raised US$2,5 million in a seed extension round to grow its footprint in the US in preparation for a Series A round. The round was led by Allan Gray E-Squared Ventures and UW Venture. Synatic provides complete solutions for the data integration market, offering a low-code/no-coder/your-code solution to simplify the integration of internal and external data sources.
South African venture capital fund management firm Fireball Capital has, alongside a fund advised by the Development Partners International Fund, invested in Ukheshe International, the UK-headquartered fintech enabler.
Lighthouse Properties’ offer to shareholders to acquire new Lighthouse shares has closed with the company issuing 7,692,308 new shares at R6.50 per share. The R50 million capital raise will provide the company with additional liquidity primarily for capital expenditure at its shopping centres.
York Timber intends to raise R250 million by way of a partially underwritten renounceable rights offer of 142,857,142 ordinary shares at a price of R1.75 per share. A2 Investment Partners will underwrite between R111 million and R160 million of the offer for a fee of R4,78 million. The proceeds of the offer will be utilised to preserve the timber volumes by procuring more timber externally and will be applied towards capital investment in manufacturing plants.
In terms of the scrip distribution alternative, Datatec will issue 3,171,196 new Datatec shares resulting in a capitalisation of distributable retained profits of R137 million.
Oasis Crescent Property Fund will issue 901,099 new units in terms of its scrip distribution alternative resulting in a capitalisation of distributable retained profits of R21,08 million.
As part of its capital optimisation strategy, Investec Ltd acquired on the open market a further 1,359,287 Investec Plc shares at an average price of 500 pence per share (LSE and BATS Europe) and 1,716,167 Investec Plc shares at an average price of R104.32 per share (JSE). Since October 3rd the company has purchased 12,58 million shares.
Transpaco has announced its intention to repurchase 1,56,000 shares from Samuel Abelheim Holdings at R27.48 per share for an aggregate of R42, 87 million, to be drawn from cash resources. The repurchase, which represents 4.95% of the issued share capital of the company, is a related party transaction and thus requires the approval of shareholders.
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 16,100,000 shares for a total consideration of £89,20 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 1,021,256 shares at an aggregate cost of A$4,09 million.
Prosus and Naspers continued with their open-ended share repurchase programmes. During the period November 28 – Dec 2, a further 5,156,456 Prosus shares were repurchased for an aggregate €315,53 million and a further 850,610 Naspers shares for a total consideration of R2,21 billion.
British American Tobacco repurchased a further 580,373 shares this week for a total of £19,77 million.
Two companies issued profit warnings this week: Marshall Monteagle and Sebata.
Three companies issued or withdrew cautionary notices. The companies were: Jasco Electronics, Murray & Roberts and Jasco Electronics.
Australian mining company Askari Metals has entered into a binding agreement to acquire an 80% interest Earth Dimensions Consulting, owner of lithium project EPL 8535 located near the town of Uis in Namibia. In terms of the agreement Askari will pay $1,6 million, payable in AS2 consideration shares at an estimated issue price of A$0.40 plus a Net Smelter Royalty of 1.5% payable by Earth Dimensions.
InfraCo Africa, a UK head officed firm providing funding and expertise to infrastructure projects, has invested US$2 million in Mobility for Africa to scale the business. The Zimbabwe-based electric mobility company delivers affordable, cargo-carrying e-tricycles and solar-powered battery charging solutions to the underserved communities in rural Zimbabwe.
Host Africa, the hosting business leading in Cloud Server solutions in South Africa, has acquired Kenyan hosting company EAC directory. Financial details were not disclosed.
Financial services company Lipa Later has acquired Sky.Garden for an undisclosed sum. Sky.Garden is a mobile first SaaS e-commerce platform for African retailers. The acquisition is in line with Lipa’s aim to build an end-to-end service connecting merchants to customers.
ShEquity, a Mauritius-based impact investment firm has made an undisclosed investment in Owoafara, a Nigerian women-owned financial inclusion startup. Through Owoafara’s digital platform and card services, member businesses are verified and provided with a variety of financial services including credit not normally provided by the banks.
Nigerian proptech startup VENCO has secured US$670,000 in a pre-seed funding round led by Zrosk Investment Management with participation from Voltron Capital, Decimal Point Ventures and Fast Forward fund, among others. The technology platform which provides solutions to enhance living experiences in residential and commercial communities, will use the funds to scale its platform with more features such as credit delivery infrastructure for household spending. VENCO has set its sights on growing its presence in Kenya and expanding into Ghana and South Africa.
East African a fintech startup Watu Credit has received an investment from BluePeak Private Capital, the funds of which will be used to further improve mass-market mobility and promote financial inclusion.
SIDEUP, the Egypt-based logistics platform previously branded as Voo, has raised US$1,2 million in a seed round from investors which include Launch Africa VC, 500 Global, Riyadh Angels and Alex Angels, among others. The funds will be used to scale its presence in Egypt and expand into Saudi Arabia.
OneOrder, the technology enabled supplier and wholesale distributor solutions provider for restaurants, has raised US$3 million in seed funding led by Nclude with participation from A15 and Delivery Hero Ventures. The funding will be used to scale its market share in Egypt with a view to exploring opportunities across the rest of Africa.
Kenyan re-commerce startup Badili has raised US$2,1 million in pre-seed funding. The second-hand phone commerce platform will use the funds raised to scale the business in Kenya and increase its footprint in other markets. Investors participating in the round included, among others, Venture Catalysts, V&R Africa, Grenfell Holdings, SOSV and Artha India Ventures.
Uncover, a Kenyan skincare startup has raised US$1 million in seed funding from FirstCheck Africa, Samata Capital, Future Africa, IgniteXL and angel investors. The funds will be used to grow operations in Kenya with the aim of expanding into Nigeria.
Brito, a Cairo-based startup operating a series of smartly distributed, and fully operated Cloud Kitchens all over Egypt helping international brands to expand their presence and delivery to the Egyptian market, has raised US$1,25 million in a pre-seed round. The startup will use the funds to further develop its technology, grow its delivery fleet and expand its presence.
This is the second in a series of articles highlighting common issues to consider when purchasing a business.
The first article dealt with the practical considerations when identifying assets and how to correctly describe such assets in the transaction agreements, as well as calculating the purchase consideration in respect thereof.
As previously noted, the sale and purchase of a business is usually more complex and comprehensive to implement than a sale and transfer of shares, and can take longer to complete. There are a myriad commercial reasons why a purchaser may wish to pursue a business acquisition rather than a share acquisition, including that the purchaser need not assume any of the seller’s liabilities incurred before transfer (unless expressly agreed otherwise, and excluding employee related liabilities). However, almost invariably, there will be prepayments to or by the seller (if only rent and rates) and consideration should be given as to how these should be apportioned. It is also worthwhile to briefly highlight the scope of warranties under a sale of business agreement, as these are generally one of the most contentious items of negotiating the transaction agreements.
Apportionment of Responsibility
Interim period undertakings are designed to protect the buyer from the seller eroding the business being purchased. Buyers often require that the seller undertakes to continue conducting the business “in the ordinary course”, and not to enter into any agreement which would alter the ordinary course of the business.
Where signing of the transaction documents and completion occurs simultaneously, few interim period undertakings are given, as most will be unnecessary. However, the position is slightly more complicated where the effective date of transfer, for accounting purposes, is different from the date on which completion of the transaction occurs.
Where the effective date of transfer predates the completion date, certain questions must be considered and negotiated, for example –
• although the parties may have agreed that transfer takes place before completion, the revenue authorities may consider the income of the business to be that of the seller during this period; thus, the seller’s tax liability in these circumstances needs to be taken into account;
• what responsibility should the purchaser assume for liabilities arising after the transfer date: all liabilities (in that the purchaser receives the profit), or only those arising in the ordinary course of business; and
• practically, it should be considered whether revenues and costs can be identified and allocated before and after the date of transfer.
Warranties
As noted above, the scope of warranties is often one of the most contentious items of negotiation. Warranties are generally expressed as statements of fact, which may be qualified by means of a disclosure letter. This, ideally, should allow both parties to consider the business’ factual position and allow the buyer to renegotiate its price, should a material issue be identified.
The purpose of warranties is two-fold
• firstly, to shake the skeletons – out of the closet, in respect of the business, so that the buyer is provided with some reassurance about the quality of the business it is buying; and
• secondly, to provide an opportunity for redress if the business is not as warranted.
Warranties are particularly important in instances where there is a gap between the signature date of the agreement, and completion. If, during this period, matters arise which are in breach of the warranties, the buyer should have the opportunity to terminate the agreement or renegotiate the purchase consideration. For this reason, it is important to minimise the time between signing and completion.
The buyer should consider which information about the business is important to it, and structure the warranties to address those items. This will depend on the nature of the business; for example, in a manufacturing or wholesaling business the physical condition of the assets is important. In a service business, supplier, customer and employee contracts are important. Warranties that certain facts are not true should also be considered and included.
If a warranty is breached, the buyer would ordinarily be entitled to claim damages resulting from the breach of that warranty. Practically, it needs to be considered how such damages will be quantified, but an appropriately worded clause in the transaction agreement may address this. Buyers should also be aware that they have a general duty to mitigate their loss in these circumstances.
In certain instances, it may also be appropriate to deal with a potential breach of warranties as an adjustment to the purchase consideration, or have it covered by an indemnity provided by the seller, particularly where the transaction contemplates the preparation of completion accounts and/or stock taking at completion. Another option is to tie it in with the retention of part of the purchase consideration or the payment of deferred consideration.
Of course, whenever an indemnity is provided, buyers should anticipate that sellers will request limitations on their liability, often in the form of time or amount based limitations. Indemnities and limitation of liability, including warranty and indemnity insurance, will be discussed in more detail in further articles.
Conclusion
The whole question of warranties, disclosures and the information process needs to be carefully planned and controlled. It is also useful to have a draft of the disclosure letter prepared as soon as possible, to encourage the parties to agree, at an early stage of the negotiations, what would be accepted as disclosure. Parties are encouraged to engage their transaction advisers at the outset, so that they are fully aware of and, preferably, the conduit for documents passing between parties.
Jaco Meyer is a Director and Haafizah Khota an Associate in Corporate & Commercial | Cliffe Dekker Hofmeyr.
This article first appeared in DealMakers, SA’s quarterly M&A publication DealMakers is SA’s M&A publication www.dealmakerssouthafrica.com
Despite a challenging macro-environment, foreign direct investment (FDI) in Southern Africa increased nearly ten-fold in 2021, to US$42 billion. FDI growth extended across the continent with West and East Africa, for instance, experiencing increases in 2021 of 48% and 35% respectively1. While the FDI landscape in 2022 is not quite as rosy as that of the previous year, positive trends nevertheless persist.
INVESTMENT IN TRADITIONAL ENERGY SECTORS
Much of the FDI into Africa is driven by an increasing demand for energy, both within Africa and outside the continent. From oil and gas to large-scale renewables, the energy industry was responsible for billions of dollars in capital deployed over the last 12 months.
Looking ahead, interest in African oil and gas will continue as prices and demand remain high. Exploration activity off South Africa2 and Namibia3 is expected to increase in the next 18 to 24 months, as companies weave through approval processes. Downstream, a liquefied natural gas project in Palma, Mozambique is being pursued, with new refinery capacity also being proposed in South Africa.
RENEWABLES SHINE AND INVESTORS ARE HEEDING THE CALL
Despite extensive carbon reserves, reliable access to electricity remains a critical problem across much of Africa, impacting livelihoods and the prospect for economic growth. According to the International Energy Agency’s Africa Energy Outlook 2022 (Outlook 2022)4, Africa will need investment of $25 billion annually just to meet current demand, while five times that investment in renewable energy solutions will be required over time to achieve Africa’s climate goals.
In 2021, there was an increase in the number of international projects in African renewables. Yet, much of the funding is concentrated among export projects in North Africa, delivering energy not to Africans, but to consumers in the Middle East and Europe. This includes a $20 billion project to supply wind and solar energy from Morocco to the UK via the world’s longest sub-sea power transmission cable.
Consequently, there remains untapped demand for renewable energy projects in the rest of Africa. According to Outlook 2022, Africa is home to 60% of the best solar resources globally, but only 1% of installed capacity. There have been recent solar installations increasing capacity across the continent, led by South Africa, the Democratic Republic of Congo (DRC), and Botswana; however, to meet the increasing demand, scalability and replication are needed.
TECH EXPANSION FUELLED BY GROWTH IN MERGERS AND ACQUISITIONS
A more recent trend in African investment across several sectors is an increase in mergers and acquisitions5. While the move is not surprising, what turns heads is the boldness of African-owned corporates in this space. Deals this year included, inter alia, the acquisition of Nona Digital by Yoco South Africa, solidifying the company’s position as a fintech leader in Southern Africa, as well as the cross-border acquisition of Ghana’s GreenLion by Nigeria’s Trade Depot, furthering consolidation in the business-to-business commerce space in West Africa.
Such acquisitions are fuelled by a wave of venture capital. As a result, growth and innovation are spreading beyond key tech hubs such as Cape Town, Nairobi, and Accra, into less established markets.
As African corporates are flexing their muscle, so too are Africa’s venture capitalists. Leading investors – from the American powerhouse, JP Morgan to start-up darling, Y-Combinator – are now joined by home-grown VCs, including AlphaWave in South Africa and 4DX Ventures in Ghana. These organisations are shifting the dynamic of ownership and expansion on the continent.
The use of African capital to fuel mergers and acquisitions is also causing ripples in the renewables sector. One example is the recently proposed merger of Nigeria’s Starsight Energy and South Africa’s SolarAfrica, two of the continent’s largest renewable power developers. If approved by regulators, the deal would create a combined portfolio of over 220MW in operated and signed generation capacity, and 40MWh of battery storage, with an additional pipeline of more than 1GW.
Both the energy and tech sectors remain ones to watch in 2022 and 2023. According to James Zhan, Director of Investment and Enterprise at the United Nations Conference on Trade and Development (UNCTAD), (“the African continent has great potential to attract international investment in the green and blue economies, as well as infrastructure. A challenge is to improve the investment climate and strengthen Africa’s capacity to absorb sustainable investment”6).
HITTING THE RIGHT MARK
Increasingly, investors wish to place their money in ‘Africa’, rather than in any one single market. This strategy is contingent on having advisors who understand the continent and, more importantly, the pitfalls and opportunities that come with it.
Put simply, investors require a partner with the necessary expertise and networks for them to thrive.
The importance of global decarbonisation and a sustainable planet is foremost; however, Africa’s journey to achieving net zero highlights the risk of further differentiating economic winners and losers. Individual countries, including the one-third of African nations that depend on fossil fuel commodities for state revenue, foreign currency receipts and local economic activity, have limited ability to influence the profound changes to the global energy market.
To achieve the targets set by the Paris Agreement requires a shift in the global economy, which implies that a third of Africa’s current oil reserves, half the current natural gas reserves, and 90% of current coal reserves shall remain in the ground. These fossil fuel resources “stranded” by the necessary changes to global energy consumption have a total value of US$6,7tn at today’s prices. Other important sectors in Southern Africa face indirect impacts; for example, the platinum sector, given the importance of catalytic converters related to internal combustion engines in the overall demand for the metal. Political discourse regarding a “just transition” risks overstating the negotiating power actually possessed by policy makers on the continent. For example, fossil fuel exporting countries cannot compel other countries to continue to accept such imports.
COVID-19 has further seen governments reprioritising budgets towards funding emergency health services and economic stimulus, and away from funding the expansion and improvement of electricity-generating infrastructure. It is estimated that it would cost Africa c. US$2,8tn to reach a net-zero energy mix by 2050, translating to roughly US$40 to $100bn investment per annum for Africa to meet its SDG 7 (Sustainable Development Goal Number Seven – Affordable and Clean Energy) targets. In contrast, estimated investment in power in Africa in 2019 was just US$17bn.
The requisite investments are unaffordable for many African economies, and increased reliance on international finance will be needed if progress is to be made. Furthermore, the cost of finance and perceived investment risk is higher for African countries than for developed economies – despite vast improvement in stability and governance.
It is important to note that there are also many positives to the energy transition and the development of the new associated technologies for African economies. Thermal power generation technologies are associated with very significant minimum efficient scale, implying centralised product of energy and complex transmission and distribution systems. In most African economies (like in many countries elsewhere in the world), power generation and distribution is owned by state-owned enterprises which, in many cases, have failed to run these systems efficiently on behalf of the public. Eskom in South Africa is a case in point. In contrast, solar PV technology can be operated efficiently at a much smaller scale, enabling individual corporations and businesses, and even families, to generate their own power in whole or material extent. As such, solar technology and the transition away from carbon is facilitating the “decentralisation” or even “democratisation” of power supply.
Additionally, many of the metals required for battery production, including vanadium, manganese, nickel, cobalt and lithium, are vastly available across the continent. The market for these metals is expected to see rapid growth in the coming years and will be driven by increased demand for electric vehicles, smartphones and off-grid energy storage. In fact, the DRC was once dubbed the “Saudi Arabia of the solar era”. The challenge for developers of these resources in Africa is likely to be the development and operation of complex benefaction assets, rather than the quality of the underlying resources.
According to the United Nations Economic Commission, there are several key drivers for an accelerated African renewable energy transition:
Africa’s energy demand is rapidly growing: Population growth, expanding middle class, industrialisation, urbanisation, trade and economic growth.
Wide recognition in the international finance community that Africa’s energy gap needs to be addressed.
Africa is endowed with an abundance and quality of renewable energy resources: Independent power producer tenders across the continent yield some of the cheapest tariffs globally. As an example, the World Bank/IFC Scaling Solar Project in Zambia saw tariffs of US$0.06 per kWh.
Verdant Capital has advised on renewable energy transactions across the value chain, embedding itself to tackle the core challenges entrenched in Africa’s energy transition. In South Africa, where, for good reasons and bad, uptake of solar infrastructure has been faster than the rest of the continent, Verdant Capital advised on a multi-hundred million rand acquisition in the battery sector, subject to Competition Commission approval.
Other countries in Southern Africa, which are less affluent than South Africa, have experienced a growth in the demand for Pico-solar products. Pico-solar systems are smaller and more affordable than their traditional solar counterparts, and have the power to provide useful amounts of electricity to charge the increasing number of low power consuming appliances from mobile phones and e-readers to LED lights. Picosolar has the power to light up millions of homes in the same way that the mobile phone has connected and empowered communities across the continent. Further, it offers an affordable means to the energy transition, incorporating the needs of lower income households and allowing for wider market reach across rural, periurban and urbanised cities. Verdant Capital’s Hybrid Fund, following its first close in December 2021, is currently finalising a US$15m investment in a leading PAYGO business in Southern Africa, assisting the firm to bridge its capital needs between inventory shortfalls and escalating market demand for Pico-solar products in the region. In West Africa, where many countries are experiencing recurring electricity outages and blackouts, with such bottlenecks costing two to four percent of annual GDP, Verdant Capital has performed financial advisory work, enabling downstream economic integration in both the off-grid commercial markets and smaller scale solar product adoption channels.
The energy transition imposes painful challenges on the economies of Africa, as it does to economies around the world. Different economies – mature versus developing, energy exporting vs energy importing – face different types of challenges and opportunities.
Climate change is real. Whether or not all economies will achieve the 2050 net zero targets remains a subject of debate, but it is undeniable that the global energy sector is changing profoundly, and will continue to do so, with significant impact on African economies. These changes imply the decline of sectors important to many economies in our region, with potentially important and painful impacts on unemployment and social cohesion. However, these changes also create new opportunities, including new extractive industries’, mining and processing of “green minerals”, reduced dependence on grid power and the associated SOEs, and new businesses’ manufacture, assembly, and installation of these renewable energy assets, large and small. Economic transition creates opportunities for entrepreneurs, large corporations, financiers and dealmakers across the board.
Sources: PwC, Africa Energy Review 2021; World Bank; IRENA
Edmund Higenbottam is Managing Director and Dusan Bozic an Associate | Verdant Capital
This article first appeared in the DealMakers’ Renewable Energy 2022 Feature
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