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Ghost Bites (Caxton vs. Mpact | Mondi | Prosus | Quantum | Tongaat

The Finance Ghost
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Ghost Bites (Caxton vs. Mpact | Mondi | Prosus | Quantum | Tongaat

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Caxton vs. Mpact: the latest

Spoiler alert: they still hate each other

Well, here we go again.

Caxton kicked off this announcement by pointing out that Mpact promised a detailed response to Caxton’s announcement “in the near future” and that nothing further has been released for a full week. I can’t fault that view. Mpact did leave things hanging with the last announcement. Never one to miss an opportunity, Caxton has complained to the JSE that Mpact’s announcement is an abuse of the listings requirements.

Mpact has now withdrawn the enforcement proceedings against Caxton and its Chairman. In the related non-confidential affidavit, Caxton claims that Mpact is admitting to the issue of customer flight by Golden Era, a large customer and material shareholder in Mpact. Caxton also reminds us that the Tribunal has confirmed that customer flight is an irrelevant consideration for whether Caxton is allowed to file a Rule 28 merger filing application.

This alleged customer flight is the crux of the entire issue. Caxton notes different statements made by Mpact in this regard, which can be interpreted on a spectrum ranging from Golden Era immediately moving its business away from Mpact through to the commencement of a process to move away over time. According to Caxton (and I must agree with this particular view), such a loss of a key customer would be considered a “poison pill” for a potential takeover by Caxton. The reason for this situation is that Golden Era and Caxton are strong rivals in the market, so Golden Era wouldn’t want to do business with a Caxton-controlled entity.

Separately, Mpact believes that Caxton and its chairman have committed criminal offences under the Competition Act, which can lead to a penalty of 10% of turnover and/or a R10,000 fine and/or imprisonment up to six months. We can all agree that those are very different punishments. Caxton and its chairman deny any such breach of the law.

The saga continues as we await Mpact’s promised announcement…

Mondi announces a strong quarter

With a share price down 27% this year, Mondi is still trying to recover from the Russian exposure

If we exclude the Russian operations, Mondi’s underlying EBITDA for the third quarter was €450 million, up 55% vs. the same quarter last year. The result was driven by higher selling prices and volume growth across most of the underlying businesses.

There’s a remarkable insight in the announcement related to Mondi’s energy needs. Although European gas prices have been a feature of the markets this year, Mondi generates most of its energy internally. Of the internal energy production, 80% is from biomass sources! Overall, only 10% of the fuel is sourced from natural gas. This is an incredible example of sustainability and good business sense in action.

The group is busy with a €1 billion expansionary capital investment programme and the projects are expected to deliver mid-teen returns. This includes a €400 million kraft paper machine in the Czech Republic facility and the acquisition and upgrade of the Duino mill in Italy for €240 million.

All eyes are on the disposal of the Russian business, with an agreement already in place to dispose of the operations for €1.5 billion. There are huge outstanding regulatory approvals for this deal, so investors are collectively holding their breath in the hope that it goes through.

Aside from Russia, investors can take a lot of heart from Mondi’s ability to grow volumes and push through pricing increases in difficult times.

Oligarch Ivan Tavrin acquires Avito from Prosus

Prosus will be paid around R44 billion with an expected close this month

For those who thought that Avito is a “donut” (i.e. a worthless, big fat zero in value), there’s a surprise on SENS. In March, Prosus announced a separation of the Russian classifieds business (Avito Group) from the rest of the business. This was obviously a move towards leaving the country in the wake of the invasion of Ukraine.

As Mondi and now Prosus have demonstrated, there are Russians waiting to acquire businesses from multinational organisations who are leaving the country. The news of a RUB151 billion (R44 billion) offer for Avito from Kismet Capital Group (controlled by oligarch Ivan Tavrin) will be welcomed by Prosus shareholders, as Prosus owns 99% of Avito.

These are extreme circumstances, so it becomes difficult to debate what the “fair value” really is. Avito made a profit of $160.3 million in the year ended March 2022. The purchase price works out to around $2.4 billion, so that’s a Price/Earnings multiple of 15x. That’s not the “desperate” price many would’ve feared!

Quantum’s financial performance is no yolk

Shareholders won’t be laughing when they see these numbers

If you love high margin businesses with low risks, the only involvement you should have with eggs and poultry is buying the products at your local grocery store. Poultry producers need to deal with everything from volatile raw material input costs through to the risk of avian influenza.

For the year ended September, Quantum’s headline earnings per share (HEPS) will be at least 63% lower than the comparable period. This implies a maximum HEPS number of 19.3 cents vs. 52.2 cents last year.

It’s been a perfect storm for the company. The margins in poultry are thin on a good day, so a substantial increase in raw material costs quickly eats into the profitability. With other issues like fuel and electricity costs along with loadshedding, there’s really not much margin left. To make it worse, a weak consumer environment put pressure on egg selling prices and reduced demand for layer livestock. The final nails in the coffin were outbreaks of avian influenza and weather conditions in the Western Cape, along with labour unrest at the Kaalfontein layer farm in Gauteng.

When demand for point-of-lay hens drops, the company needs to hold them for longer than planned and this drives a higher cost of production and reduced margins. The poultry industry is one of the strongest examples of operating leverage in action, as very high fixed costs and low contribution margin (profit per hen, per egg etc.) mean that profitability is hugely impacted by changes in volumes.

Of course, this means that when things are going well, they go very well.

In response to the pressure on profitability, Quantum is closing businesses that just aren’t attractive. The decision has been taken to close the Tongaat layer rearing farm and the East London packing station.

There is minimal liquidity in this stock, which is the only explanation for why the share price didn’t move on Friday despite this announcement.

Tongaat needs R1.5 billion for milling

Stakeholders will shortly receive a restructuring plan from the board

Tongaat Hulett is currently suspended from trading on the JSE. Despite reducing its debt from R11.7 billion to R6.3 billion through various asset sales and other management actions, the company’s balance sheet remains unsustainable.

The wheels really fell off when the planned equity capital raise from Magister Investments failed.

The sugar milling operations are performing better than the previous season but the company needs R1.5 billion to cover the peak working capital requirement. In July, South African lenders put forward a R600 million base facility. It has a scheduled repayment date of 25 October, which is less than two weeks away.

In an attempt to keep the company alive, the board has developed and approved a restructuring plan. “Various stakeholders” need to accept the proposal, with the announcement not giving further details on who the stakeholders are or what the proposal is. All we know is that the plan seeks to address both the debt and liquidity constraints.

This is perhaps a perfect example of the old joke: when you owe the bank R6 million, it’s your problem. When you owe the banks R6.3 billion, it’s their problem.

Anything could happen here!

Little Bites

  • Director dealings:
    • A director of Bidvest sold R10 million worth of shares on the open market.
    • A director of NEPI Rockcastle acquired shares in the company worth nearly R2.3 million.
    • Des de Beer has acquired another R5.5 million worth of shares in Lighthouse Properties (and I still can’t find a working website for the company).
  • In a production report for the nine months to September 2022, Merafe confirmed that attributable production from the Glencore Merafe Chrome Venture in the third quarter was 84kt, resulting in a 3.7% increase in production year-to-date vs. the prior period.
  • Cognition Holdings is in the process of disposing of 50.01% of Private Property for R150 million. In the circular released to shareholders on Friday, the independent expert concluded that the price is fair as it is higher than the suggested fair value range of R107.5 million to R136.3 million for 50.01% of the group. To help you understand how sensitive a valuation is to discount rates and terminal growth rates (the assumed growth into perpetuity), here’s the sensitivity table from the circular:

TreasuryONE webinar: Inflation, recession and the US dollar

The Finance Ghost
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TreasuryONE webinar: Inflation, recession and the US dollar

The latest TreasuryONE webinar couldn’t come at a better time, with so much going on in the market and the dollar continuing to dominate the global economy.

In this webinar, Wichard Cilliers and Andre Botha unpack the global economic landscape. As always, there’s a great Q&A session at the end of the webinar.

Watch the recording below and look out for the registration link for the next event when we announce it!

Ghost Bites (Afrimat | Aveng | Grindrod | Karooooo | RCL Foods)

The Finance Ghost
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Ghost Bites (Afrimat | Aveng | Grindrod | Karooooo | RCL Foods)

If you enjoy Ghost Bites, then make sure you’re on the mailing list for a daily dose of market insights in Ghost Mail. It’s free! SIGN UP >>>

Afrimat sees a drop in profitability

Although diversified, Afrimat hasn’t escaped the commodity pressures

Afrimat released a trading statement for the six months ended August 2022. Headline earnings per share (HEPS) is expected to be between 236.1 cents and 265.6 cents, a decrease of between 10% and 20% vs. the comparable period.

An increase in volumes helped soften some of the pain from iron price decreases and higher production costs. The force majeure declaration from Transnet won’t help here, with an impact on logistics for the iron ore mines.

The balance sheet remains very strong (the company is debt free) and Afrimat’s strategy of building a diversified group is ongoing.

The share price is down 21% this year.

Aveng looks increasingly interesting

Australian subsidiary McConnell Dowell is winning a lot more work

After agreeing to sell Trident Steel for a price that was much higher than many expected, Aveng has released more good news in the form of a 39% increase in McConnell Dowell’s work in hand to A$3.5 billion.

52% of the work is in Design and Construct, 34% is in Alliance and 14% is in Construct only, in case you were curious.

As any investor in the construction industry will tell you, there’s a big difference between new work and profitable new work. To help mitigate the risks of inflation, the contracts have escalation clauses and other terms to manage risk. Of course, we will only know for sure whether it works once profits on these contracts are reported in periods to come.

Grindrod jumps 6.5% after a trading update

There was a “strong performance” in the nine months to September (whatever that means)

Although we don’t know what percentage earnings grew by, the market took kindly to the wording used by Grindrod in this trading update. I suspect that the real driver of the jump was the detail given on the core underlying business units.

For example, Maputo Port volumes were 23% higher thanks to the additional slab and berthing capacity. The Grindrod drybulk terminals achieved a 47% increase in volumes, with profit participation on coal cargo. At Matola, the damaged berth infrastructure has been repaired and there are feasibility studies underway to expand the terminal from 7.3 million tonnes per annum to 12 million tonnes.

On the logistics side, the coastal shipping and container depot businesses enjoyed strong charter rates on leased and subleased vessels. The locomotive deployment rate improved from 32% to 63%. Graphite operations in Northern Mozambique seem to have done well at the port of Pemba. Finally, the clearing and forwarding business was supported by favourable freight rates.

The disposal of Grindrod Bank is effective on 1 November.

Overall, it’s clear that the underlying operations are still doing very well in this economic environment. Grindrod’s share price is up a whopping 89% this year!

Karooooo releases solid second quarter numbers

Profitability seems to (mostly) be on the right track again

Long-standing followers will know that I was a big fan of Cartrack just before the transaction to take the listing offshore and rename the company in such a way that vowels exceed consonants by some margin.

Speaking of margin, there hasn’t been as much of it at Karooooo as I would like. Covid put a real spanner in the works in Southeast Asia where the company tried to expand. After incurring significant expansion costs, it’s taken a while for revenue growth to come through.

The company has now released its results for the second quarter ended August 2022. There are just over 1.6 million Cartrack subscribers, up 14% year-on-year. Net additions in the quarter of 57,251 compare favourably to the 42,139 subscribers added in the comparable quarter last year.

The company notes that there is “traction” in Southeast Asia. We need to see more than just traction to justify the share price.

Looking at the financials, revenue was up 30% and subscription revenue was 17% higher. The group has changed over the past year, as there are now other business lines that aren’t recurring in nature. The largest non-recurring business is Carzuka, which I see as a blemish on the group strategy.

Cartrack EBITDA margin has recovered to 51%, up from 46% in the second quarter last year. That’s a LOT more like it. Sadly, Carzuka has lost R6.2 million in this quarter off revenue of R65 million. With a gross profit margin of just 10%, it remains beyond me why Karooooo is wasting time on that business. Karooooo Logistics (the renamed Picup business) is at least washing its own face, with a modest profit of R514,000 off revenue of R41.4 million.

Earnings per share increased by 28% and cash generated from operating activities jumped by a substantial 42%, which is good news for investors.

There was a net cash balance of R1 billion at the end of August. With free cash flow generation looking stronger, I hope to see distributions to shareholders. I fear that there will be investment in the likes of Carzuka instead.

RCL Foods wants to unwind its B-BBEE deal

This is a classic example of a structure that is “underwater”

Here’s the recipe for the average B-BBEE deal in the market:

  • A target is set for Black Ownership and Black Women Ownership (and other sub-sections of the code like broad-based etc.)
  • A shareholder register analysis is conducted to figure out how empowered the company already is
  • The % ownership for the deal is established on this basis e.g. the B-BBEE partner may only need to take a 10% stake in the company to achieve maximum points or the desirable number of points
  • The company decides to do the deal at listed level (using listed shares) or at subsidiary level (only the South African operations)
  • A funding structure is designed, either using bank funding or a notional loan / preference share from the company
  • Everyone hopes and prays that the share price grows enough and pays sufficient dividends to service the debt, thereby leaving behind some equity at the end of the structure
  • Bankers celebrate, lawyers buy new cars and the ESG section of the report has new content

Sadly, the economics rarely work out as well as planned. There are numerous reasons for this. The most obvious one is that if a dividend yield on a listed share is only 3% and the deal is funded using debt or preference shares at a cost of funding of say 7%, then clearly the structure actually goes backwards in value unless the shares grow in value by at least inflation.

If the deal is done at the wrong time or if the company doesn’t perform as hoped, the structure is “underwater” because the value of the debt or preference shares exceeds the value of the shares.

So, with that out the way, it should now make more sense to you that RCL Foods needs to unwind its B-BBEE deal (which was for employees and strategic partners) because the share price has fallen sharply since the deal was implemented in 2013.

Assuming shareholders give the green light, RCL will repurchase the shares held in the structure for a total price of nearly R230 million. When the shares were issued, the value was over R345 million. This deal isn’t just underwater – it’s at the bottom of the ocean! the proceeds will be used to repay as much of the preference shares as possible, with the outstanding balance being waived by RCL.

The big question is: what is the cost to RCL?

Well, RCL effectively loaned money to third parties to subscribe for shares in the company when the price was much higher (R17.32 per share). The share price has fallen to a 30-day VWAP of R11.49 and RCL is now buying back those shares.

The trick is that the original issuance was a subscription for new shares rather than a purchase on the market, so cash left RCL and came straight back. After the buyback, cash once again leaves and comes back. All else being equal, there’s the same number of shares in issue today as there were before the original deal was done. It’s also possible that such deals are implemented without any cash actually flowing i.e. via accounting entries and legal set-off.

Unless I’m missing something, the only cost to RCL is the tax leakage and the money spent on advisors and other costs. This is because the deal was funded by a vendor loan rather than a bank loan. There’s also the reputational risk of a failed deal and the disgruntled employees who aren’t receiving anything under the structure. I’ll be interested to read the full circular when that gets released.

If you have a different view on the economics of this deal from the perspective of RCL, let me know!

Little Bites

  • PSG Konsult released interim results for the six months ended August 2022. Total assets under management increased by 7% and gross written premium was 8% higher. Recurring HEPS only increased by 2% excluding intangible asset amortisation, with the insurance business impacted by the floods in KZN and the asset management side affected by lower securities prices (on which fees are based). PSG Wealth carried the can here, with recurring headline earnings up 13%. The dividend per share is 10% higher. Return of equity of 19.8% is well above the cost of capital.
  • Schroder European REIT has had its property portfolio revalued as at 30 September. The direct portfolio was independently valued at €218.7 million, an increase of just 0.1% in the quarter. The entire portfolio has leases that are subject to indexation, so rising inflation is contributing to rental growth that should mitigate declines in value.
  • Almost all the Ascendis shareholders unsurprisingly prefer to have more money rather than less, with just 0.63% of shareholders voting in favour of the deal to sell Ascendis Pharma to the Pharma-Q / Imperial Pharma consortium. 99.56% voted in favour of selling to Austell Pharma, which really isn’t surprising considering the offer by Austell was much higher.
  • If you’ve been waiting patiently for Heriot REIT to distribute the circular for the Safari Investments offer, your wait is now over. Heriot is making a cash offer of R5.60 per share and the circular is finally available.
  • Sappi recently announced a tender offer process for its 3.125% Senior Notes due 2026. Simply, that means that Sappi is reducing its debt by offering to buy back its notes. Sappi will repurchase €209.6 million notes on a purchase yield of 5.544%, which means a purchase price that is 92.410% of face value. If you buy fixed income instruments and interest rates then go up, you end up losing capital. After the repurchase, €240.4 million worth of notes are outstanding.
  • James Smith (interim CEO of DRA Global) has now been appointed as the permanent CEO.

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

Sanlam has made an offer to take control of black-owned JSE-listed investment holding company AfroCentric Investment (ACT). The offer is conditional on Sanlam acquiring a minimum of 36.6% and a maximum of 43.9% shareholding in ACT from minorities at an offer price of R6.00 per share – a premium of 49.01% to the 30-day VWAP. Currently Sanlam, through its subsidiary Sanlam Life, holds a 28.7% stake in ACT Healthcare Assets (AHA) which it acquired in 2014 giving it an effective 27% stake in Medscheme. As part of the transaction, Sanlam will transfer its shareholding in AHA to AfroCentric in exchange for a 28.7% stake in AfroCentric. The deal will see Sanlam expand its client proposition to provide a more holistic product offering.

Grindrod Shipping has made a further announcement regarding the potential agreement with Taylor Maritime Investments (TMI). Grindrod Investments which holds c.10.12% stake in Grindrod Shipping will tender its shares to TMI in line with the voluntary cash offer to shareholders of US$26 (this includes a US$5 dividend distribution) per Grindrod Shipping share. The voluntary offer however is conditional on TMI receiving more than 50% of the voting rights from existing shareholders by the expiration time of the offer. Should this minimum stake not be achieved, the deal will not take place.

Ascendis Healthcare shareholders have approved the Ascendis Pharma disposal to Austell Pharmaceuticals in a R432 million deal. The deal was conditional on shareholders not approving the sale of Pharma to Pharma-Q and Imperial Logistics, a R375 million deal first announced in February 2022. In a statement the company said it expected the Austell deal to close by end-October.

RCL Foods is to unwind its BEE transaction announced in 2013 by way of a repurchase of shares. Subsequent to its implementation the company’s share price has significantly declined in value, resulting in the existing BEE transaction being materially underwater at the end of its term in May 2022. The aggregate repurchase consideration is R229,63 million which will be funded from the company’s cash resources. Since the shares to be repurchased amount to over 5% of the company’s issued share capital, the repurchase is treated as an affected transaction requiring the appointment of an independent expert.

Spear REIT is to acquire the industrial property known as The Island in Milnerton for R185 million from Inospace 2. The deal is in line with the company’s strategy to increase exposure in the logistics, urban logistics and bulk warehousing in the Cape Town Metropol.

Heriot has released its offer circular to Safari Investments RSA shareholders detailing its firm intention to make a general offer of R5.60 per Safari share. The offer will remain open until 25th of November. An independent expert will now be appointed by the Safari board to opine on whether the offer is fair and reasonable.

In a small related party deal, Famous Brands has acquired the properties 478 James Crescent and 37 Richards Drive, both in Midrand.

Unlisted Companies

Cape Town-based EXEO Capital, an alternative investment partner in sub-Saharan Africa, has acquired The Vital Health Food Group through Nurture Brands, the convenience foods platform in EXEO Capital’s Agri-Vie Fund II. Vital is a local manufacturer and distributor of vitamins, minerals and supplements. Financial details were undisclosed.

Sakhumnotho Group, a local equity investor, has acquired a 25% stake in the Boschkrans Boerdery Business, a producer and exporter of citrus and tables grapes. The investment will further Boschkrans strategic vision to be a global role player in the production and marketing of fresh produce.

Mineworkers Investment Company (MIC) has added to its impact investing portfolio in a deal which will see it take a 24.85% stake in TooMuchWifi for an undisclosed sum. Funds will be used to grow the business and so expand access to affordable data by customers and their communities.

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

Datatec is to distribute to shareholders the entire initial gross proceeds of £135,1 million received from the sale of Analysys Mason. Shareholders will receive a special dividend of R12.50 per share with the option of a scrip distribution alternative.

As part of its capital optimisation strategy, Investec ltd acquired on the open market 1,714,710 Investec plc shares valued at £6,6 million (LSE and BATS Europe) and 1,657,834 Investec plc shares for R128 million (JSE). The shares were purchased between 3rd and 7th October, 2022. Investec will purchase a maximum aggregate market value equivalent of R1,2 billion. The purchase programme commenced on 3rd October 2022 and will end on or before 17th November 2022.

The JSE and the New York Stock Exchange have signed a memorandum of understanding to collaborate on the dual listing of companies on both exchanges and will also explore the development of new products and share knowledge around ESG, ETFs and digital assets.

The following companies repurchased their shares on the open market:

Astoria Investments has repurchased 19,335 ordinary shares for an average price of R5.63 per share during September 2022. The repurchased shares represent 0.03% of the Company’s issued share capital.

Glencore this week repurchased 15,450,000 shares for a total consideration of £75,61 million. The share repurchases form part of the second part of the Company’s existing buy-back programme which is expected to be completed over the period from August 4, 2022, to February 14, 2023.

South32 has this week repurchased a further 8,855,043 shares at an aggregate cost of A$33,13 million.

Prosus and Naspers continued with their open-ended share repurchase programmes. This week Prosus announced the repurchase of a further 3,001,749 shares for an aggregate €167,28 million. Naspers repurchased a further 369,148 shares for a total consideration of R871,77 million.

British American Tobacco repurchased a further 815,795 shares this week for a total of £26,9 million. Following the purchase of these shares, the company holds 212,831,564 of its shares in Treasury.

Four companies issued profit warnings. The companies were: Finbond, Datatec, Nu-World and Afrimat.

Five companies issued or withdrew cautionary notices. The companies were: African Equity Empowerment Investments, Afrocentric Investment, Pembury Lifestyle, Conduit Capital and Huge Group.

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

About Capital Management, a Hong Kong-based fund management company has acquired a controlling stake in Seychelles-based cryptocurrency exchange Huobi Global. Financial details were undisclosed.

Egypt’s state-owned National Automotive Company has acquired a 33% stake in Electrified, a Cairo-based content driven community accelerating the adoption of electric mobility.

P2P payment app Telda, has raised US$20 million in a seed funding round led by Global Founders Capital with participation from Sequoia Capital. The Egyptian consumer money app which services unbanked users will use the funds to expand into new markets and build its product offering.

iSupply, Egypt’s B2B pharma platform, has raised US$1,5 million in a pre-seed funding round led by Disruptech. The funds will be used to onboard c.60,000 pharmacies, launch distribution and financing services and expand regionally to Africa and the MENA region.

E-commerce financing platform FlapKap, a tech-enabled revenue-based financing platform in the Mena region, has closed a US$3,6 million seed round. Funds, raised from Bolt by AED, Nclude, Outliers and A15, will be used to increase its capacity to service more e-commerce businesses and to consolidate its position in the region.

Roboost, an Egypt-based delivery management solution startup has secured a six-figure seed round from Falak Startups, AUC Angels with follow on funding from Flat6Labs. Roboost transforms and digitalises business to achieve reduced costs, improve delivery time and increased productivity. The new funding will accelerate growth by enhancing Roboost’s AI delivery management solution and expanding its product offering.

Nigerian health technology company Lifestores Healthcare has raised US$3 million in a round led by Health54, the venture capital arm of CFAO Group and Nigerian early-stage growth equity fund Aruwa Capital Management. The investment will be used to increase the network of health services providers and the existing wholesale distribution capabilities in Nigeria and across Africa.

Holged Group, a provider of primary and secondary education in Morocco and Tunisia, has received an undisclosed investment from Africa50, a pan-African infrastructure investment fund. The funds will be used to further accelerate the expansion of Holged’s network of schools across Africa.

Stears, a Lagos-based data and intelligence company, has raised US$3,3 million in a seed round led by MaC Venture Capital with participation from Serena Ventures, Luminate Fund, Melo 7 Tech Partners and Cascador. Funds will be used to expand coverage geographically by establishing a presence in East and Southern Africa.

Healthtech startup Egypt-based Vezeeta has raised an undisclosed sum to accelerate its organic growth and fund acquisitions across the Middle East and Africa. Investors included Abu Dhabi-based Gulf Capital and Swedish investment company VNV Global.

Purple Elephant Ventures, a Nairobi-based venture studio using technology to improve sustainable travel and tourism across Africa, has secured US$1 million in pre-seed funding. Investors include Canadian Klister Credit Corp, The Untours Foundation and a number of angel investors. Funds will be used to build the next generation of startups to modernize the travel industry.

Nigerian FSDH Merchant Bank has received a US$25 million trade finance facility from the African Development Bank. The approved package consists of a US$15 million trade finance line of credit and a US$10 million transaction guarantee for the merchant bank to provide loans to local enterprises in the agricultural, manufacturing and energy sectors in Nigeria.

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

Thorts: Legal considerations relating to electronic meetings

Ziningi Hlophe is a Partner, Tebogo Moloko a Senior Associate and Lwazi Mthembu an Associate | Corporate at Webber Wentzel
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Thorts: Legal considerations relating to electronic meetings

As more companies convene virtual shareholders’ meetings post-pandemic, they need to follow certain procedures to avoid falling foul of the Companies Act.

The COVID-19 pandemic, the resulting lockdown, and social distancing requirements changed many aspects of life. One of those was companies’ meetings.

The Companies Act, 2008 (the Act) requires all public companies to convene an annual general meeting (AGM)1, and various entities are also required to do so by their relevant constitutions. At the height of the pandemic, electronic participation in meetings (including meetings of shareholders with a large number of attendees) became widespread practice and, in many instances, they included a facilitator.

Convening a virtual AGM may necessitate the use of a facilitator to:

• receive questions from the individual shareholders;

• convey communication to the board or other AGM participants; and

• switch the microphones on and off to control who speaks and when.

In this article, we will discuss the legal considerations relating to virtual meetings of shareholders and their reasonable and effective participation.

Section 63(2)(a) of the Act states that:

“unless the MOI states otherwise, a company may provide for a shareholders’ meeting to be conducted entirely by electronic communication, as long as the electronic communication employed ordinarily enables all persons participating in that meeting to communicate concurrently with each other without an intermediary, and to participate reasonably effectively in the meeting.”

The Act is flexible and recognises that companies may conduct a virtual AGM, if it is not prohibited by the MOI. Some commentators have suggested that electronic participation and voting encourages shareholders to play a more active role in the company’s affairs and would promote shareholder activism.2

Although virtual AGMs are permitted and their convening must comply with the requirements of the Act,3 s63(2)(a) of the Act is yet to be interpreted by the courts. The term ‘intermediary’ is not defined in the Act, but the ordinary meaning of intermediary (mediator or agent, for example)4 would suggest that the Act prohibits any limitation on the rights of shareholders to communicate effectively for themselves or by proxies at a shareholders’ meeting.

We believe that reasonable and effective participation in a virtual AGM (and/or any other meeting of shareholders by electronic means) should (without creating an exhaustive list):

• ensure that the participants are free to speak and pose questions in real time;

• ensure that participants can communicate without excessive moderation and may be allowed to communicate verbally or in writing;

• afford shareholders the same rights as in an in-person AGM; and

• where there is a facilitator, the facilitator must not assume controlling power over the shareholders’ communication and limit their communication as if it were acting as an intermediary (which would contravene s63(2) of the Act).

The King IV Codes state that the board of directors (the Board) should adopt a stakeholder-inclusive approach that balances the needs, interests and expectations of material stakeholders in the best interests of the organisation over time.5 In addition:

• the Board should oversee that the company encourages proactive engagement with shareholders, including at the AGM of the company;

• all directors should be available at the AGM to respond to shareholders’ queries on how the Board executed its governance duties; and

• the Board should ensure that shareholders are equitably treated, and that the interests of minority shareholders are adequately protected.6

It is important to preserve shareholders’ rights in virtual AGMs, and to allow them to hold the Board to account in a reasonable and effective manner. Shareholders must be enabled to participate to the fullest extent at a virtual AGM.

The increase in electronic communication at shareholders’ meetings has become common practice following the pandemic. Consequently, now more than ever, companies are required to ensure that such electronic means adhere to the Act. To improve good corporate governance and compliance with the Act, a company should ensure that shareholders’ rights to participate in a reasonable and effective manner are upheld at a virtual AGM. Also, care should be taken to prevent any facilitator from acting as an intermediary at a virtual AGM, by limiting the participation of the shareholders. The electronic platform used must be accessible, reliable, secure and allow all participants to hear each other in real time. This platform should allow the shareholders to ask questions at any time, and to vote freely and effectively.

1 Section 61(10) of the Act.
2 Cassim et al Contemporary Companies Act (2012) at 379.
3 Sections 62(3) and 63(3) of the Act.
4 As per the Merriam-Webster dictionary definition.
5 Principle 16 of King Code IV.
6 Recommended practices 6, 7 and 9 of the King Code IV.

Ziningi Hlophe is a Partner, Tebogo Moloko a Senior Associate and Lwazi Mthembu an Associate | Corporate at Webber Wentzel.

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

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

Ghost Bites (Grindrod Shipping | Steinhoff | Spear | Zeder)

The Finance Ghost
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Ghost Bites (Grindrod Shipping | Steinhoff | Spear | Zeder)

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Grindrod Shipping announces the Taylor details

Taylor Maritime Investments is looking to take control of Grindrod Shipping

The deal is structured as an offer, which means shareholders can choose to approve it or not. That sounds obvious unless you are familiar with a scheme of arrangement structure, in which shareholders are asked to vote on the deal and if 75% say yes, the rest are forced to sell.

In this case, the minimum that Taylor requires for the offer to go ahead is 50% in the company. In other words, the offer is for control or nothing.

Shareholders will receive an aggregate value of $26 per share, structured as a $5 special dividend and a $21 purchase price from Taylor. This is a 26.8% premium to the last traded price on 26 August, the day preceding the initial announcement of a deal.

An update on Steinhoff

The 64% drop in the share price this year is a reminder of the state of the balance sheet

Steinhoff has taught the world many things. Leaving aside the obvious scandal, it has also taught investors that a group valuation is a function of the underlying operations (like Pepco in Europe) and the balance sheet at group level.

No matter how well the operations are doing, an over-leveraged balance sheet tends to break the story. To that end, part of Steinhoff’s latest update is that the group is engaging with potential lenders about a restructure of the debt with a view to extending the duration. This simply means that Steinhoff is trying to get more breathing space to repay its debt.

Let’s start with Pepco, the pan-European discount retailer in the group. For the year ended September 2022, revenues were up 17.4% on a constant currency basis. PEPCO (the European business) grew 28.7% and Poundland in the UK managed just 5%.

Importantly, most of that European growth is from new stores being rolled out. On a like-for-like basis, PEPCO is up 7.4% and Poundland 2.6%. You can now see the difference that an expanding footprint made to the growth rate in PEPCO.

PEPCO also reports an “exit rate” to give an idea of the current growth run-rate, with September like-for-like growth of 15.5% vs. September last year.

Expected EBITDA of between €735 million and €750 million implies an EBITDA margin of around 15.4% on a constant currency basis.

Of course, growth doesn’t come for free. Net debt of €1,43 billion is an increase of €228 million year-on-year, driven by the store expansion plan and higher net working capital.

These are impressive numbers, especially against the backdrop of difficulties in Europe. The key is that in the core markets of Poland, Hungary and Romania, inflation in clothing and footwear is only a third of the headline inflation rate. The UK also has major issues, but Poundland’s value offering is somewhat resilient as consumers tend to shop down the price curve.

Moving on to Mattress Firm, a mattress specialty retailer with 300 stores in the US, the latest news is that there is no news. The group has been IPO-ready since March 2022 but the market conditions have been terrible. Steinhoff says that it is “exploring strategic options” which could mean a private equity rather than a listing. At this stage, there’s no certainty over the course of action.

The share price was only 0.5% higher on the day of the release, so there doesn’t seem to have been any excitement in these numbers vs. market expectations.

Spear acquires The Island

The Cape Town focused property fund is increasing its exposure to logistics properties

I drive through Paarden Eiland regularly and this deal sounds like a winner. Spear REIT is acquiring The Island from Inospace, perfectly situated in arguably Cape Town’s best industrial area.

The property offers large-scale modern warehousing complexes with roof heights ranging from 11 metres to 14 metres under eaves. For investors, the important point is that there aren’t many properties like this running around in Paarden Eiland.

The purchase price is R185 million and the acquisition yield is 9.75%. The weighted average escalation is 7.6%, the weighted average lease duration is 2.45 years and the vacancy is 0%. That’s exactly what you want to see.

Because the price is more than 5% of Spear’s market cap and less than 30%, this is a Category 2 Transaction. This means that Spear is required to announce the details (which it has done) but shareholders won’t be asked to vote.

Zeder is trading at nearly a 30% discount to NAV

The good news is that much value has already been unlocked

Over the past six months, Zeder’s net asset value per share has dropped by 42.3%. That sounds terrible unless you know the full story, as Zeder is a lot smaller than it used to be for all the right reasons.

For example, the Kaap Agri investment (a 42.2% stake in that company) was unbundled in April. The Logistics Group was sold in March and Zeder paid a special dividend of 92.5 cents per share with the proceeds. A further special dividend of 10 cents per share has now been declared.

The group is now focused on growing the remaining assets and potentially selling them when the time is right.

I was pleased to note that the announcement gives the numbers that explain the value unlock journey. Zeder was trading at R4.23 per share at the end of February 2019. Since then, Zeder paid special dividends of R3.53 per share and unbundled an additional R1.03 per share (Kaap Agri). The current market price is R1.90. That’s R6.46 per share in value vs. a R4.23 starting point in the space of 3.5 years, a return of nearly 53% overall.

Shareholders will now focus on the remaining assets, of which Zaad and Capespan are by far the largest.

Little Bites

  • Director dealings:
    • The CFO of Absa has sold shares in the company worth over R8.7 million.
  • Nu-World Holdings Limited released a trading statement covering the year ended August 2022. Headline earnings per share (HEPS) fell by between 35% and 45%. The company notes just about everything you can think of to explain the drop: the global economy, the riots, weak volume growth, subdued selling price inflation and reduced consumer discretionary spend. Either way, this illiquid stock may see some ugly moves on Wednesday as the announcement came out after market close.
  • AngloGold Ashanti has announced a target of 30% reduction in Scope 1 and Scope 2 Greenhouse Gas emissions by 2030. Emissions have been reduced by more than two-thirds since 2007. The capital cost over the next eight years is $1.1 billion, of which $350 million will be covered by AngloGold Ashanti and the rest will come from third-party providers of renewable energy infrastructure. Between $250 million and $300 million will be raised by the company through green bonds to fund its contribution. The capital will go into wind and solar projects at various operations. There will be other initiatives like the use of battery electric vehicles.
  • In another feel-good story, Orion Minerals is conducting a trial of electrolysis water treatment at Prieska to produce valuable agri-nutrients for local communities. The idea here is to recover valuable agricultural nutrients (like calcium and magnesium) during the upcoming dewatering campaign at the Prieska Copper-Zinc Mine. This sounds like a great initiative and it seems to use locally developed technology as well, so that’s a double-whammy of awesomeness.

Ghost Global (US Banks | GM | Porsche | Samsung)

Kayla Soni and Sinawo Bikitsha
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Ghost Global (US Banks | GM | Porsche | Samsung)

In this week’s edition of Ghost Global, Ghost Grads Kayla Soni and Sinawo Bikitsha bring us the latest on banks, automobile manufacturers and the world of Samsung.

Get ready for provisions

When US banks report earnings, they will need to adjust for economic conditions

Like a group of toddlers running in the same direction, the US banks report earnings in quick succession. Much like the toddlers, it might become an emotional affair with significant highs and lows.

The bank shares have taken serious pain this year. JPMorgan has lost nearly 37%, Morgan Stanley is down 23% and Goldman Sachs has lost 25% as new listings have dried up.

In an interview on CNBC, JPMorgan’s Jamie Dimon noted “very, very serious things” going on that would push the US into a recession by the middle of next year. Dimon has been in the markets for longer than some of us have been alive, so his opinion matters. With rapidly rising inflation, higher interest rates and the contagion from Europe’s economy, it’s hard to argue with his view.

The bad news never seems to end for these banks, with Morgan Stanley and Bank of America part of the consortium that committed to provide $13 million for Musk’s acquisition of Twitter. This is the same man who has just launched a fragrance called “Burnt Hair” – more like burnt lenders! If the banks tried to offload that debt in this environment, they would almost certainly suffer substantial losses.

General Motors beats Toyota and Ford in the US

Yet nothing can stop the bloodshed in these share prices

This really hasn’t been a good year for automotive manufacturers. The General Motors share price has lost over 47% of its value in 2022 and Ford is down by a frighteningly similar number.

The year-on-year sales numbers for the third quarter tell a different story, with GM’s unit sales up 24.3%. After Toyota experienced a sales decline of 7.1%, GM was able to regain top spot as the country’s top-selling automaker. Ford managed to achieve sales growth of 15.9% in the same period.

With continuing supply disruptions, increasing rates and the risk of recession, the outlook isn’t great for the sector.

Of course, there’s never a dull moment in these corporates. GM has a new COO and among the many things on his plate, there’s GM Financial’s agreement to pay $3.5 million to settle an alleged violation of the Servicemembers Civil Relief Act.

Porsche on pole position

The iconic 911 manufacturer is now Europe’s most valuable automaker

It’s been a volatile start for the P911 stock ticker, trading as high as €93 in Frankfurt before retreating to €85. This isn’t unusual for a new listing, with investment banks sometimes hired under a “greenshoe option” to help stabilise the price after a listing. In this case, Bank of America was the stabilisation manager and “stable” is a relative term here.

With all said and done, Reuters reports that Volkswagen raised 19.2 billion euros from reducing its stake in Porsche. This initial public offering (IPO) was Germany’s second-largest listing on record, so there has been plenty of market attention on this opportunity.

Porsche’s market cap is higher than Volkswagen’s after this listing, with Mercedes-Benz in third place. Further back we find BMW and Stellantis, which is a conglomerate of marginal car brands.

Compared to the rest of the German market, Porsche has the fifth higher market cap overall. Those ahead are Linde, SAP, Deutsche Telekom and Siemans. It turns out that putting the engine in the wrong place is big business.

Samsung slumps

Smartphone demand has dropped as consumers become more cautious

It’s been a productive year for Samsung Electronics Company, with the launch of numerous smartphones and electronics to support the company’s ongoing position as the second-largest electronics company.

So, the real question is this: why has the share price fallen if Samsung remains popular within the target market? It must be the case that Chinese competitors like Xiaomi are hurting demand for Samsung’s products, a function of Samsung’s positioning in the highly competitive Android market. This is why Apple continues to stand apart from the rest.

In earnings guidance released to the market ahead of full third quarter results, Samsung notes that operating profit could fall by over 32% year-on-year. This is the first year-on-year decline in roughly 3 years. The drop vs. the preceding quarter is as high as 25%.

Although we have to wait for detailed results to be released, analysts are estimating a double-digit drop in smartphone shipments. Have smartphones simply become too expensive for this economic environment?

You’re obviously interested in global stocks if you’ve made it this far. There’s a library of 50 research reports and podcasts produced by The Finance Ghost and Mohammed Nalla in Magic Markets Premium. For R99/month or R990/year, the full library is available, along with a new show each week.

Ghost Bites (Afrocentric | Datatec | Tharisa)

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Ghost Bites (Afrocentric | Datatec | Tharisa)

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Afrocentric receives a complicated offer from Sanlam

This is a partial offer (an unusual corporate finance tool) at R6 per share

Afrocentric closed at R4.19 on Monday before the news broke on Tuesday of a partial offer by Sanlam. The share price moved to R5.10, still well below the R6.00 offer price. The price differential is being driven by the partial nature of the offer, as there is no guarantee that a shareholder’s entire stake can be sold.

Sanlam wants to acquire between 36.9% and 43.9% of the current share capital of Afrocentric. Sanlam reserves the right to acquire fewer shares or more shares than this range suggests. Assuming that range holds, Sanlam will hold between 55% and 60% of the Afrocentric shares after the transaction. The announcement notes that under no circumstances will Sanlam hold more than 74.9% of the shares in Afrocentric after the transaction.

The rationale here is for Sanlam to integrate Afrocentric’s product suite of affordable medical aid and health insurance products into its ecosystem. This gives Afrocentric access to a much stronger distribution network than it currently has, with the additional benefit of cross-selling other Sanlam products to the Afrocentric client base. There will be the opportunity to develop integrated healthcare solutions going forward.

For Afrocentric shareholders, this is an opportunity to partially liquidate their holdings, something that would otherwise be difficult to do with the low level of liquidity in the stock. Excess tenders are allowed, which means shareholders can try to sell more than their proportional share of the partial offer. Whether those excess tenders are accepted would depend on the total number of shareholders that accept the offer, as well as Sanlam’s decision to acquire more than the guided range of shares.

Critically, Afrocentric will not be delisting.

There’s another trick here, in that a condition precedent to the partial offer is that Afrocentric must acquire the shares held by Sanlam Life in ACT Healthcare Assets Pty Limited (AHA). Sanlam Life currently holds 28.7% in AHA and Afrocentric holds the rest. This would be an asset for share deal in which Sanlam Life would be issued shares in Afrocentric that would give it a 28.7% stake in the listed company. The intention is that the partial offer would then take Sanlam to a controlling stake.

There are effectively two deals here, but one wouldn’t happen without the other.

Datatec’s earnings are significantly lower

But there’s a special dividend of R12.50 per share after the sale of Analysys Mason

In the six months ended August, Datatec had to contend with multiple issues related to global supply chains and the strength of the US dollar, which has caused havoc for many companies.

The company expected Logicalis Latin America to struggle, with some signs of supply chains easing in the region. Going forward, Datatec will report on the Latin America and International arms of Logicalis separately to give investors more detail with which to assess the group.

In both Westcon and Logicalis, the good news is that the backlog remains high and order intake remains strong. Ongoing demand is part of why supply chains haven’t fully recovered.

It’s also important to note that Analysys Mason is still included in these numbers, as the disposal was concluded after the period. When you see the drop in earnings, it’s not because that business was sold. That impact isn’t in this HEPS result.

Headline earnings per share (HEPS) for this interim period is expected to be between 4 and 5 US cents, between 36.5% and 20.6% lower than the prior year. It’s even worse if you look at underlying earnings, which is the company’s way of presenting a cleaner view of the numbers with fewer once-off distortions. On that basis, earnings will be between 63.9% and 51.8% lower.

Related to the disposal of Analysys Mason, the initial proceeds on that sale are being distributed to shareholders in the form of a special dividend of R12.50 per share. There is a scrip dividend alternative that allows investors to receive shares to that value without the incurrence of dividend withholding tax.

The share price closed 2.9% lower at R41.61, so the special dividend is 30% of the market cap.

Tharisa reports higher production numbers

The net cash position also improved significantly from $48 million to $78.6 million

Tharisa is a platinum group metal (PGM) and chrome co-producer that is dual-listed on the JSE and the London Stock Exchange. This makes it both unusual and interesting. The latest production and cash balance numbers for Q4 also point to a company that is operating at a high standard.

Higher rough feed grades and recoveries led to quarterly PGM production increasing by 7.6% vs. the preceding quarter and 13.6% year-on-year. Although the PGM basket price is 10.3% lower vs. the preceding quarter and 16.6% down year-on-year, the production numbers go a long way towards mitigating the impact.

Chrome concentrate production was up 6.8% vs. the preceding quarter and 5.1% year-on-year. Chrome pricing has retreated in this quarter (down 8.5% vs. the preceding quarter) but is still 35.7% higher year-on-year.

The balance sheet is looking good, with a cash balance of $143.4 million and a net cash position of $78.6 million.

The Karo Platinum project is due to break ground in December 2022 and there has been a lot of operational progress with the project, like filling key managerial positions.

Little Bites

  • Director dealings:
    • The CEO of Bell Equipment has acquired shares in the company worth R205k
    • As was pointed out to me by a Ghost Mail reader, Discovery CEO Adrian Gore recently received shares in the company to the value of nearly R3.3 million. Although that’s nothing to write home about given his wealth and position in the company, it’s interesting that he paid the tax out of his own funds and kept all of the shares. The norm is to sell enough shares to cover the tax, so this is effectively a show of faith from the CEO in the current share price.
  • Famous Brands will be acquiring properties from its founders in order to expand and reconfigure the head office and logistics centre in Midrand. The purchase price for the properties is R181 million, which is similar to the values at which the properties were shown in recent financial statements. This is a small related party transaction, so it can only go ahead if the independent expert provides a positive fairness opinion. BDO Corporate Finance has been appointed as independent expert and the opinion has been submitted to the JSE. Interestingly, the company doesn’t confirm whether the opinion is positive or not!
  • Exemplar REIT released an updated trading statement for the six months ended August 2022. The expected increase in the distribution per share is now higher, coming in at between 50% and 51.6%.
  • I haven’t been reporting on the several companies that are busy with regular buybacks. The sheer scale of Naspers and Prosus always deserves a mention though, with Prosus repurchasing shares worth nearly $165 million in the space of a week in early October. In a couple of days, Naspers managed to repurchase $48.5 million worth of shares. That’s a casual R3.8 billion in combined repurchases!
  • Rand Merchant Investment Holdings has issued the documentation required to formally change its name to OUTsurance Group Limited. The expectation is that on 7th December, you would be able to trade in JSE:OUT in your portfolio. I hope they pay regular dividends, otherwise investors won’t always get something out.
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