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.
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 issuedprofit 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.
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
Tsogo Sun Hotels has distributed the circular for the related party transactions announced in May and the proposed name change to Southern Sun Limited (which the group has already rebranded to), which would see the company trade under the ticker SSU. This will remove the confusion with Tsogo Sun Gaming. The important financial impact is clearly from the transactions, not the name change. In these deals, Tsogo Sun Hotels will acquire the Emnotweni Hotels from Tsogo Sun Gaming for R141.6 million and will agree to the termination of management agreements related to fifteen hotels owned by Tsogo Sun Gaming for a termination fee of R398.8 million. The net impact is an inflow for Tsogo Sun Hotels of R257 million and the acquisition of two hotels. If you would like to read the full circular, you’ll find it here.
ROX equity partners is hoping to acquire all the shares in SilverBridge for R2.00 per share. Both the offer circular and the response circular were made available on Wednesday. The announcement doesn’t give us the juicy bit: the independent board of SilverBridge believes that the offer is reasonable but unfair and thus no recommendation is made to shareholders to accept the offer. “Reasonable” is in relation to the share price history and “fair” is in relation to the value. In other words, ROX would be getting a great deal here. This is where it gets awkward: the directors who are also shareholders have already said that they will accept the offer, so they clearly see this as the best way to realise value for the shares. With the JSE recognised as a place where microcap valuation dreams go to die, who can blame them? You can use these links to read the offer circular and the response circular.
Vukile Property Fund is undertaking a debt capital markets roadshow, which means the company is speaking to institutional debt investors as part of a capital raise. There’s a very pretty and highly detailed presentation available that would be a worthwhile read for any investor in Vukile. You can find it at this link.
Financial updates
Nedbank has released a trading statement for the six months ended June. I’ve written many times before that these have been great times for South African banks, with the balance sheet growing and higher interest rates improving net interest margin. Sure enough, headline earnings per share (HEPS) for the period is expected to be between 23% and 28% higher, coming in at between 1,333 cents and 1,388 cents per share. Nedbank’s share price is up more than 17% this year.
ArcelorMittal South Africa has released a trading statement for the six months ended June. HEPS is expected to increase from R2.23 in the comparable period to between R2.61 and R2.81 in this period, an improvement of between 17% and 26%. The company managed to deliver in line with expectations and in same cases beyond them, despite an incredibly disruptive period including a labour strike, flooding and load shedding. Although the long-term investment case for steel remains intact, the group is preparing for tougher times as global economic growth slows down. The share price closed 16.7% higher based on this update. To give you an example of what a low multiple looks like for a cyclical business, the share price is just R6.57 and annualising the first half result (very dangerous in this business and only to show you the maths) gives a forward price/earnings multiple of 1.2x! The share price is down 36% this year.
Vivo Energy has confirmed the rand values of the scheme consideration and the special dividend. On 28th July, scheme consideration of R30.5842085 and a special dividend of R0.34172330 will be paid to shareholders. Those decimals become important when you have a big stake in this company that will shortly be disappearing from our market.
Operational updates
Metair Investments has released a voluntary update for the six months ended June. The company has been hugely impacted by the flooding in KZN as the automotive components business counts Toyota SA as a major client. This hit the second quarter and the reduced demand has carried over into the third quarter as well. An interim cash payment of R150 million has been received under a business interruption claim, which should be finalised in the second half of the year. The automotive business also services Ford and is investing in capex and working capital for the new model launch in the final quarter of the year. On the plus side, the energy storage vertical is performing well in Turkey (export volumes up 40%) but Rombat in Romania is down at least 10% due to lower consumer confidence from the conflict in Ukraine. It doesn’t do Metair any favours that Turkey is now a hyperinflationary economy, especially as that business is 31% of group turnover. As mitigating factors, 55% of turnover is directly linked to hard currencies (dollar or euro) and there are no restrictions on remittances of dividends from Turkey. Interim results will be released on approximately 14th September.
There’s definitely an increased sense of nervousness at Gemfields Group. The Montepuez Ruby Mining operation is in northern Mozambique which isn’t the most stable area around. An attack has taken place in the Muaja village area which is only 30kms away by road from the mine, clearly too close for comfort. A large number of people are relocating to the area where the mining operations are located. Operations are continuing “with increased vigilance” and hopefully security is being beefed up. The terrible attacks in the town of Palma took place in March last year and the Total gas operation is still on hold based on what I’ve read. This is worrying, yet the share price only fell 1% for the day.
Southern Palladium has released a drilling operations update for the Bengwenyama PGM project. The drilling programme is planned to commence in August 2022 and the host community has signed a term sheet for a framework and cooperation agreement. The agreement addresses a sensitive balance: the company’s need to undergo prospecting and mining activities on locally owned farms and the community’s right to live, farm and raise livestock on that land.
Share buybacks and dividends
British American Tobacco gave its usual daily update on share buybacks but Glencore was noticeably absent. I checked the last Glencore announcement and it didn’t say that the buybacks are finished. Perhaps someone just took a long lunch.
Notable shuffling of (expensive) chairs
Invictahas announced that Anthony Sinclair will be retiring with effect from 31 July 2023 and will then consult to the group. Gavin Pelser will retire with effect from 31 March 2023 and will subsequently help Invicta with offshore growth, particularly regarding Bearing Man Group China. Both directors have been with the group for many years.
Director dealings
Due to the unbundling by RECM and Calibre of 5,115,000 shares in Astoria, three directors of Astoria and their associated entities have received Astoria shares as they are also shareholders in RECM and Calibre.
Unusual things
It feels as though the unusual things section was built especially for Nutritional Holdings. For example, there’s currently a liquidation application underway by a former shareholder and director, which was postponed to “July 2022” – that’s now! It seems as though efforts are underway to stop it going to court, with a current shareholder now negotiating with that former shareholder to find a way to settle it amicably. If the application isn’t withdrawn, it goes to court this week. The soap opera continues.
I usually ignore any trades by the PIC. They often don’t make sense and especially not when viewed in aggregate. My understanding is that several different parties manage the PIC’s money, so they naturally have different viewpoints. Something I did find interesting is that the PIC has disposed of its entire stake in Premier Fishing and Brands. The company is part of the Sekunjalo group (Iqbal Surve). One can imagine some of the tricky discussions going on behind closed doors.
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Lawrence Stroll made his money from Tommy Hilfiger and eventually the IPO of Michael Kors. Now living the billionaire lifestyle, he is the Executive Chairman of Aston Martin Lagonda. Can his magic touch with luxury goods translate into success for the iconic car brand? Ghost Grad Kreeti Panday takes a seat on plush leather and straps in for the ride.
Most luxury car companies have flirted with bankruptcy at some point along the way. Aston Martin is a repeat offender, having survived near-bankruptcyeight times: in 1924, 1925, 1932, 1947, 1974, 1981, 2007 and 2020! The most recent scare was the catalyst for Canadian billionaire Lawrence Stroll’s involvement. He became the company’s Executive Chairman in April 2020, thereby securing a seat in Formula 1 for his son Lance if nothing else.
Source: Aston Martin
It always helps when daddy is a billionaire.
The latest news is that Aston Martin Lagonda Global Holdings Plc (the current corporate form of this iconic brand) has announced plans to raise equity funding from the Saudi Arabian sovereign wealth fund. The Public Investment Fund (PIF) will invest £78 million in the company, giving the fund a 16.7% stake as well as two board seats. This would make the PIF the group’s second-largest shareholder.
The cars may be gorgeous but the share price certainly isn’t, so the PIF will be hoping for a better outcome from here:
The PIF is headed by Crown Prince, Deputy Prime Minister and Chairman of the Council for Economic and Development Affairs, HRH Prince Mohammad bin Salman bin Abdulaziz Al Saud. The fund currently has stakes in American electric vehicle manufacturer Lucid, as well as British luxury automotive manufacturer McLaren. It also owns shares in Disney, Uber and Boeing and took over English football club, Newcastle United last year.
The football deal gave the PIF an 80% stake in the football club and resulted in protests outside the club’s stadium against human rights issues in Saudi Arabia.
Is this a good time to bring up the fact that Aston Martin unveiled its first SUV, the DBX, in 2019 with the aim of marketing it to female buyers? I wonder if we’ll start seeing less of those adverts. Controversial perhaps, but this is the world we live in.
Source: Aston Martin
Aston Martin is raising equity funding so that it can “meaningfully de-leverage the balance sheet” and support long-term growth. The goal is to hit 10,000 wholesale units by 2024/2025, which would generate around £2 billion in revenue and £500 million in adjusted EBITDA. The firm hopes to be free cash flow positive from 2024 onwards.
The structure of the capital raise is a placement of £78 million to the PIF and a subsequent underwritten rights issue of £575 million. Yew Tree Overseas Limitedholds 22% of the company and will take up its full entitlement (£105.3 million). Mercedes-Benz AG holds 11.7% and will also fully support the rights issue to the tune of £56 million. Both parties will dilute due to the PIF placement.
It’s worth highlighting that J.P. Morgan Securities and Barclays Bank will underwrite the rights issue up to £318 million, which excludes the shares being taken up by the three anchor investors.
This comes after the group rejected a proposed investment worth up to £1.3 billion from the Atlas Consortium, comprising Chinese group Geely (which owns brands including Volvo, Proton and Lotus) and Italian investment group InvestIndustrial, a previous owner of Aston Martin who sold out before the pandemic.
Aston Martin didn’t mince its words regarding the rejection of the proposal:
The Board of Aston Martin believes that the Proposal markedly overestimated the Company’s new equity capital requirements, would have been heavily dilutive for existing shareholders, and comprised a number of execution obstacles. Furthermore, the structure of the Proposal and the nature of its delivery are such that the Board of Aston Martin considered this an attempt by the Atlas Consortium to acquire a controlling and prospectively majority ownership position without any premium paid to existing shareholders.
Aston Martin press release 15 July 2022
In contrast, the PIF deal introduces a new strategic shareholder and reaffirms the commitment from the other two major investors in the company.
The company intends to use up to half of the proceeds to pay off debt, which as at the end of March 2022 amounted to £957 million. The reduced interest costs will hopefully improve the company’s cash flow generation. The proceeds are also expected to improve the company’s liquidity in the midst of a strenuous operating environment, given current Covid-19 lockdowns in China, the Russia-Ukraine war and continued supply chain issues.
The group also intends to use this capital to develop next-generation front-engine sports cars and furthering the company’s offering of their mid-size SUV model, the DBX, as well as its high margin mid-engine vehicles, such as its special edition Valhalla. Aston Martin is also planning for the launch of various electric and hybrid sports cars and SUVs, aiming for the launch of their first plug-in hybrid vehicle in 2024, their first battery electric vehicle in 2025 and a fully electric portfolio of GT / Sports and SUVs by 2030.
The announcement also gave an update on recent trade. Order intake for the DBX is more than 40% higher year-on-year and the GT / Sports cars are full sold out into 2023. Wholesale volumes in H1 were down due to supply chain disruptions (2,676 units vs. 2,901 in the comparable period). Despite this, guidance has been reaffirmed for over 6,600 wholesale units for full year 2022, which will be a huge achievement from this midpoint. If achieved, adjusted EBITDA margin would increase by 350 – 450 basis points.
After announcing a nasty loss in the first quarter, the market will closely examine the interim results due on 29th July.
If anyone can fix Aston Martin, it just might be Lawrence Stroll and the leadership team he has put in place that includes Amedeo Felisa, an ex-Ferrari executive. Stroll’s experience with super-luxury companies comes through strongly in this statement:
“We started by fixing the core fundamentals of the Company, successfully de-stocking the dealer network to rebalance supply to demand, optimising inventory levels aligned for an ultra-luxury business, and now benefit from the strongest order book we have seen in many years. We also signed a strategic co-operation agreement with Mercedes-Benz and have developed a breathtaking pipeline of products, starting with the DBX707 and V12 Vantage, all of which are aligned with our 40%+ contribution margin targets – a significant increase from the past.”
Lawrence Stroll, Aston Martin press release 15 July 2022
You can immediately see the important elements for success with luxury brands: demand in excess of supply and products that generate high margins. You also need a strong enough balance sheet to support that journey. This deal goes a long way towards achieving that.
The team from TreasuryONE looks ahead to the important rates decision this week, with an expectation of a 50 basis points hike by the MPC.
It would be an understatement to say that markets have been volatile in the past month. One of the most significant factors of the recent bout of market volatility has been the growth and inflation conundrum currently in the market. We have seen record inflation numbers globally, with Central Banks scrambling to fight inflation, which will invariably affect growth worldwide – so much so that there is a significant threat of a recession on the cards.
Yield curve inversion
A significant indicator of an impending recession is the 10-2 year treasury yield spread that inverted further after the US CPI number printed its highest result in 40 years. Markets ran to the US dollar following the US CPI release, and the EUR/USD traded below parity for the first time in 20 years as the market priced in a full percentage point interest rate hike at the next FOMC meeting later this month.
Markets, however, cooled as Fed officials played down such a hike over the weekend, with a report from the University of Michigan showing long-term inflation expectations are falling.
USD / EUR
In rand terms, we have seen the local unit still on the back foot, trading at a high of R17.30 after the release of US CPI. Still, with the US dollar slipping since the market opened yesterday, we have not seen the relief rally in the rand that other emerging market currencies enjoyed against the US dollar. The rand has failed to break below the R17.00 level after testing it numerous times, and we await the MPC decision on Thursday for any meaningful direction in the rand.
USD / ZAR
Speaking of the MPC, we expect a hike in interest rates of 50 basis points on Thursday, but that might change higher if the inflation number on Wednesday shows a significant increase from the previous month’s number. The MPC is caught between a rock and a hard place: with anaemic growth in South Africa, hiking too quickly will cause a recession. Still, with their overall mandate to curb inflation, they could be forced to hike aggressively in a low-growth environment.
On the international front, the ECB will announce their interest rate decision on Thursday, and the markets expect a 25 basis point hike. With inflation rampant in the Eurozone, we expect the rhetoric from the ECB to be relatively hawkish. However, with low growth, sustaining the hiking cycle in the Eurozone could be challenging, which could mean that the ECB will be well behind the curve in tackling inflation.
With all these market events towards the latter part of the week, the rand might be in for a volatile time with the MPC decision and the ECB decision happening almost simultaneously. We might see moves to both extremes depending on how the market perceives risky assets in the wake of the Central Bank rhetoric and forward guidance.
Have you watched the TreasuryONE webinar on the macroeconomic factors affecting the rand and the petrol price? Andre Cilliers (Currency Strategist at TreasuryONE) gave a great presentation on this topic last week and you can watch the recording here.
There’s news at Ascendis and it has nothing to do with Gary Shayne. He’s no longer on the board and his name is being utterly hammered by the investigative journalists at Daily Maverick, so Ascendis will be pleased to have seen the back of him. Instead, this update is about the potential sale of Ascendis Pharma to Austell Pharmaceuticals. As one of the many recent opportunistic lenders involved with Ascendis, Austell loaned R590 million to the company at JIBAR plus 4% plus another 3.5% for good measure. Another 2% gets added to this if shareholders approve the sale of Ascendis Pharma to a joint venture of Pharma-Q and Imperial Pharma, or if shareholders don’t approve a sale to Austell if that deal falls through. The price to Austell is R410 million, so that would get rid of most of the loan but not all of it. Ascendis Pharma made a net profit after tax for the six months to December 2021 of R22 million, so on an annualised basis this is a Price/Earnings multiple of 9.3x. The price for the Pharma-Q / Imperial Pharma deal is only R375 million, so shareholders would be leaving money on the table if they approved that deal. The corporate advisors look set to make money here, as two separate circulars will be sent to shareholders: one for the Pharma-Q / Imperial Pharma deal and one for Austell. Here’s a summary of the typical decision facing an Ascendis shareholder:
Tongaat Hulett is trying desperately to pull its balance sheet in the right direction and survive its current crisis. The company asked the JSE to suspend its shares from trading. The JSE has decided to suspend trade from 20th July but notes that this isn’t because the company asked it to do so. Instead, the suspension is because the company hasn’t released its provisional results. This may sound like kids fighting in the sandpit but these decisions set an important precedent. The suspension won’t be lifted until Tongaat has caught up on financials, which is unlikely to happen until there is certainty around the balance sheet. If you’re a Tongaat shareholder, you should make yourself comfortable (if that’s possible), as you’ll be one for a while whether you like it or not.
As part of PSG’s internal restructuring ahead of the much bigger deal that will see PSG leave the market, the group has sold down its Kaap Agri stake. It will hold 34.7% in the agriculture group at the time of the unbundling, assuming that transaction goes ahead. You can find the PSG circular at this link with all the information on the restructure.
Fortress has distributed the circular to shareholders dealing with the proposal to repurchase all the A shares in consideration for the issue of 3.01281 B shares per A share. In simple terms, this means the REIT is getting rid of A shares and issuing more B shares instead, assuming all goes ahead. If it doesn’t go ahead, Fortress is likely to lose REIT status. EY was hired as independent expert and has opined on the terms as being fair and reasonable. You’ll find the circular at this link and they managed to keep it under 100 pages, so it’s a light read by regulatory standards.
Astoria shareholders were reminded that the company is still in the process of finalising agreements for the intended acquisition of 25.1% in International Mining and Dredging Holdings for $5.5 million. The share price closed 14.7% higher, though a quick look at the share price chart makes it clear that the big move was a result of the bid-offer spread.
African Equity Empowerment Investments and AYO Technology have jointly announced that they have agreed to acquire a business called Italian Summer. The entity through which the deal is being done is called SGT Solutions, owned 40% by AYO and 60% by AEEI. Italian Summer supplies power management and backup solutions for commercial and industrial applications, adding some romantic flair to everyone’s Eskom problems. The price is around R73.6 million based on a price/earnings multiple of 5.5x. Half of the amount is subject to earn-out payments, which is the right way to acquire private companies. In these structures, the sellers only receive all the cash once warranted profit after tax numbers are achieved after the deal. If those levels aren’t achieved, the earn-out is adjusted downwards based on a formula.
Financial updates
Super Group has published a trading statement for the year ended June 2022, a period that was full of disruptions ranging from riots and the tail end of the pandemic through to load shedding. We all deserve a medal for getting through this. Super Group especially deserves a medal, with HEPS up between 29.6% and 43.7%. The guided range is 370 cents to 410 cents, which also compares favourably to the 373.8 cents achieved in 2019. Impressive stuff, all things considered!
There was a pretty weird announcement from MTN clarifying tax remittances by MTN Nigeria for the 2021 fiscal year. Using the words “MTN Nigeria” and “tax” in the same sentence sends a shiver down the spine of any MTN shareholder. I’m not going to pretend to understand the intricacies of what is going on here, but MTN notes that MTN Nigeria is one of the most tax compliant organisations in Nigeria for the year 2021. Separately, the company announced a N200 billion bond issuance programme. This is a follow-on to the 2021 programme in which MTN Nigeria issued N100 billion worth of 13.00% 2028 bonds and N90 billion in 12.75% 2031 bonds. This gives you an idea of what long-term funding in Nigeria costs.
Operational updates
BHP has released an operational review for the year ended June 2022. The update was headlined by the news of a fatality-free year and record sales volumes from Western Australia Iron Ore, allowing the group to fully capitalise on high prices. Full year guidance for iron ore and energy goal was achieved, along with revised guidance for copper and metallurgical coal. Nickel production missed guidance due to a smelter outage in the final quarter of the year. That quarter also saw the conclusion of major corporate actions, including the sale of 80% in BMC to Stanmore Resources for $1.1bn plus adjustments, as well as the merger of the oil and gas portfolio with Woodside Petroleum with a subsequent distribution of the shares to shareholders. Other than the usual operational matters, the executives are lying awake at night thinking about the Samarco dam disaster in 2015 which seems like it will play out in UK courts after a critical recent ruling against BHP. Of course, the company is appealing the ruling that allows a group action in the UK. Importantly, simply allowing an action to take place isn’t a ruling on the merits of the case.
I couldn’t quite decide if this is a financial or operating update, but eventually I chose the latter. Aveng has announced that Australian subsidiary McConnell Dowell has been awarded an AUD600 million contract by the Tasmanian Department of State Growth for Tasmania’s largest-ever transport infrastructure project: the New Bridgewater Bridge. One would’ve hoped for a better name for such a momentous occasion. This takes the company’s current work in hand to around AUD3 billion. The bridge will include a shared pathway for cyclists and pedestrians, which is guaranteed to cause fights among people in clothes that fit too tightly. The share price only rallied 2% in response, which is why I classified this as an operating update. When Aveng successfully banks this amount and finishes the bridge, we can move it up.
Share buybacks and dividends
For a useful reminder of how huge Naspers and Prosus are, share repurchases last week came to R1.68 billion and €338 million respectively.
Omnia Holdings has obtained SARB approval for the chunky dividend of 525 cents per share (current share price R67.87). The last day to trade is Tuesday 26th July.
Similarly, Bytes Technology Group has received SARB approval for its proposed final (4.2 pence per share) and special (6.2 pence per share) dividends. The dividends will be proposed at the Annual General Meeting on 26th July.
Don’t forget that British American Tobacco and Glencore are both busy with share buyback programmes and are releasing daily updates.
Notable shuffling of (expensive) chairs
Following the sad passing of Meyer Kahn in June, Capital Appreciation Limited has appointed Kuseni Dlamini as Lead Independent Non-Executive Director. He has been on the company’s board since May 2018 and is currently the Chairman of Massmart and Aspen, having previously held the roles of CEO of Old Mutual South Africa and Head of Anglo American South Africa. Kahn’s shoes are big to fill and Dlamini looks more than capable of doing so.
Director dealings
Capitalworks is a long-standing partner of listed food business RFG Holdings. In recent weeks, the private equity investment house has bought shares worth nearly R460k. To add to that tally, there’s been another purchase of over R50k. This is announced on the market because two of the RFG Holdings directors are from Capitalworks.
Unusual things
Fund manager Bluebell Capital Partners is attempting to improve the corporate governance at Richemont. Before you panic, the company hasn’t done anything wrong, so the emphasis here is “improve” rather than “fix” it. Bluebell is pushing for the “A” shareholders (the listed shares that normal plebs can buy) to be able to appoint a representative to the board. The fund manager also wants Richemont to amend its articles of incorporation such that A and B shareholders have an equal number of representatives on the board. It’s an interesting attempt at levelling the playing field for shareholders. The board is “considering” the proposals.
Deutsche Konsum REIT is having a little fight with the German financial regulators. BaFin is upset about the treatment of loan agreements in the company’s separate financial statements. The investment of liquid funds with the main shareholder was fully disclosed according to the company and the auditors issued an unqualified audit opinion. It will be interesting to see how this develops.
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Ghost Global is a weekly segment brought to you by the Ghost Grads on a rotational basis. This week, Karel Zowitsky updates us on earnings from giants like PepsiCo, Delta, Morgan Stanley and more.
PepsiCo’s woes in Europe
PepsiCo has achieved revenue growth in each operating region except for Europe, which fell 5% for the six months to June 11th, 2022 to $4.8 billion. Over the same period, net revenue for the group grew 7% to $36.4 billion.
PepsiCo has been impacted by the conflict in Ukraine, which has impacted manufacturing and business activities in the region. This year, the company has recognized $1.6 billion in impairments as a result of the conflict.
If we split out the once-off gain associated with the sale of the Tropicana, Naked and other juice brands to PAI Partners in the first quarter for $3.5 billion, then year-to-date operating profit is just over $4 billion vs. $5.2 billion in the comparable period. Adding back the impairment gives us $5.6 billion vs. $5.2 billion, which tells a more accurate story of underlying profitability that is under the control of the management team.
Sadly, shareholders are also exposed to things beyond anyone’s control. For now at least, Europe is causing headaches for PepsiCo.
How high can Delta fly?
With restrictions easing across the world, people are taking to the skies once more. Domestic passenger revenue was 3% higher compared to the June 2019 quarter and international passenger revenue has seen an 81% recovery compared to the June 2019 quarter.
There is still room for improvement, specifically in the Pacific, with Australia and South Korea reopening and restrictions in Japan easing.
It is worth noting that Delta still has a long recovery ahead. Operating income is down 29% and net income is down 40% compared to the second quarter in 2019. This is due to a combination of factors, not least of all the average fuel price per gallon increasing from $2.08 USD to $3.74 – an increase of 79.8%!
This puts a lot of pressure on management to run at full capacity to avoid operating losses. This must be balanced against the need to keep the rights to fly certain routes. This is a tough balancing act between operational efficiency in the short-term and growth and longevity in the long-term.
Investment banking revenues take a dive
Banking has hit a slump. Morgan Stanley delivered decent results when viewed in isolation. On a comparable basis though, revenue went backwards across the board. Net income is down 11% from Q2’21 and investment banking revenues took the hardest knock, down 55%.
When corporate transactions dry up, so too do the advisory fees related to these deals. On the plus side, market volatility helped drive increases in equity and debt revenues on the trading desks, though not enough to offset the advisory fee issues.
Wealth management revenue also fell, which is to be expected when markets are down.
Ericsson is connected to the future
Ericsson provides 5G mobile infrastructure in North America and Europe. Revenue in the latest quarter was up 5% year-on-year and a gross margin of 42.1% was achieved, slightly down from 43.4% in Q2’21 due to the impact of component and logistics costs. Operating profit margin went the right way though, up from 10.6% to 11.7%.
There’s a change in reporting segments coming in the next quarter, with Digital Services and Managed Services being merged into a single segment called Cloud Software and Services. This is a response to customer demand for cloud technologies.
Blackrock revenues and margins drop
Asset management firms are exposed to the broader fortunes of the markets. Considering this has been a terrible first half of the year for practically all asset classes, Blackrock’s 6% drop in revenue in the latest quarter doesn’t seem too bad. Operating margins deteriorated, as one would expect when revenues decrease. Margin fell from 40.1% to 36.9%.
The company is executing extensive share buybacks, taking advantage of market conditions to mop up its own shares at a lower price. This has a positive long-term impact on earnings per share, as there are simply fewer shares in issue. The share price is down 34% this year.
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At times when global markets are falling, inflation is rising, and there are no clear signals on whether to buy or sell – like now. A diversified portfolio that includes safe-haven assets offshore suddenly looks very appealing.
Diversification is a strategy to reduce the volatility in the returns from your portfolio, while still achieving growth. This is achieved by including different asset classes that are less correlated with equity and fixed interest markets. Examples of such assets, which are often called safe-haven assets, are commercial real estate with long leases or gold. Commercial real estate is regarded as a “safe haven” because they have traditionally retained value, or even appreciate, driven by escalating rentals and the increasing costs of construction when other assets are losing value.
Maybe cryptocurrency looked like a good diversifier because it appeared to exist outside traditional financial systems. What it is showing now is that cryptocurrency is highly correlated with the economic growth outlook – when people are nervous about the future or have geared their crypto and need to pay down debt as interest rates rise, they sell their crypto.
Property is not a uniform asset class
Although a “bricks and mortar” asset will probably lose less value than shares in a market downturn, not all property is the same. Residential property underpinned by floating-rate mortgages and eroding income is vulnerable when interest rates increase, because borrowers may start to default. Investing in a public REIT may be easy but is subject to market sentiment and often trade below the value of the underlying assets.
On the other hand, investing in a commercial building that is fully leased to medical tenants, conservatively geared at a fixed rate, with long-term leases that ensure the tenants are fully responsible for variable costs (called net leases), is less risky.
Medical real estate in the US (depending on how it is structured) is a resilient investment in the property sector because it offers a stable income stream and wealth preservation.
Medical tenants are reluctant to move, since they often have to install costly equipment in customized offices, so they enter into long-term leases. Consider an imaging centre, a pathology laboratory, or even your dentist, who cannot afford to move premises without significant cost and disruption. That means the property owner can depend on receiving a steady income stream.
Medical businesses in the US generally have escalation built into their leases, and the services that they provide are not discretionary, which makes them reliable tenants. With a net lease in place, a lot of the costs that tend to rise in inflationary times, such as municipal rates and maintenance, are passed through to the tenants.
Different strokes for different folks
There is obviously more risk in investing in a single building (particularly if it has only one tenant) than in a portfolio of several buildings. For a big-ticket investor, a single building might be the preferred option. You can visit it in person, analyse the pros and cons and keep an eye on how it performs.
If you don’t have the expertise and capital to build your own portfolio of medical commercial real estate, it is better to diversify within this sector to reduce your risk.
For example, OrbVest, the specialist in US medical real estate, has launched OrbVest Diversified Holdings (ODH), which spreads investors’ risk beyond a single tenant/single building. ODH holds shares in all the recent buildings that OrbVest has brought to the market. It’s current offering, ODH 5, contains about 80 tenants spread across more than 20 buildings. OrbVest has made it just as easy as investing in a single building because it still requires a single payment into a company, which is listed on the MERJ exchange in Seychelles. But you can sleep better at night, knowing that even if one tenant defaults for some reason, it has very little impact on your total return.
For South African investors, the minimum investment has been reduced to only $1 000 to allow investors to start small. Returns are paid in dollars, not rands, into your wallet in Seychelles and are completely offshore. The returns are gross of tax, so if you are an SA-resident taxpayer, you need to declare tax on your foreign earnings, as you do with crypto or any other offshore-based asset. While earning a return in dollars, you can pay the tax due in rands and keep your funds offshore.
Alexander Forbes has released the circular related to the partial offer by New Veld LLC, the investor that bought the 14.83% stake in the company from Mercer Africa. The ultimate parties behind New Veld are Prudential Financial (a global financial services giant) and LeapFrog Investments (an investor in Africa and Asia). The offer price is R5.05 per share (calculated at R5.25 less the 20 cents per share dividend) which is the same price paid to Mercer. Although there was no regulatory requirement for an independent expert, Alexander Forbes hired one anyway and the opinion is that the terms are both fair and reasonable to shareholders. ARC Financial Services holds a 41.47% stake in Alexander Forbes and will not be accepting the offer. The offer allows holders of up to 100 shares to sell all their shares and holders of more than 100 shares to sell the first 100 plus 45.2% of the rest of the shares. Excess tenders are allowed, which is a reference to selling more than the partial offer percentage (which helps make up for shareholders who may not choose to sell any shares) rather than the latest juicy government contracts. As a final important point, the offer is structured such that New Veld cannot end up with a stake of over 33% of the issued shares, putting it below the 35% threshold that would trigger a mandatory offer for all shares in the company. You can find the offer circular at this link. I just couldn’t resist replicating this wonderful bit of “lawyering” from the announcement:
“The Investor is extending the Partial Offer to Shareholders other than those to whom the offer is not being made.”
Alexander Forbes SENS, 18 July 2022
Industrials REIT has completed the sale of Rose Kiln Court in Reading for £5.88 million. This is a 2.2% discount to the 31 March 2022 valuation of the property. This is a single let asset that doesn’t fit the Industrals REIT strategy of multi-let industrial properties. A selling price below book value isn’t great, as the market may worry about some of the other valuations.
The disposal of the 49% interest in Al Tayer Stocks LLC by Stefanutti Stocks has now become unconditional (i.e. all conditions to the deal have been met and it has closed) and the payment of the final purchase consideration is expected in due course.
Financial updates
In a short and sweet trading update, Trencor updated the market on the expected financial performance for the six months ended June 2022. The headline loss per share is expected to be between -0.7 and -0.2 cents, which is much better than the headline loss of -9 cents per share in the comparable period. It’s still a loss, though. A bit of further digging reveals that Trencor is just a cash shell now, after unbundling its investment in Textainer and selling its container asset owning company. The cash can’t be distributed to shareholders yet as it is restricted by indemnities etc. related to the underlying asset sale.
Sebata Holdings has released results for the year ended March 2022. The company has lost over 80% of its value in the past 5 years and now has a market cap of just R230 million. In this financial year, revenue fell by 25% and HEPS collapsed quite spectacularly to -443.68 cents. For context, the share price is only R2.01! The group is trying to recover earn-out amounts from Inzalo Capital Holdings for a disposal of businesses back in 2020. Those who enjoy special situations punts (also known in some circles as gambling) could dig through the financials at this link.
Operational updates
Kore Potash has released an operational update for the quarter ended June. It was a busy period for the Kola Potash Project, including the signing of a memorandum of understanding with the summit Consortium in April and a heads of agreement for the construction of Kola in June. An Engineering, Procurement and Construction (EPC) contract proposal is expected in August, followed by a financing proposal. The metrics for the Kola Potash Project look strong, with the capital cost reduced by over 22% through recent work and the internal rate of return at 20% on an ungeared post tax basis (i.e. without debt). If potash prices stay where they are, IRR is estimated to be 49% on the same basis! At corporate level, new shares were issued to Sociedad Quimica y Minera de Chile S.A. in June in lieu of fees payable under a technical services agreement. By the end of the quarter, Kore Potash had $7.6 million in cash. There was no new information in this update but it does provide a useful reminder of the progress made in the past three months.
Share buybacks and dividends
As there were no other unusual buyback announcements, I’ll remind you that British American Tobacco and Glencore are buying back shares on a daily basis.
Datatec announced the results of its scrip dividend alternative. The company ended up paying R64.76 million in cash dividends and capitalised R176 million in new shares. The scrip dividend was at a very attractive price because of the timing of the Analysys Mason disposal announcement, so I’m surprised that even more people didn’t take it.
Notable shuffling of (expensive) chairs
York Timber has appointed two non-executive directors. Alton Solomons joins the board after a career that included being CEO of Sanlam Private Equity from 2012 to 2019 and his current role as Head of Growth Catalyst and Listed Equities at the IDC. Adrian Zetler is a name that York shareholders already know well; he is one “A” in A2 Investment Partners, the shareholder activist investor that drove significant changes at York (and elsewhere).
There are yet more changes to the board at Luxe Holdings, a company that truly has a revolving door in the boardroom. Here is this year’s SENS history for this messy group:
Director dealings
The director of Kaap Agri who has been buying up shares is back at it, with a purchase worth nearly R119k.
The CEO of Dipula Income Fund has bought shares in the company worth R18.5k
Unusual things
For some reason, Lewis seems to have made it onto the radar of international investors. Dimensional Fund Advisors LP has taken a stake of 5.152% and LSV Asset Management now owns 5.28%. The company has a strong investment case thanks to its great capital discipline and highly successful share buyback strategy. Still, it’s quite odd that international investors are buying like this! I’m also not sure who the sellers are, as Lewis is a fairly illiquid stock and it takes a while to build positions of this size.
Zimbabwean company Hwange Colliery is still in administration and has no board of directors. Despite this, the underlying operations are still running and production volumes even increased by 74%! I couldn’t resist including this quote from the colourful update released by presumably the only warm body still standing in the Hwange boardroom:
“The administration team is still working on resuscitating the company”
Hwange Colliery SENS, 18 July 2022
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