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Ghost Global (Amazon | Twitter | Tesla | Verizon | AT&T)

Ghost Global is a weekly segment brought to you by the Ghost Grads on a rotational basis. This week, Sinawo Bikitsha updates us on news from some of the biggest names on the US market.

Amazon and One Medical

Amazon announced an agreement to buy US healthcare provider One Medical for $3.9 billion in cash, yet another push from the eCommerce giant into the medical industry. This was particularly good news for One Medical shareholders, as the share price was trading at around $10 before the announcement and the Amazon offer is $18 per share!

Amazon plays in many verticals and healthcare is one of them, with strategies around online pharmacy and telehealth services. Amazon’s reputation doesn’t always work in its favour, with some commentators expressing concern about Amazon having access to medical records. Leaving that aside, the strategy here is clearly to make healthcare and the purchase of related products more convenient for customers.

Not everyone believes in the dream, as Amazon’s public policy and communications executive Jay Carney has been snatched up by Airbnb. Amazon previously lost its Amazon Web Services executive Charlie Bell to Microsoft. The company has lost at least four executives since Jeff Bezos stepped down as CEO in 2021 to go off and live the playboy lifestyle (literally).

Amazon will release its second quarter results on 28th July. The first quarter wasn’t great, with just a 7% increase in sales and a net loss of $3.8 billion after writing down the investment in EV business Rivian by $7.6 billion. The market will be anxious about new numbers.

Twitter blames everyone else

Twitter didn’t take long in its announcement to blame Elon Musk’s cold feet for its poor results in the quarter. Twitter is pursuing legal action against Elon Musk to force him to perform – a legal way of saying that Twitter wants him to stick to the contracts.

Twitter shareholders would love it if the company would perform as well, especially after a revenue decrease of 1% year-on-year and a net loss of $270 million. Only $33 million in costs can be attributed to the negotiations with Musk, so there are many other problems in the Twitter business model.

The biggest issue is its expenses, which jumped by a rather shocking 31% year-on-year.

Tesla margins under pressure

Tesla’s second quarter automotive revenues were lower than the preceding two quarters. On a year-on-year basis, automotive revenue was up 43%. A bigger concern and one that we are seeing across the market is pressure on gross margin, which came in at 27.9%. This is way down from 32.9% in Q1’22. In fact, this is lower than any quarter in the past year!

Operating margin of 14.6% was a decent outcome when you consider the pressures further up the income statement. This is down from 19.2% in Q1’22 but is in line with the second half of 2021.

The market is highly focused on free cash flow and Tesla had a tough quarter in that regard, with free cash flow of $621 million. Although this is in line with Q2’21, it is way down from the levels seen in the past few quarters.

The crypto fans won’t be impressed with the latest result, as Tesla has converted 75% of its bitcoin holdings into fiat currency (i.e. good old fashioned dollars and other currencies).

Tesla is facing much stiffer competition these days, not least of all from fellow American manufacturer Ford. Tesla sold over 1.1 million cars in the past 12 months and Ford is aiming for 600,000 electric vehicle unit sales in 2023.

Tesla is a favourite for short sellers because the valuation is so divorced from reality. This is a dangerous game, as a rally of over 11% in the past month has demonstrated once more. This year though, Tesla is down 32%.

Verizon and AT&T – tough times for telecoms

Verizon and AT&T did some synchronised swimming with their share prices and not in the right direction:

Verizon reported a drop in service revenue by 3.9% and in net income by 10.7%. Operating margins fell from 31.9% to 27.9%. These aren’t pretty numbers and they were driven by a loss in retail customers, which did nothing to encourage the market. The company noted tight competition and inflationary challenges as part of the drivers of this result. The CFO talked about remaining “confident in our long-term strategy” with perhaps the only highlight being decent gains in the number of business customers.

AT&T reported better results than Verizon, yet the share price still took a knock. Revenue grew by 2.2% and there were positive net additions to subscriber numbers. The troubles came in the operating margin, which fell from 21.2% to 16.7%.

Even the telecoms businesses aren’t immune to the effects of inflation.

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Africa – the final frontier (part 1)

Having spent several weeks tackling the retailers on the JSE, Chris Gilmour now turns his attention to Africa. Some years ago, South African companies simply had to have an Africa growth strategy. Today, many have come home and decided to focus on the core local market. Africa offers great potential and challenges, as Chris explores in part 1 of this series.

Africa is the last great outpost; the one part of the world where globalisation has had little if any impact. And in the new order, where Pax Americana has broken down and individual trade links are being re-established all around the world, how will Africa fare?

What is the impact of globalization on Africa’s economy today? In short, while globalization has made some contribution to economic growth in Africa, it has not yet facilitated the process of structural transformation required for African countries to reach the take-off stage and accelerate economic development and poverty alleviation. There have been sporadic bursts of growth in Africa in recent decades but nothing that could be regarded as being sustainable, mainly because Africa does not yet have a tradition of manufacturing very much.

Rising incomes elsewhere in the world have increased demand for African commodities and natural resources, boosting national economies. Globalization has also supported knowledge transfer, enabling African countries to improve living standards by “leapfrogging” to new technologies, most evident in the widespread use of cellphone technology on the continent.

But manufacturing (and especially high-tech manufacturing) is conspicuous by its absence in Africa. There are a number of Special Economic Zones (SEZs) all over Africa but few of them have been very effective. Without a large and growing industrial base, Africa’s current spurt in economic activity may not be sustainable. No meaningful country or region in the past couple of hundred years has made the transition from relative poverty to high income development without having a well-developed manufacturing base – for example Japan, China, Malaysia, India, Hong Kong, Taiwan and Mauritius to name but a few.

For Africa observers, the continent offers seemingly limitless potential coupled with a unique ability to squash optimism dead in its tracks. Africa’s advantages are glaringly obvious and yet its “leadership” over the decades has been marked by unbelievable levels of corruption coupled with a relatively forgiving population that doesn’t criticize its “leaders” in public.

The positives

Theoretically at least, the continent should prosper during this century, as it contains more than 60% of the world’s uncultivated arable land. This factor should become increasingly important as the effects of climate change, supply chain disruption and the war in Ukraine take their collective toll. And yet, Africa remains a net importer of food as it has struggled to meet the demands of a rapidly burgeoning population.

Africa is the only continent where the absolute number of undernourished and malnourished people has increased over the past 30 years. One must also bear in mind that much of that uncultivated arable land is not available for farming for a number of reasons and will remain so for the foreseeable future. Reasons include unreachability (too remote) and geographical issues like conflict zones and conservation zones.

Currently, the total African population is approximately 1.4 billion people, or roughly the same size as China or India. That number is likely to increase to 2 billion by 2050 and feeding such a huge number of people will be of critical importance. As things stand, excluding South Africa (and what is left of the Zimbabwean farming industry), the great bulk of Africa’s food is grown by small, inefficient subsistence farmers. The type of large-scale mechanised farming that is so apparent in many parts of South Africa is largely absent in Africa.

A coherent approach to agricultural transformation on the continent is critical if Africa is to become not only self-sufficient in food but hopefully over time a net exporter of food.   

But there’s far more to Africa than food, as important as it undoubtedly is. In a rapidly de-populating world, Africa’s population is growing rapidly. As people move from the rural to urban areas of the continent, economic growth follows. Already, there are more than 65 cities in Africa with a population of 1 million people or more and at 40% of the entire population, Africa is more urbanised than India (30%) and almost as urbanised as China (45%), according to McKinsey. The number of cities that exceed a million inhabitants is similar to Europe and higher than North America or India. Unlike the ageing populations of Europe and Asia, Africa’s population is youthful, which is another big advantage.

Urban spending in Africa is increasing twice as fast as rural spending. Highly fragmented informal retailing accounts for the bulk of all retailing in the rest of Africa, in stark contrast to SA, where most retailing is highly concentrated in the hands of a few large retailers.

Most uninitiated observers intuitively think of Africa as being predominantly a resources-based continent. And while resources and commodities constitute a very high proportion of the GDP of countries such as Nigeria and Angola, it comes as a big surprise to most people to learn that 45% of Africa’s GDP arises from consumer-facing industries.  For example, a hefty chunk of Kenya’s GDP is accounted for by its money-transfer service called MPesa.  

The African population is young and growing: more than 50% of the African population is younger than 20. In China, the figure is only 28%. African growth is predicated upon consumer facing industries (45% of total African GDP) with resources only contributing 23% according to McKinsey.

The negatives

One of the biggest problems that companies and investors face in deciding whether or not to invest in Africa is the sheer size and diversity of the continent, coupled with exceptionally poor or often non-existent transport links. It is often quicker and more cost-effective to fly via the Middle East or Europe when planning a trip within Africa, rather than attempting to fly directly between two points on the continent. Far better road and rail networks are urgently required in Africa, as are vast improvements in airlift capacity.

Better infrastructure and especially massively improved electrical generating and distribution capacity is vital in ensuring Africa’s sustained economic growth. The 48 countries that comprise sub-Saharan Africa (SSA) have a combined electrical generating capacity roughly equal to that of Spain’s capacity. The whole of Africa’s capacity is roughly equal to that of Germany. Two-thirds of Africa’s total electrical generating capacity is produced in South Africa.  Less than 25% of the population of SSA has access to electricity, compared with 50% in South Asia and 80% in Latin America.

Often, people forget just how diverse Africa is. It comprises 54 countries with 2,000 different languages and dialects. Now compare that with the South American continent, where there are only 13 countries, most of which speak Spanish, the exception being Brazil, which is Portuguese-speaking.

There are some wonderful plans for clean sustainable energy on the continent, notably the much talked about Grand Inga project on the Congo River in the DRC. Although a couple of small hydro plants have been built nearby the envisaged site of Grand Inga, nothing comes close to the scale of this mega project itself. Eskom was looking to get involved in this project as far back as the late 1970s, which just underlines how long this thing has taken and it’s still nowhere near the start.

When completed, Grand Inga would consist of seven dams that would generate at least 40 gigawatts of electricity. That would be the largest hydro plant ever built on earth and its output would be roughly the same size as Eskom’s entire installed capacity. Financing this project is estimated to cost around $80 billion but one of the big drawbacks is the physical location; it’s in the middle of nowhere and connecting power lines across thousands of miles to where the power is needed is costly and inefficient. So unless some form of highly imaginative funding can be brought about, Grand Inga is destined to remain an African dream.

But unless African leaders can change from being interested only in short-term extortion possibilities to having true long-term vision, this potential will remain theoretical. The type of extortion that is endemic in Africa varies from paying bribes to minor officials at border posts to allow goods to pass through all the way up to bribing senior government officials for tenders for large infrastructure projects

Another big negative is the serious mismatch between physical size and GDP size. There can be no doubt that Africa is a vast land area but in terms of GDP, it is tiny.

While SA is a reasonably sized economy-ranking about 26 in global GDP terms, Africa’s highly fragmented economy of 54 countries makes it difficult  for manufacturers and retailers to formulate strategies to enter the continent.  For example, the 20 countries that comprise geographical east Africa have a combined GDP similar to that of Switzerland. Total African GDP is approximately $2.6 trillion, or roughly the same size as the UK. Remove the Arab countries of North Africa and SSA GDP including SA is approximately $1.8 trillion, or roughly the size of Italy.

In summary: a SWOT analysis of Africa

Strengths– Huge, young population
– Massive mineral and agricultural wealth
Weaknesses– Over-reliance on unbeneficiated commodity exports
– Poor governance
– Low skills base
Opportunities– Using existing infrastructure better
– Consolidation of informal sector
– Tourism / open skies policy
Threats– Political impasse regarding regional co-operation
– Inability to absorb people in the formal sector

This series will continue next week. For more from Chris Gilmour, you could for example read his series on discretionary retailers on the JSE. You can find part 1 of that series here.

Unlock the Stock: PBT Group

Unlock the Stock is a platform designed to let retail investors experience life as a sell-side analyst. Corporate management teams give a presentation and then we open the floor to an interactive Q&A session, facilitated by the hosts.

With several of these events under our belts, we are thrilled with the corporate access that we are bringing to retail investors in association with our sponsor Kuda, a specialist insurance and forex services provider.

I co-host these events with Mark Tobin, a highly experienced markets analyst who has worked in several global markets, as well as the team from Keyter Rech Investor Solutions who help numerous JSE-listed companies with investor relations services. The South African team from Lumi Global looks after the webinar technology for us.

You can find all the previous events on the YouTube channel at this link.

The latest event saw popular technology business PBT Group present its strategy and exciting prospects. Buzzwords like “big data” and “cloud computing” are always thrown around in the context of global companies, yet few South African investors realise that there are ways to invest in these themes right here on the JSE. PBT Group is one such way!

To make that even easier, the company has partnered with EasyEquities to offer zero brokerage on any purchases of PBT Group shares. It’s wonderful to see the ecosystem coming together in favour of retail investors!

Watch the presentation here:

Ghost Bites Vol 54 (22)

Corporate finance corner (M&A / capital raises)

  • There’s big news from Astoria Investments, with the investment holding company selling its remaining shares in Afrimat for nearly R54 million and investing nearly R52 million in shares in Leatt Corporation, a South African business that has become a household name for action sports enthusiasts worldwide thanks to its leading technology in neck braces. Astoria now holds 2.4% of Leatt’s shares, including an additional R8 million investment. In other words, the total investment in Leatt is around R60 million. Leatt trades on an OTC basis in the United States, as the management team always envisaged an eventual listing on a major US exchange. This OTC structure makes it much harder for South African investors to directly hold shares in Leatt, so this is a good example of an investment holding company doing what it should be doing: offering exposure to assets that aren’t easy to get elsewhere. Investment holding companies that simply hold shares in other locally listed companies have lost favour with investors and are being collapsed left and right to “unlock value” with PSG as perhaps the most important example.
  • Grindrod is in the process of disposing of Grindrod Financial Holdings Limited (the holding company for Grindrod Bank) and its preference shares in Grindrod Bank to African Bank Limited. This deal was announced back in May and is a big step forward for both Grindrod and African Bank. This is a Category 1 disposal under JSE rules, so a circular has been distributed to shareholders (find it at this link). The price is R285 million for the preference shares and R1.18 billion for the ordinary equity (subject to adjustment for dividends). African Bank is currently a consumer-focused bank and wants to grow into business banking. Grindrod Bank offers an immediate market entry for African Bank into that space, so this deal makes a world of sense to me.
  • The buyout of Vivo Energy by Vitol Group has achieved another milestone, with a court order now in place to sanction the scheme (this is a UK requirement as Vivo is domiciled in the UK). The listing on the JSE will be suspended from the 25th of July and cancelled from the 29th. Farewell, Vivo.

Financial updates

  • Ellies Holdings has released a trading statement for the year ended April 2022. The company has sadly slipped back into the red, with a headline loss per share of between 6.49 cents and 7.77 cents vs. headline earnings per share (HEPS) of 9.19 cents for the prior year. Revenue was down 24.6% in the first half of the year and by the end of the year this had been clawed back to a decline of 10.8%. Still, that’s a nasty outcome. The major drivers were supply chain disruptions and a decline in satellite dish installations. Clearly, relying on satellite dishes isn’t sustainable as people shift to streaming, so Ellies has thrown in buzzwords like “smart home” and “internet of things” – presumably new product offerings are on the way along with potential acquisitions. The inverter and solar power product range must’ve been flying in recent weeks thanks to load shedding, but this will only come through in the next set of results as the worst of load shedding was experienced in winter and fell outside of the FY22 financial year. Ellies shareholders suffered value shedding on Friday as the share price closed 28% lower.
  • In case you want to make notes in the diary, Textainer Group will release second quarter results on 2nd August. NEPI Rockcastle will release interim results on 23rd August.

Operational updates

  • As part of an announcement on proceedings at its AGM, Famous Brands gave a brief update on trading at its restaurants. It sounds promising overall, with the company “coping with the food inflation on menu items” – a vague description that doesn’t tell us much. There’s a difference between “coping” and “passing inflationary increases on to consumers” of course. 45 stores have been opened this year and a recovery is evident across the Leading Brands and Signature Brands segments, with the business performing in line with budgets for the past four months. I quite enjoyed this bullet point from the announcement as a reminder of what it’s like to do business in South Africa:

“Business “as usual” again in SA other than load shedding disruption.”

Famous Brands announcement, 22 July

Share buybacks and dividends

  • Assuming that Bytes Technology shareholders approve the final and special dividend at the AGM on 26th July, the rand values will be 85.16084 cents and 125.71362 cents respectively. The total dividend is thus R2.11 in round numbers and the share price closed at R88.00 on Friday.

Notable shuffling of (expensive) chairs

  • Grindrod has appointed Xolani Mbambo to the top job in the group, replacing Andrew Waller as group CEO with effect from 1 January 2023. Mr Mbambo is an internal appointment (usually a good sign) and currently runs the Freight Services business. Before Grindrod, he worked for Anglo American in various roles. Strategically, this appointment makes perfect sense to me based on where Grindrod is focusing its efforts going forward.
  • In a very strange start to its announcement, Conduit Capital talks about how it has become a “diversified niche investment holding company” and then reminds us that all it owns is 100% of the Constantia group of insurance companies. I guess diversified means different things to different people. In a major change to leadership of the group, Sean Riskowitz has resigned from the board and his role as CEO. Peter Todd will take over as CEO of Conduit Capital on an interim basis in addition to his role as CEO of Constantia Group.
  • The Company Secretary of EOH has resigned to “pursue other interests” – the company will announcement a replacement in due course.

Director dealings

  • The managing director of Vodacom South Africa has sold shares in Vodacom Group worth nearly R3 million.

Unusual things

  • In a moment of great pride for me, PBT Group joined us on Unlock the Stock on Thursday and announced its participation through SENS – it was great to see the Unlock the Stock name in lights! You can watch it at this link in Ghost Mail and I highly suggest that you do, as this tech small cap is on the move in a big way. The share price is over 4x higher than at the start of 2020!
  • Efora Energy has been suspended since October 2020 and needs to release its results for the year ended February 2021 to lift the suspension (along with all subsequent results). This can’t be done until the audit of Afric Oil Proprietary Limited is completed. The audit has been delayed by the additional work required as a result of appointing new auditors. This is another good example of how listed companies can go badly wrong. This issue will hopefully be resolved soon.

The big liberalisation, and putting the FSCA under the microscope

This edition of Today’s Trustee, covering the second quarter of 2022, is a blockbuster, digging deep into a number of the biggest stories affecting our society and economy.

In our cover story, we deconstruct finance minister Enoch Godongwana’s decision to allow pension funds to invest up to 45% of their assets in offshore assets. This is a considerable liberalisation from the current situation where only 30% was allowed for offshore investment, with another 10% possible for investing on the African continent.

Yet, as Phakamisa Ndzamela writes, after interviewing SA’s largest asset managers, there are a number of unintended consequences for our stock market and currency to this otherwise widely-praised decision. As analysts from RMB Morgan Stanley warn, it could lead to “potential outflows from the SA pool of assets of up to R550bn to R800bn”.

Which isn’t to say Godongwana shouldn’t have opened up our pensions landscapes in this way – it’s just that it introduces greater risks into the system, which now need to be considered as part of a fund’s wider investment strategy.

Ndzamela’s analysis spells out exactly where these risks are, and how pension funds, and their trustees, ought to react to this new status quo. (Hint: it doesn’t entail ratcheting up your fund’s offshore investment quote right to that new 45% ceiling.)

Elsewhere, Today’s Trustee examines the ructions in National Treasury, and what changes in the top echelons of that organisation means for the future of SA’s regulation, and fiscus.

With director-general Dondo Mogajane having already left this month, after three decades service, and his deputy Ismail Momoniat due for an overhaul in his responsibilities, it’s clear that the changing of the guard may lead to a change in the way in which investment firms, financial services companies and pension funds interact with the state.

Hopefully, the treasury shake-up will inject much-needed fire into the regulator, the Financial Sector Conduct Authority (FSCA). As we detail in this edition, the FSCA has shown a crippling lack of urgency in dealing with a drama more than a decade in the making: the battle to trace 4.8-million people owed a combined R47bn in unclaimed pension fund benefits.

And this is only one of the issues on the FSCA’s to-do list.

Aside from that, the FSCA’s notorious backlog in processing section 14 transfers between retirement funds – a process meant to ensure savers get the best possible retirement outcome – flies in the face of the ‘treating customers fairly’ principle meant to govern our market. Gareth Stokes outlines exactly why it’s a problem – and why you should care.

Elsewhere, Londiwe Buthelezi examines the curious case of former pension funds adjudicator Mamodupi Mamodupi Mohlala-Mulaudzi, who was suspended as the CEO of Property Practitioners Regulatory Authority (PPRA) after failing to pay over some employees’ pension fund contributions.

As these stories, and many others illustrate, this edition of Today’s Trustee continues the fine tradition of journalistic standards that Allan Greenblo always insisted on.

It illuminates the world of the modern trustee, and remains essential reading.

READ ALL THESE ARTICLE HERE >>

Ghost Bites Vol 53 (22)

Corporate finance corner (M&A / capital raises)

  • The corporate finance industry took a breather today – there were no updates.

Financial updates

  • Oceana Group kicked off the day’s news on SENS with a trading update and appointment of a new auditor. After a period of governance that was smellier than Hout Bay Harbour when the wind is blowing the wrong way, shareholders are looking for stability. The first step towards that is the appointment of Mazars as auditor after PricewaterhouseCoopers resigned. The Mazars team will be under pressure here to get up to speed, as the financial year-end is September 2022. Moving on to financial performance, pilchards had a solid quarter and the 9-month period shows a slight drop in volumes vs. the comparable period. Importantly, there is an improved mix towards more profitable local production. African fishmeal and fish oil is now higher over the 9-month period than the comparable period, having recovered from the impact of lower opening inventory levels. I was today years old when I learnt what a “gulf menhaden landing” is – the arrival of a little fish that is basically the McDonald’s of the ocean, because everything else eats it. Gulf menhaden are used to make fishmeal and fish oil and landings were 83% higher than the comparable period, which is good news for production. Hake and horse mackerel were hit by poor catch rates and the business has had to deal with higher fuel and quota costs. Volumes over the 9-month period are down 10% but demand looks ok, so this is a production issue.
  • Vodacom Group released a trading update for the quarter ended June 2022. In the world of telecoms, Vodacom is the tortoise and MTN is the hare. Telkom is the awkward cousin that nobody really wants to invite to dinner, though MTN is trying to change that with a potential takeover. Vodacom’s growth is typically steady and boring and this period has been no exception. Group revenue increased 5.2% and South Africa is the mature business, up 3%. International service revenue grew by a far more interesting 10.4%, supported by data revenue growth and a weaker rand. Telecoms companies are increasingly behaving like banks in emerging markets and so they should, as smartphones offer a wonderful way to reach people. Financial services revenue increased 9.3% in this period and is still small in the broader group (R2.1 billion revenue vs. R26.1 billion total). It would’ve grown 19.7% without mobile money levies in Tanzania but this is a typical risk of doing business in frontier markets and can’t just be brushed away. In line with what we’ve seen in other telecoms groups, Vodacom has established a “TowerCo” internally that will have its own Managing Director. This is clearly a move towards potentially spinning off the infrastructure at some point, creating a more capital-light structure. Also keep in mind that Vodacom is busy acquiring 55% of Vodafone Egypt for R41 billion and regulatory approval is expected in the “near term” – so hold thumbs! There’s also a regulatory approval process underway for the acquisition of a 30% stake in CIVH’s fibre assets. Another important move is the launch of Safaricom in Ethiopia, Africa’s second largest country by population.
  • Anglo American Platinum released a trading statement for the six months ended June 2022. This wasn’t a good period, as sales volumes fell by 20% due to once-off benefits in the comparable period and the basket price fell by 14% vs. the record prices in the comparable period. With that combination of factors, you won’t be surprised to learn that headline earnings per share (HEPS) has fallen by between 40% and 50%. The actual range is between R87.45 and R106.46 per share. Annualising a mining stock is always dangerous and the result needs to be handled with care. It does give some context to the earnings, though. If we double the interim result, the forward price / earnings multiple is just under 6x. The group also released a production report for the second quarter which noted a drop in total production of 2% in that quarter and an expectation of further short-term impacts from planned maintenance in Q3 (just one example of why annualising earnings is dangerous). A five-year wage agreement was signed without any industrial action. Tragically, two mineworkers lost their lives during the period.
  • Kumba released a production and sales report as well as a trading statement for the six months ended June 2022. This is the company’s sixth year of fatality-free production, which is a great track record. Full year production and sales guidance has been reiterated (despite a 13% drop in this period). Unit cost guidance at Kolomela has been increased to between R420 and R440 per tonne and Sishen’s unit cost guidance is maintained at R500 to R530 per tonne. Capital expenditure guidance has been lowered by R500 million. The iron ore market came under pressure in the quarter from lockdowns in China and weaker global economic conditions. Kumba’s product is of premium quality, which is why the realised price of $136 per wet metric tonne is 15% above the benchmark price. The company resisted the temptation to complain about Transnet’s incompetence in this announcement, perhaps because of an 8% improvement in the second quarter in ore railed to port. For the six-month period though, that metric is down 4%. With lower realised FOB export iron ore prices, HEPS is expected to be 48% to 53% lower. The actual range is R33.87 to R37.49. On an annualised basis (with the same health warning to this approach that I gave above), the price / earnings multiple is approximately 6.5x.
  • Reinet Fund, which forms the bulk of the balance sheet of Reinet Investments, experienced a decrease in net asset value of 3.8% between March and June 2022.

Operational updates

  • Anglo American released a production report for the second quarter ended June 2022. Unlike the other mining updates, it doesn’t include a trading statement and hence falls into the operational update section. Full year guidance is unchanged for PGMs, copper and iron ore. It has been increased for diamonds and decreased for steelmaking coal. The Quellaveco project delivered its first copper concentrate in July and will eventually add around 10% to Anglo’s global output once fully operational. One of the highlights of the quarter was the unveiling of the world’s largest hydrogen-powered haul truck, part of the nuGen Zero Emission Haulage Solution. I’ve included a picture of this epic machine below. Anglo has done a deal to commercialise this product across the industry. Looking at production in more detail, every commodity except manganese ore experienced a drop in quarterly production year-on-year. For the six-month period, only diamond production is higher (up 10%). When it comes to realised prices, diamonds and nickel were up sharply and steelmaking coal blew everyone away with an increase of well over 200%. If we combine the production numbers and the realised prices, the best story right now is in the diamonds side of the business.

Share buybacks and dividends

Notable shuffling of (expensive) chairs

  • The chairs ended the day where they started.

Director dealings

  • The CEO of Tsogo Sun Hotels is a dip-buying enthusiast of note. Marcel von Aulock has bought another R2.2 million worth of shares in the company. I highlighted his previous purchase as a strong show of faith in the tourism recovery. It just makes sense, doesn’t it?
  • A trust associated with Barloworld CEO Dominic Sewela has bought shares in the company worth almost R2 million.
  • Invicta director Lance Sherrell has a long history with the business and is still topping up his investment in the industrial group, with a purchase of shares worth nearly R263 million. The share price has really rolled over this year, having lost nearly 30% in just the past few months.
  • Directors of BizSpace (Sirius Real Estate’s operation in the UK) have bought shares in Sirius worth £19.5k or around R400k.
  • Entities associated with a non-executive director of PSG Konsult have bought shares worth over R440k.
  • I wasn’t quite sure whether to include this under dealings or dividends, so forgive me if you disagree with the classification. Three directors of Datatec elected the scrip dividend alternative with an aggregate value of R20.8 million. This means they received Datatec shares in lieu of a cash dividend. As this is a strong show of faith in the business, I included it here.

Unusual things

  • For once, there was no “weird” news!

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

DealMakers AFRICA

Siseko Minerals, 51.7% held by London-listed Botswana Diamonds plc, has acquired a further 21% stake in the prospective Maibwe joint venture in Botswana, increasing its shareholding in the joint venture to 50%. In addition to the consideration payable of £27,215, Maibwe has agreed to pay a royalty to the liquidators of BCL Botswana of 2% from any future commercial development. Botswana Diamonds will fund its share of c. £13,600.

Multinational beverage alcohol company Diageo plc, headquartered in London, is to sell Guinness Cameroon S.A. to French beverage company Castel Group. In the £389 million deal, Castel will take over the production and distribution of Guinness in Cameroon under a licence and royalty agreement.

Agthia, the food and beverage company based in Abu Dhabi, is to acquire a 60% stake in Egyptian healthy snack and coffee manufacturer and retailer Auf Group. The deal is in line with Agthia’s strategy to focus on strengthening its portfolio and diversification into branded consumer goods.

Mainstream Renewable Power together with investment company Actis, are to dispose of Lekela Power (40%:60%), Africa’s largest pure-play renewable energy independent power producer seven years after they made the initially investment.  Infinity Group and Africa Finance Corporation will acquire the IPP in a deal said to be valued at c.US$1,5 billion.Lekela Power operates five wind assets in South Africa and one each in Egypt and Senegal.

Afentra plc via its Angolan subsidiary is to acquire a 4% interest in Block 3/05 and a 5.33% interest in Block 3/05A, offshore Angola. The deal follows the acquisition earlier this year of a 20% stake in Bloc 3/05 from Sonangol. The assets acquired from INA will be funded through the same debt and existing available funds as those being utilised for the Sonangol transaction.

Magma, an Egypt-based manufacturer of sportswear, has been acquired by Averroes Ventures, led by Magma’s chairman. Financial details were undisclosed.

In a cautionary announcement Pachin, the chemical industries company headquartered in Cairo, advised shareholders it had received a non-binding offer to acquire at least 51% of the company. 

Sudanese fintech startup Bloom has raised US$6,5 million in a seed round from investors who include Visa, Global Founders Capital, Goodwater Capital and VentureSouq amongst others. Bloom provides fee-free accounts for consumers to save in dollars and buy and spend in Sudanese pounds. The funds will be used to expand across the region into Ethiopia, Kenya, Rwanda, Tanzania and Zambia.

Enimiro, a Ugandan vertical supply chain partner, has received a US$515,000 investment from Pearl Capital Partners-managed Yield Uganda Investment Fund. The investment will be used to construct a new processing facility warehouse and to improve efficiencies, increase volume and improve product quality for both Vanilla and Arabica coffee. 

Stllr Network, the Egyptian outsourcing startup which puts businesses in touch with marketing professionals that provide a range of services, has closed a six-figure investment round from 500 Global and angel investors. The investment will be used for regional expansion and bolster talent.

Nigerian fintech startup Swipe has raised US$500,000 in pre-seed funding. The credit-focused tech company aims to expand access to its various credit services across Africa with its BNPL (Buy-Now-Pay-Later) product.

Smartprof, a Morocco-based educational tech startup, has secured US$50,000 in investment from UM6P Startgate and Plug and Play.

Zambian agribusiness company Zambeef is to receive US$35 million in investment from the International Finance Corporation to partly finance the expansion of its food production and processing capacities.

d.light, a manufacturer of clean energy products, has raised a further US$50 million from a consortium of lenders financing renewable energy projects in Africa. The investment is structured as a balance sheet debt facility with participation from Mirova SunFunder, Trade and Development Bank and Dutch entrepreneurial development bank FMO.

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

Exchange Listed Companies 

SGT Solutions owned by African Equity Empowerment Investments (60%) and Ayo Technology Solutions (40%) has announced the acquisition of Italian Summer, a supplier of power management and backup solutions and products for commercial and industrial applications throughout Southern Africa. The R73,63 million deal will ultimately create a larger market share in the telecommunication sector through an increase value-add and access to new customers. 

Buka Investments (previously Imbalie Beauty) has made its first acquisition in its journey to become a premium fashion company. The cost of the acquisition of the Socrati Group for R140 million will be discharged by the issue of 70 million shares at R2 per Buka share.

A caveat to a R590 million loan agreement announced in May between Ascendis Health and Austell Pharmaceuticals is that if shareholders did not approve the R375 million sale of Ascendis Pharma to Pharma-Q and Imperial Pharma announced in February, it would trigger a default under the loan agreement if Ascendis did not then agree to sell the business to Austell at R410 million. Shareholders will be asked to vote on two transactions at the next shareholders meeting.

Industrial REIT has disposed of Rose Kiln Court in Reading, UK for a total consideration of £5,88 million. The sale price represents a 2.2% discount to its March 31, 2022, valuation of £6,02 million.

Cautionary notices to shareholders of Telkom and MTN disclosing the companies are in talks (once again), sent the share price of Telkom up 26% and MTN up 5% on the day. Details are yet to be announced but there has been a great deal of speculation on what structure a deal would take. The strategic asset in the Telkom portfolio is fibre – in November last year Vodacom entered a R13,2 billion deal with Remgro’s CIVH to combine their fibre assets.

Unlisted Companies

Private equity firm Legacy Africa Capital Partners has taken a 30% equity investment in Continuous Power Africa, a provider of power solution to the telecommunications industry in Africa. Funds will be used scale the business and accelerate growth.

Actis, a global investment firm focused on energy and infrastructure, together with Mainstream Renewable Power, is to dispose of Lekela Power (60%:40%:), Africa’s largest pure-play renewable energy independent power producer seven years after they made the initially investment. Infinity Group and Africa Finance Corporation will acquire the IPP in a deal said to be valued at c.US$1,5 billion. Lekela Power operates five wind assets in South Africa and one each in Egypt and Senegal.

Nexia SAB&T has acquired audit firm Kreston Johannesburg as its 10th office in South Africa and its second in Gauteng. 

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Weekly corporate finance activity by SA exchange-listed companies

The JSE’s suspension of Tongaat Hulett is, as it noted in the SENS announcement, not as a result of Tongaat’s July 15th request for a voluntary temporary suspension but rather based on its failure to publish timeously its provisional results as per the JSE Listing Requirements. Tongaat is working towards finalising its restructuring plan on which the publication of the provisional results depends.

The latest update on the investment by Ivanhoe Mines in local natural gas and helium producer Renergen reveals that the strategic investment involving the second subscription of shares has lapsed due to the non-fulfilment of conditions within the stipulated 120-day period. In March this year Ivanhoe’s initial investment gave it a 4.35% shareholding in Renergen which was to be increased to 25% after a subscription to a second tranche and 55% following a third tranche.

In February MC Mining announced it had entered into a subscription agreement with local resource investor Senosi Group Investment whereby the company would issue a total of up to 71,697,242 for R86 million. The funding would be undertaken in two tranches with the first tranche of 38,4 million shares, representing 19.9% stake in the company, for an aggregate of R46 million. The second tranche funding was conditional on shareholder approval which was not obtained and therefore the issue of an additional 33,3 million shares at R1.20 per share will no longer take place.

Datatec has issued 4,787,467 new company shares in terms of its scrip distribution alternative resulting in a capitalisation of distributable retained profits of R176,08 million. 

Naspers and Prosus continued with their open-ended share repurchase programmes. This week the companies announced that during the period 11th to 15th July 2022, a total of 5,155,610 Prosus shares were acquired for an aggregate €338,14 million and 659,095 Naspers shares for R1,68 billion.

British American Tobacco repurchased a further 960,000 shares this week for a total of £33,24 million. The purchased shares will be held in treasury with the number of shares permitted to be repurchased set at 229,400,000.

Three companies issued profit warnings. The companies were: Trencor, Kumba Iron Ore and Anglo American Platinum.

Nine companies this week issued or withdrew cautionary notices. The companies were: MTN, Telkom SA Soc, PSV, Tongaat Hulett, Huge Group, MTN Zakhele Futhi (RF), Astoria Investments, Ascendis Health and Nutritional Holdings.

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Thorts: Navigating competition law compliance in dual distribution relationships

Competition law generally classifies relationships between firms as vertical (supplier and customer) or horizontal (competitors or potential competitors). The nature of the relationship has important implications for how the law applies.

In South Africa, arrangements between firms in vertical relationships are regulated by section 5 of the Competition Act. Aside from minimum resale price maintenance, which is prohibited outright, vertical arrangements are analysed under the so-called rule of reason. This analysis seeks to identify precisely the anti-competitive effects and pro-competitive gains arising from the arrangement, before determining, on balance, whether the arrangement should be prohibited. Because vertical arrangements generally have positive, neutral or mixed effects on competition, section 5 is invoked relatively infrequently.

Horizontal arrangements are governed by section 4 of the Competition Act and receive more aggressive treatment. There is virtually global consensus amongst competition enforcers that agreements between competitors pose significant risk to effective competition. Arrangements between competing firms that involve any form of price fixing, market allocation and/or collusive tendering are prohibited, and attract administrative penalties and criminal sanctions.

Dual distribution – where horizontal and vertical relationships meet

Because of the stark differences in the treatment of vertical and horizontal agreements, a hotly contested area of competition law enforcement is so-called dual distribution. This is a situation where a firm sells a product to its distributor, but also supplies the product to downstream customers directly, in competition with the distributor. As a result, the relationship between the supplier and distributor has both horizontal and vertical components.  

Consider, for example, the risk and complexity that arises where the agreement between supplier and distributor includes a territorial restriction reserving a particular territory for the supplier, and an adjacent territory for the distributor. Should this be considered an efficiency-enhancing vertical arrangement that promotes investment without the risk of free-riding, or is it automatically unlawful market allocation between competitors, in contravention of section 4(1)(b)(ii)? The answer depends on the specific facts in each case.

Recent case precedent – the importance of characterization

The importance of properly characterising the nature of the relationship as either vertical or horizontal, and the difficulties entailed in doing so, have been confronted in a number of South African cases. Most recently, in Aranda Textile Mills and Mzansi Blanket Supplies v Competition Commission, the Competition Appeal Court explained1:

There may be instances where a firm’s conduct will, on the face of it, fall within the ambit of section 4(1)(b), but their conduct will not be found to fall within the object of the [sic] section 4(1)(b) in which case no contravention will be established.

…the absence of a characterisation enquiry could well produce a false positive, meaning that a contravention is found when upon a proper analysis by way of characterisation the true object of s4(1)(b) will not be found. A characterisation enquiry into the conduct should be made… as this makes for a constitutionally compliant approach.

… characterisation is important as it ensures that competition law does not unnecessarily hamper or obstruct pro-competitive and genuine commercial transactions from occurring.

Statements like the aforementioned in case precedent improve legal certainty and provide firms some comfort that their efficiency-enhancing distribution arrangements will not necessarily be misconstrued as unlawful cartel conduct. However, this does not remove all of the risk associated with dual distribution structures. A critical aspect of proper compliance is the management of information exchanges between the supplier and distributor, to ensure that the economic relationship between them remains genuinely vertical.

Practical (draft) guidance from Europe

While there is no guidance on this issue in South African case law, the European Commission has recently published a draft amendment to its existing Guidelines on Vertical Restraints2, which provides helpful direction. In particular, the document specifies a number of specific types of information which, if exchanged in a dual distribution relationship, would be considered pro-competitive and thus defensible:

• Technical information, such as information relating to the registration, certification or handling of goods, or information that enables a party to adapt the goods to a customer’s requirements;

• Supply information, such as information relating to production, inventory, stocks, sales volumes and returns;

• Aggregated customer service information, including information relating to customer purchases, preferences and feedback;

• Prices at which the goods are sold by the supplier to the buyer;

• Certain resale price information, such as information relating to the supplier’s recommended or maximum resale prices and information relating to the prices at which the buyer resells the products, provided that such information exchange is not used to restrict the buyer’s ability to determine its sale price or to enforce a fixed or minimum sale price;

• Information relating to the marketing of the products, including information on new goods or services under the vertical agreement, as well as information on promotional campaigns for products; and

• Performance-related information, including aggregated information communicated by the supplier to the buyer relating to the marketing and sales activities of other buyers of goods or services, provided that this does not enable the buyer to identify the activities of particular competing buyers.

• Information relating to the volume or value of the buyer’s sales of goods or services relative to the buyer’s sales of competing goods or services.

By contrast, exchanges of the following information would give rise to the risk of the relationship appearing predominantly horizontal, and the exchange potentially falling foul of section 4:

• Information relating to the actual future prices at which the parties will sell goods or services downstream;

• Customer-specific sales data, including non-aggregated information on the value and volume of sales per customer, or information that identifies particular customers, unless in each case such information is necessary to enable a party to adapt the goods or services to a customer’s requirements or to provide guarantee or after-sales services or to allocate customers under an exclusive distribution agreement; and

• The exchange of information relating to goods sold by a buyer under its own brand name with a manufacturer of competing branded goods, unless the manufacturer is also the producer of the own-brand goods. It bears emphasis that the European Commission’s recent guidance is still in draft form for public comment. The final, amended guidelines will be of further interest and value.

Conclusion

Dual distribution remains a complex issue where a vigilant approach to compliance is essential. However, recent developments in South African case precedent, and practical guidance from other jurisdictions allow this area to be navigated with increasing confidence. More guidance in a South African context pertaining to the types of information sharing that result in pro-competitive gains or technological benefits outweighing the harm of competition, akin to the European Commission’s draft guideline, would be welcomed.

1 190/CAC/DEC20 (CAC) paras 78, 82 and 86.
2 OJ C 130, 19.5.2010, p. 1.

Neil Mackenzie is a Partner and Hadassah Laing a Candidate Attorney | Fasken (Johannesburg)

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

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