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Simple, but Effective, Investing

The Finance Ghost
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Simple, but Effective, Investing

By Nico Katzke, Head of Portfolio Solutions at Satrix*

Diversification is an often-cited concept. The virtues of not tying one’s fortunes to a single event have been known for centuries – as Shakespeare eloquently states in the Merchant of Venice:

“My ventures are not in one bottom trusted, … therefore, my merchandise makes me not sad.”

But there is more to diversification than simply being an effective sleep aid. Below, we highlight five important features of diversification to keep in mind when investing.

1. Diversification is more than just shuffling eggs between baskets…

Most would answer that diversification simply means placing your eggs in different baskets. But if your eggs are in different baskets that are all on the same vehicle, and that vehicle overturns – all your eggs might be broken. This means, the key to diversification is not simply holding many assets, but rather holding different types of assets. An index that holds 1,000 equities might not be diversified at all if equity markets experience a coordinated downturn (as seen in 2008 and 2022). This makes carefully considered portfolio construction a key step in building long-term wealth. It is wise to keep in mind that N-diversification (holding many assets) is not the same as risk-diversification.

2. Investing is not just about holding the best assets

This might seem like a very strange statement, but similar to picking the best players for their positions in sport (and not just the 15 quickest or largest players) – building a well-diversified portfolio may mean holding seemingly inferior assets too. These assets can offer important hedging features to your portfolio, shielding against large periodic losses. Although equities offer significantly more upside over the long term than fixed income instruments, holding alternative assets with lower correlations ensures a smoother long-term investment journey. This feeds into the next point:

3. Avoiding downside is (far) more important than capturing upside.

A smoother return profile through diversification has both health and wealth benefits – specifically by helping to better manage downside risk. The impact of losses is far more severe than similar gains. The graph below shows initial price moves on the X-axis, and the subsequent required moves to get back to parity. Notice how steep the required gains are following losses (left) compared to required losses following gains (right).

Asymmetric return illustration graph

This means that losing 60% requires a gain of 150% to get back to parity, while a gain of 60% is fully offset by a mere loss of 37.5%. The cumulative impact of large losses is therefore felt for long periods – something investors may not fully appreciate. This feeds into the next point:

4. Entry and exit points matter.

Timing entry and exit points can be a precarious exercise. To show this, we plot the peak-to-trough variation for listed local stocks (split between large-, mid- and small caps) per year. The coloured box shows the 20th and 80th percentiles, with the horizontal line in the middle being the average. From this we see that individual share prices on the FTSE/JSE All Share Index commonly deviate between 30% – 40% per year. This means that even if you take a correct long-term view on a company, the timing of entry and exit points matter greatly. This makes the act of stock picking, by both individuals and even professional fund managers, a high-risk strategy. Contrast this to investing in a simple vanilla index, such as the FTSE/JSE Capped SWIX Index, which is made up of a diversified combination of listed stocks. The index typically deviates between 10% – 15% (the orange bar), meaning the timing of entry and exit points matter far less than when trading individual stocks. And as stressed above, the importance of avoiding large swings is very important for long-term wealth creation.

Peak to Trough Dispersion" FTSE/JSE all-Share Equity Constituents

5. Diversification is thankless.

As the benefits of diversification are not directly observed, its value in your wealth creation journey is often underappreciated. This means we have to consciously accept the virtues of a diversified approach to building wealth. But this is easier said than done.

We are often confronted by stories of great investment decisions, such as that one friend at a braai reminding you about her recommendation to buy that stock at the beginning of the year that is now 90% up; or the uncle who told you to buy Sasol at R25 per share; or the relative that suggested buying bitcoin when it dipped. We then instinctively do mental accounting and get frustrated at missing out on said opportunities – painfully aware of the comparatively pedestrian returns that our long-term diversified strategies delivered over that period. Unfortunately, the desire to share poor investment decisions as cautionary tales is not as strong, so we receive a misrepresentation of the reality of taking concentrated bets.

But hindsight is a fiendish mistress – and it is tempting to grow impatient and act in order to chase the next big payoff opportunity. In those times of great temptation, it may be wise to remind yourself of the short poem written by Ambrose Bierce called A Lacking Factor:

‘You acted unwisely,’ I cried, ‘as you can see by the outcome!’
He calmly eyed me:
‘When choosing the course of my action… I had not the outcome to guide me.

The simple insight offered is to never judge decisions based on uncertain outcomes, as it may teach us bad lessons. We should instead focus on that which we can control: avoiding concentrated risks and the large swings (positive and negative) it entails. Fortunately, indexation vehicles can be easily accessed through, e.g., ETF, or exchanged-traded fund, vehicles where diversification is a built-in feature. It should also be sought through holding diverse asset classes and seeking intermediated help in building a portfolio that can withstand periods of instability. Thereafter, it becomes a psychological game of fighting the urge to change course and chase the high returns that look so easy after the fact.

After all, a diversified approach can be thankless and not very exciting, with few highlights. But it sure has gold at the end of the road.

*Satrix, a division of Sanlam Investment Management

Satrix Logo

Satrix Investments (Pty) Ltd is an approved FSP in term of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision. Satrix Managers is a registered Manager in terms of the Collective Investment Schemes Control Act, 2002.

While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSPs, its shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaims all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information. 

Ghost Wrap #57 (British American Tobacco | Absa + Nedbank | Transaction Capital | Spur | Murray & Roberts)

The Finance Ghost
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Ghost Wrap #57 (British American Tobacco | Absa + Nedbank | Transaction Capital | Spur | Murray & Roberts)

The Ghost Wrap podcast is proudly brought to you by Mazars, a leading international audit, tax and advisory firm with a national footprint within South Africa. Visit the Mazars website for more information.

In this episode of Ghost Wrap, I recapped five important stories on the local market:

  • British American Tobacco is seen as a defensive stock, but I have a different view on it.
  • Absa and Nedbank released updates this week and although Absa’s return on equity is likely still ahead of Nedbank, the share price performance this year shows what happens when expectations aren’t met.
  • Transaction Capital is now behaving more like an investment holding company than the integrated, one-team-one-dream business of a few years ago.
  • Spur is ready to go Italian, with the acquisition of 60% of Doppio Zero having closed and some interesting prospects already on the table.
  • Murray & Roberts has made great strides in repairing the balance sheet, with an encouraging update that takes a rights issue off the table (for now at least).

Ghost Bites (Absa | Anglo American | Anglo American Platinum | Kumba Iron Ore | Murray & Roberts)

The Finance Ghost
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Ghost Bites (Absa | Anglo American | Anglo American Platinum | Kumba Iron Ore | Murray & Roberts)

Listen to the latest episode of Ghost Wrap here, brought to you by Mazars:

Absa’s share price is as red as its branding (JSE: ABG)

A voluntary trading update resulted in a 6% drop in the share price

The market really didn’t like this one. When a company updates its guidance to reflect return on equity “somewhat lower” than last year, that’s not great.

Starting at the top, revenue growth in 2023 at Absa is expected to be high single digits, driven by net interest income as we’ve seen at the other banks as well. The second half of the year has been slower due to base effects, which is also in line with what we’ve seen elsewhere.

The credit loss ratio is expected to exceed the through-the-cycle target range of 75 to 100 basis points. It’s better in the second half of the year, but is still above target.

Operating expenses are up by high single digits, which means the cost-to-income ratio has deteriorated from 51.2% last year. This is negative jaws, which isn’t what we’ve seen at the other banks where margin is improving. I’m sure this is one of the major reasons for the drop in the share price.

Pre-provision profit will only increase by mid-single digits.

The group’s B-BBEE deal became effective on 1 September and will reduce 2023 earnings by 1%.

When all of this is combined, return on equity (the key metric for banks) is lower than 16.4% last year but above the cost of equity of 14.5%. As mentioned earlier, the wording “somewhat lower” suggests that it has moved quite a bit towards the cost of equity, which isn’t great.

The overall flavour here is that South African earnings have decreased and the African earnings have increased, despite the tough situation in Ghana. This is why a bank like Standard Bank is doing so well, as it earns nearly half of its earnings in Africa.

Absa expects to maintain a full year dividend payout ratio of at least 52%.

Anglo American’s SENS announcement talks about unlocking value (JSE: AGL)

The market had a different idea, slashing the share price by over 13%

When a company tries to drive the narrative in the heading of a SENS announcement, you know they are expecting a tough response. This isn’t just an “operational update” from Anglo American. No, this is “Anglo American unlocks value through operational, cost and capital discipline” – except the market is smarter than that, even if many media houses are too lazy to read past the headline.

The CEO of Anglo American kicks off the announcement by claiming that the prospects for mined products have rarely looked better. That’s a rather interesting introduction to a story that features cyclical weakness in PGMs and diamonds, forcing Anglo American to cut its business support costs.

The group gives high-level guidance all the way out to 2026, expecting production to fall in 2024 and 2025 before picking up again in 2026. The guidance for capex is also lower than before, which doesn’t exactly tie in with the prospects looking so great.

It’s sad to see them talking about “aligning to logistics” at Kumba. That simply means that they are having to adjust production based on how utterly useless Transnet is. Refer to the specific update on Kumba in Ghost Bites for more details.

They do make the point that PGM prices reflect an “aggressive consensus” on the pace of decline in internal combustion engines. Although not referenced in this report, I know that Ford is slowing down its global investment in EVs based on worries about demand. Comments like that from the automotive manufacturers don’t seem to be reflected in PGM prices, which suggests some upside for the local mining houses.

At De Beers, they are scrambling to reposition mined diamond to fight the onslaught of lab-grown diamonds. I’ve written extensively on this topic and I quite liked these adverts from the Anglo presentation (which you’ll find at this link).

Much of the good news at Anglo American lies in the copper business and crop nutrients, believe it or not. These are both focus areas going forward.

Anglo American Platinum reduces its production and capex outlook (JSE: AMS)

This is how mining cycles work

When commodity prices drop, the producers of those commodities must respond to the drop by pulling back on production. Over time, the lower supply should lead to higher prices, which in turn drives a period of investment to meet demand at better prices. This is why mines are always referred to as being cyclical businesses and why you have to time your entry very carefully to avoid buying at the top of the cycle when it’s all sunshine, rainbows and dividends.

We definitely aren’t in sunshine and rainbow territory in PGMs at the moment. Prices are depressed and so are shareholders. In response to the price pressures, Anglo American Platinum has announced that production over the next few years will be lower than previously guided. Capital expenditure will also be lower, accompanied by a plan to reduce costs. It should be noted that part of the reduction in refined PGM production is because some relationships will transition to toll arrangements.

Refined production in 2024 was previously guided to be 3.6 to 4.0 million ounces. It’s now between 3.3 and 3.7 million ounces. In 2025, guidance has dropped from 3.3 – 3.7 million ounces to between 3.0 and 3.4 million ounces. Production is 2026 is expected to remain flat vs. 2025.

As noted, capex guidance has dipped by roughly R3.5 billion in 2024, but actually moves higher than guidance in 2025.

The cash operating unit cost per PGM ounce is expected to be R17,800 in 2023 and is anticipated to drop to between R16,500 and R17,500 in 2024.

Kumba continues to be hurt by Transnet (JSE: KIO)

It’s all going wrong “beyond the mine gate”

In case you’ve been living under a rock for goodness knows how long now, infrastructure in South Africa is crumbling all around us. Our economy is heavily influenced by commodity exports, so this is a disaster. Most worryingly, it’s a disaster that just doesn’t seem to be going away.

In Kumba Iron Ore’s update, the company talks about stock levels at the mines increasing to unsustainable levels because the transport infrastructure just doesn’t allow for it to be taken away quickly enough. The only possible outcome is a drop in production, with 2023 production down by roughly 1 million tonnes vs. previous guidance. That might only be around a 3.8% decrease at Sishen, but it has a substantial impact on unit costs per tonne at that mine (up from between R540 – R570 per tonne to R570 – R590 per tonne). As a mitigating factor, unit costs at Kolomela have improved from guidance of R510 – R540 per tonne to R480 – R500 per tonne because of improved production metrics and because production guidance at that mine is unchanged.

The bigger problem for South Africa is lower production in years to come. The production outlook is dropping from 37 – 39 million tonnes in 2024 to between 35 and 37 million tonnes. In 2025, they hoped to increase to 39 to 41 million tonnes, but now the plan is to keep production flat.

Thanks to cost reduction plans, the unit cost is forecast to improve over the next three years despite the flat production. If we actually had a working railway network, they might be talking about creating jobs rather than reducing costs. They also probably wouldn’t be talking about a reduction in capex spend, which certainly doesn’t help our GDP.

There has been a 15% decrease since 2019 in the amount of ore that is being railed. If Transnet doesn’t figure this out, then it’s hard not to have a bearish outlook on the South African economy.

Some good news from Murray & Roberts (JSE: MUR)

The board has given a strong update that a rights issue is not being considered at the moment

Murray & Roberts has been firmly in survival mode, with a broken balance sheet and all kinds of troubles. The market has been concerned that an equity raise might be needed to get it on a sustainable footing. In response to the news that “meaningful progress” has been made on the balance sheet, the share price closed 13.6% higher on Friday!

When something is priced for failure, any good news is cause for a share price celebration. Welcome to speculative investing. Or having a good ol’ punt, as I like to call it.

A big help was the sale of the 50% shareholding in the Bombela Concession Company, which halved South African debt to R1 billion. With the sale of a non-strategic investment in Aarden Solar and the agreement of new commercial terms on one of the group’s largest mining projects in South Africa, debt was further reduced to R770 million over the past three months.

Finally, Cementation Canada has renewed its banking facility with a Canadian bank and will thus pay a dividend of roughly R550 million (excluding withholding taxes) to Murray & Roberts over the next six months to June 2024. This is a classic case of shifting debt from the holding company into a subsidiary. This will take the South African debt down to R350 million.

Based on this, the board does not believe that a rights issue is necessary. The intention is to refinance the remaining South African debt by June 2024. A further bit of good news is that operational costs and overheads have been significantly reduced.

Little Bites:

  • Director dealings:
    • The CEO of Datatec (JSE: DTC) loaded up on shares in a big way, buying a whopping R46 million in shares on the open market. This takes his total shareholding to 15.5% of the shares in the company.
    • The CEO of Invicta (JSE: IVT) and Dr Christo Wiese are still playing matchy-matchy, each buying shares to the value of R88k in the company. These are on-market trades, so I’m not sure what’s going on with these identical orders in the market from these two. Perhaps there’s a bet going on?
    • An associate of a director of Huge Group (JSE: HUG) has bought shares worth R36.5k.
  • The Tongaat Hulett (JSE: TON) soap opera continues, with three “affected persons” (including the Industrial Development Corporation) giving notice of their intention to oppose the urgent applications that were launched to try and stop the current business rescue plans.
  • Astoria Investments (JSE: ARA) has renewed the cautionary announcement related to a potential acquisition. The first cautionary announced was released back in July 2023.
  • The joy of being a successful listed company is that you can issue shares to pay for acquisitions. This is exactly what CA&S Holdings (JSE: CAA) has done to acquire a further 5% in Smithshine, one of the existing subsidiaries of the company. The seller is the minority shareholder in that company and that seller was happy to be paid in shares. The issuance is only for around 0.1% of existing shares in issue in CA&S.
  • Tiny listed group Nictus (JSE: NCS) released results for the six months ended September. They reflect a significant improvement in profits from a loss of R0.4 million to profit of R3.7 million. No dividend was declared for this period.

Ghost Bites (Accelerate Property Fund | African Rainbow Capital | Mondi | Southern Palladium | Spur | Wesizwe Platinum)

The Finance Ghost
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Ghost Bites (Accelerate Property Fund | African Rainbow Capital | Mondi | Southern Palladium | Spur | Wesizwe Platinum)

Listen to the latest episode of Ghost Wrap here, brought to you by Mazars:

Accelerate pops its Cherry (Lane) (JSE: APF)

The property in Pretoria is being sold

Accelerate Property Fund is still offloading properties to help get the balance sheet back to a sustainable level. The newest sale is Cherry Lane Shopping Centre in Pretoria. The buyer is Chrysoula Sourlis, who is not a related party to the fund.

The sale is priced at R60 million. The property was valued at R65 million as at 31 March 2023, so that’s quite the discount. The vacancy rate has spiked from 32.3% to 47.8% since March, so a drop in the valuation is understandable.

I decided to dig back into the archives to see what the property was worth when Accelerate bought it. I found the abridged pre-listing statement for Accelerate in 2013, reflecting a value for the property of R102 million.

A lost decade, indeed.

African Rainbow Capital gives a portfolio update (JSE: AIL)

There are many companies in the portfolio, so they focus on the most important and interesting ones

African Rainbow Capital Investments has a diverse portfolio of assets ranging from boring financial services businesses through to exciting startups. I’ve been vocal with my views on how they treat shareholder capital and how the fee structure historically worked, with the market sharing many of my concerns – as evidenced by the share price. This is no reflection on the underlying portfolio, which includes some very good businesses.

The announcement starts with rain, which continues to meet its monthly financial targets. They also mention that take-up of rainOne (the all-in-one connectivity package) is increasing steadily.

The news is less positive at Kropz, where the Elandsfontein project faced localised flooding due to heavy rains. Rain is clearly a theme at African Rainbow Capital. The fund injected another R290 million worth of capital into this project in the period between 30 June and 30 September.

I’m going to jump to the financial services portfolio now, as TymeBank is too important to push further down. There is now an annual revenue run rate of R1.8 billion in TymeBank and R100 million in GoTyme. Across South Africa and the Philippines, the business is growing at 450,000 new customers a month, with 200,000 being in TymeBank South Africa. The local business now has 8 million customers since launching in February 2019. GoTyme in the Philippines has a customer base of 1.6 million customers and is growing at 250,000 customers per month (in case your maths is letting you down based on the numbers given earlier).

A Series C capital raise is currently underway at Tyme. The business seems to be marching on towards a separate listing at some point.

At Bluespec, the company is on track to meet the growth budget. It also sounds like they are doing a good job of managing costs while scaling, which is important.

At ooba, performance is tracking budget and conversions into mortgages are going well despite the economic difficulties and higher interest rates.

The efforts in the agri portfolio are progressing well, with the RSA Group highlighted as achieving strong performance in this period.

The operations at Upstream Group tell us about the state of play for South African consumers. Creditors are lending to the same pool of consumers and those consumers are entering the debt review process a lot sooner than in previous years.

At Crossfin, transaction value has come under pressure along with consumer spending. The company has made an early-stage investment in something called Mypinpad.

Capital Legacy group was enlarged by the acquisition of the Sanlam Trust business, with a 26% stake in Capital Legacy going to Sanlam. The management team has been focused on integrating the offerings.

And finally, GoSolr saw a slowdown in the rollout of residential solar in this quarter. This is because load shedding dipped vs. the first half of the year, although perhaps the recent jump to level 6 will remind people that the Eskom show is far from over. Management is working on increasing the run-rate of installations in this business. My viewpoint is that this is a highly competitive space with no obvious moat for GoSolr.

In case this section didn’t make it clear, the most exciting part of the group right now is TymeBank and GoTyme. With management of African Rainbow Capital making various disgruntled comments in the media about the realities of being listed, one wonders if they will maintain the group listing for long enough for investors to get a proper value unlock from a separate listing of Tyme.

A collective sigh of relief at Mondi (JSE: MNP)

The final payments for the Syktyvkar asset have been received

When selling a business to Russian investors at a time like this in the world, I think nerves are unavoidable. Do you really want to launch a court bid as a Western firm to get your money in Russia? No, definitely not.

The good news is that Mondi has been paid for Syktyvkar, with the total cash consideration of RUB 80 billion in the bank (converted to euros, of course).

The net proceeds from the sale of this asset and other Russian assets come to €775 million. This amount is earmarked for distribution to Mondi shareholders, which is a mature capital allocation decision. There will also be a share consolidation to try and make the post-distribution share price as comparable as possible to the pre-distribution share price. That’s unusual and interesting. In fact, it’s a rather clever way to avoid confusion around share price performance!

Southern Palladium released a Mineral Resource update (JSE: SDL)

In junior mining, it’s all about hitting these milestones

If you’re going to try and read these mining exploration updates in detail, then you better have a degree in geology. Without that, you’re going to struggle to understand what is going on.

I certainly have no such qualification, so I always look to the management commentary to see whether things are going to plan.

I do at least understand the importance of Southern Palladium noting that its UG2 Indicated Mineral Resource has doubled, so that’s clearly good news. This obviously doesn’t mean that there are more minerals than before. It means that ongoing drilling work has confirmed that the status of Inferred Mineral Sources can be upgraded to Indicated Mineral Resources. These terms mean something in the world of junior mining, especially when speaking to funders.

The next significant milestone is the planned release of a Scoping Study in January 2024.

Spur is ready to take you to Italy (JSE: SUR)

The acquisition of Doppio Group has now closed

Back in July 2023, Spur announced the acquisition of a 60% stake in restaurant group Doppio Zero, giving access to a portfolio of 37 franchised and company-owned restaurants. I really like this deal, as this is a solid operation. The deal is now unconditional and has been implemented with effect from 1 December.

The Doppio Zero group hasn’t sat still in the meantime, which is the benefit of buying a controlling stake rather than a 100% stake. The sellers are still motivated to keep growing it. They have opened Ciccio, a sub-brand of Piza e Vino, with the first one at Melrose Arch. The group also owns an Indian-inspired concept called Modern Tailors, with the second restaurant scheduled to open in 2024.

I am a big fan of everything that Spur is doing right now. I keep wishing that the share price would crack so that I can buy at a better valuation, but it seems to be holding onto the recent gains:

No Christmas holiday for Tongaat Hulett’s lawyers (JSE: TON)

The year is ending with a bang

In yesterday’s Ghost Bites, I explained the significant court blow dealt to Tongaat Hulett regarding the company’s attempts not to pay sugar levies while in business rescue. News also broke of two separate court actions that aimed to scupper the upcoming meeting of creditors. The applicants are RCL Foods and the South African Sugar Association.

Unsurprisingly, Tongaat Hulett has announced that it will oppose both court applications. The parties have agreed that pleadings will be exchanged on an urgent basis, such that the urgent application will be heard on 13 December.

To allow for this hearing, the court has ordered the adjournment of the creditor meeting from 8 December to 14 December.

One thing is for sure: any attorneys and advocates who work for these groups and who had booked leave for the next week or so are about to have disappointed families. It’s easy to be jealous of what these people earn, but life as a high-end professional is also filled with sacrifice and tough trade-offs. Been there, done that.

From bad to worse for Wesizwe Platinum (JSE: WEZ)

Employees embarked on an “illegal sit-in”

Things are going really badly for Wesizwe Platinum at the moment, with employees now on an illegal sit-in at the Bakubung Platinum Mine. Essentially, this means that employees chose not to return to the surface at the end of their shift on Wednesday morning.

The employees participating in this labour action have made demands and management is trying to persuade them to return to the surface.

It feels like the platinum sector in South African is gently imploding all over again.

Little Bites:

  • Director dealings:
    • There’s a very important share purchase by Phil Roux, who has been brought in to achieve a turnaround at Nampak (JSE: NPK). He has bought shares worth just under R4 million. That will definitely help calm some of the nerves in the market – for now, at least!
    • Calibre Investment Holdings (related to director Theunis de Bruyn) has bought shares in Ascendis (JSE: ASC) worth R3.5 million.
    • As part of the mandatory offer for Brikor (JSE: BIK), a director of the company has sold shares worth R347k.
    • Des de Beer has bought another R206k worth of shares in Lighthouse Properties (JSE: LTE).
    • A director of Mantengu Mining (JSE: MTU) has bought shares worth R1.2k. I don’t think that’s going to cause too much excitement in the market!
  • BHP Group (JSE: BHG) has announced important leadership changes. Vandita Pant is moving from Chief Commercial Officer to the CFO role, having joined BHP back in 2016. The current CFO (David Lamont) will remain in the group until February 2025 in an advisory and projects capacity, reporting to the CEO. Rag Udd is the new Chief Commercial Officer (another internal appointment), Brandon Craig has been appointed to run the Americas business and Johan van Jaarsveld is the new Chief Technical Officer. Those three appointments are also all internal appointments. It always says a lot about a group when new executive-level appointments are internal.
  • Shareholders of Kore Potash (JSE: KP2) passed the resolution required for the issuance of shares. The chairman and CEO of the company supported $750k of this capital raise to help get the company to finalisation of its all-important project.
  • Buka Investments (JSE: BKI) is taking a long time to close the potential acquisition of Socrati Footwear. The deal was first announced in February 2023. The company has released a further announcement that the deal is still underway. No estimated timing for completion was given.

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

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

Exchange-Listed Companies

Aspen Pharmacare has concluded two interdependent agreements with Swiss headquartered Sandoz. Aspen, via its subsidiary Aspen Global Incorporated (AGI), will acquire the Sandoz business in China for up to €92,6 million, with €18,5 million contingent on the sales performance of the Pipeline Products. In terms of the second transaction for which it will receive €55,5 million, AGI will dispose of the rights and IP of four anaesthetic products sold by Aspen in the European Economic Area. Of this, €9,3 million is contingent on sales performance. AGI will fund the net upfront cash consideration from existing debt facilities.

Sanlam Investments Sustainable Infrastructure Fund (Sanlam) is to invest R46 million in the Mkomazi Alienfuel joint venture. The biomass-to-energy project, a joint venture with energy company Alien Fuel Group and Sappi, will provide crucial baseload renewable energy derived from biomass to Sappi’s dissolving pulp manufacturing plant in Umkomaas.

Datatec has increased its equity stake in UK-based digital and technology consultancy Mason Advisory by 40% to 80%. The purchase consideration for the stake acquired from management was undisclosed but will be paid from existing cash resources.

Accelerate Property Fund has disposed of Cherry Lane Shopping Centre in Pretoria to Alma Trading CC for R60 million. The proceeds will be used to reduce debt and reinvestment into its core property portfolio.

In February Buka halted the acquisition of Caralli Leather Works and Socrati Footwear from B&B Media (a material shareholder in Buka) and Moltera Group following a request from B&B Media. B&B Media had acquired local shoe manufacturer Eddels Shoes during February 2023 and wanted sufficient time to thoroughly assess the synergies between the Socrati Group and Eddels. By placing the transaction on hold, Buka failed to comply with the JSE Listings Requirements for a cash shell and consequently Buka’s listing was suspended with effect from 24 February 2023. The company has been finalising a strategy to reverse viable assets into the Buka listed cash shell as required for the lifting of its suspension. The company announced this week that the final transaction is progressing, and shareholders will be updated with any progress.

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

Weekly corporate finance activity by SA exchange-listed companies

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

In connection with the continued implementation of its repurchase programme, Prosus has sold 513,500 ordinary shares in Tencent on the open market, bringing its total ownership in Tencent to 24.99%.

Texton Property Fund is to raise R85 million by way of a fully underwritten, non-renounceable rights offer of 38,636,364 Texton shares at a price of R2.20 per share. The offer price represents a 10% discount to the 30-day VWAP of the shares as at 23 November 2023. The offer will open on Tuesday 2 January and will close on Friday 5 January. Oak Tech Properties and Rex Trueform have underwritten the offer for which they will receive an amount of R274,784, representing 1% of the underwritten shares value. The circular will be available on 21 December 2023.

Lighthouse Properties has disposed of a further 145,509,646 Hammerson plc shares on the open market for an aggregate cash consideration of R936,3 million.

The price for City Lodge’s Odd-lot offer has been announced. The price, at R4.70, is a 5% premium to the 30-day VWAP of the share as at 1 December 2023. The results of the offer will be announced on 18 December 2023.

Having received the final payments from the sale of Syktyvakar, Mondi has announced it will distribute the net proceeds to shareholders by way of a special dividend. If approved the special dividend is expected to be paid in the first quarter of 2024.

Atterbury Property (APH) has settled the balance of the loan owed to RMB Holdings through the issue of 17,876,140 APH shares. RMH now owns 38.5% of APH.

During the period 8 August to 4 December 2023, Calgro M3 repurchased 3,690,342 shares for an aggregate R14,56 million. The shares have been delisted and cancelled. Calgro may repurchase a further 16,7 million shares.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 27 November to 1 December 2023, a further 4,438,373 Prosus shares were repurchased for an aggregate €134,39 million and a further 228,464 Naspers shares for a total consideration of R995,4 million.

Following the announcement in October of its share buy-back programme, AB InBev has repurchased a further 782,924 shares at an average price of €57.44 per share for an aggregate €44,98 million. The shares were repurchased in the period 27 November to 1 December 2023.

Glencore intends to complete its programme to repurchase the company’s ordinary shares on the open market for an aggregate value of US$1,2 billion by February 2024. This week the company repurchased a further 9,650,000 shares for a total consideration of £43,14 million.

Two companies issued profit warnings this week: Ayo Technology Solutions and Tharisa plc and two companies issued or withdrew a cautionary notice: Chrometco and Ellies.

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

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

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

DealMakers AFRICA

British International Investment, FMO, Proparco and Frontier Energy have announced a co-investment of over US$52 million in Planet Solar, an independent solar power producer. The 50MW greenfield solar power project in Sierra Leone is being developed by Frontier Energy and Planet One. The project is expected to increase the country’s power supply by approximately 30%.

Kenya’s SunCulture, a company that provides solar-powered irrigation systems to smallholder farmers, has received a US$2,6 million investment from British International Investments ($2,1 million) and Shell Foundation ($0,5 million). The funding will assist more than 9,000 smallholder farmers to increase productivity in a sustainable way.

Electronic bus solutions company, BasiGo, has secured a US$5 million debt facility from British International Investment to support the delivery of 100 electric buses. The Kenyan e-mobility startup announced a $6,6 million seed funding round in early November.

Fortis Green Renewables has announced a US$1,5 million investment in Camco’s financing platform, Spark Energy Services. This completes a $10 million equity round for the Kenyan platform which was developed to support energy efficiency and captive solar generation initiatives in dub-Saharan Africa’s commercial and industrial sector.

Lychee Egypt has announced a Series A round led by Beltone Venture Capital, along with Index Sports Fund and Twenty Eight Capital. The value of the round was not disclosed, but the food and beverage company will use the funding to expand into the Saudi Arabian market.

Egyptian online auto parts marketplace, Mtor announced a US$2,8 million pre-seed round led by Algebra Ventures. Other investors include Dutch Founders Fund, Aditum Ventures, LoftyInc Capital Management and a number of angel investors.

Kenya’s climate-tech startup, Amini has raised a US$4 million seed round led by Salesforce Ventures and the Female Founders Fund. The round was also supported by Satgana, Pale Blue Dot and Superorganism.

Franco-Tunisian SaaS startup, Cynoia, has announced a €850,000 funding round which will be used to expand into UEMOA markets, with a strategic emphasis on Senegal and Ivory Coast. Investors in the round included United Gulf Financial Services, 216 Capital Ventures and Bpifrance.

The Emerging Africa Infrastructure Fund (EAIF) has committed c.US$19 million to a new 20MW solar PV project in North-West Uganda. Ituka West Nile Uganda has a 20-year Power purchase Agreement with the Uganda Electricity Transmission Company. This is EAIF’s third PV project in Uganda having previous financed the 10MW Tororo Solar PV plant and the 10MW Soroti solar plant.

ASX-listed Desert Metals has entered into an agreement to acquire 100% of Côte d’Ivoire gold and lithium explorer CDI Resources. CDI has interests in seven gold and lithium projects including the Tengrela South gold project, the Adzope gold project and the Agboville lithium project. Desert Metals will issue a total of 75,000,000 fully paid ordinary shares to the existing CDI shareholders in exchange for the 100% stake.

Energean has announced a farm in agreement into Chariot’s offshore acreage Morocco. The agreement includes the acquisition of 45% of the Lixus licence, with the option to increase its stake to 55% following drilling results and 37.5% of the Rissana licence. Energean will assume operatorship of both licences. Terms of the farm in include a US$10 million cash payment on closing; the carrying of Chariot’s share of the pre-FID costs plus $15 million in cash (contingent on FID being taken on the Anchois development).

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

Devil in the details: indemnities vs warranties in M&A

Keagan Hyslop and Roxanna Valayathum
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Devil in the details: indemnities vs warranties in M&A

Introduction

In an economy that is still recovering from the COVID-19 pandemic and other global challenges, companies are adopting an increasingly risk-averse approach to the M&A environment. Two common safeguards used to mitigate risk are indemnities and warranties. The fact that both warranties and indemnities seek the same result – compensating an innocent party that has suffered damages – often leads one to question whether it is necessary to include both indemnities and warranties. Warranties and indemnities play significant but different roles in managing risk and liability, and it is therefore important to understand how they compare.

Underlying difference between warranties and indemnities

Warranties and indemnities primarily differ in the legal remedy used when a claim is triggered. A warranty is a contractual statement that a certain situation is true. If it is not true, this is a breach of the contract, and the appropriate remedy is one for contractual damages. A warranty is not an under-taking to make the situation true and, therefore, the remedy of specific performance is normally not possible nor appropriate. Conversely, an indemnity is an agreement between the parties that the indemnifying party will compensate the indemnified party for any losses suffered as a result of a claim by a third party. The appropriate remedy for an indemnity claim is, therefore, one for specific performance in terms of the contract.

Practical significance of the difference

Whether claiming damages or specific performance – the end result seems to be the same, namely compensation for a loss.

However, practical differences arise from the rules that apply to claims for contractual damages, which do not apply to claims for specific performance. Two legal rules, amongst others, apply to contractual damages –
• a party may only claim contractual damages that were reasonably foreseeable and not too remote; and
• the amount recoverable as contractual damages is limited to the innocent party’s actual pecuniary damage.

Amongst the legalese, two issues of practical significance arise that limit the amount that an innocent party may claim as contractual damages.

Contractual damages must be reasonably foreseeable and not too remote
Contractual damages are limited to damages that the contracting parties reasonably foresaw as a probable consequence of the breach in question. Damages that were not reasonably foreseeable may not be claimed unless such damages were expressly or tacitly agreed to by the parties. Consequently, assessing contractual damages is a tedious task that normally devolves into arguments over which damages were reasonably foreseeable and which are too remote. It is unlikely that the innocent party will ever be able to fully recover the actual damages suffered. This rule applies to warranty claims (claims for contractual damages), but not to indemnity claims (claims for specific performance). Since this rule does not apply to an indemnity claim, it is usually possible for the party to recover its loss on a Rand-for-Rand basis when claiming under an indemnity, provided that this is permitted by the wording of the contract.

Contractual damages are limited to the innocent party’s actual pecuniary damage
The innocent party’s actual pecuniary damage is the difference between the actual purchase price and what the purchase price would have been if the warranty was actually true, which the courts have determined would be its market value. This rule becomes problematic when a party pays a bargain price. Since the innocent party paid less than the market value, the fact that an untrue warranty reduces the market value does not necessarily result in the innocent party suffering claimable damages. The innocent party only suffers a loss if the market value is reduced below the actual bargain price that it paid. This is not a problem faced by indemnity claims, as the party is able to claim any damages they have suffered, whether actual pecuniary damages or not, provided that this is permitted by the indemnity clause.

Why still have warranties?

From the above discussion, indemnities clearly provide benefits that warranties do not. However, both are important to mitigating risk. Warranties induce parties to stand behind their word, and are therefore worth their weight in gold in the event of litigation. Indemnities also usually only apply to third-party claims, rendering them unsuitable where there is no third-party claim but only a loss suffered between the parties (e.g. where the purchase price would have been less, simply because the quality of the assets is not that which was warranted).

Conclusion

There is, therefore, a clear distinction between warranties and indemnities, and the seemingly identical end result is not as identical as it seems. Both warranties and indemnities should be included in M&A deals in order to effectively manage and mitigate risk. Each has its own role to play, and the party that understands these roles will have the upper hand.

Keagan Hyslop is a Candidate Attorney and Roxanna Valayathum a Director in Corporate & Commercial | Cliffe Dekker Hofmeyr.

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

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

FinSurv’s concerning silence on the regulation of crypto assets

Bright Tibane and Andani Thovhakale
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FinSurv’s concerning silence on the regulation of crypto assets

Despite the Financial Sector Conduct Authority’s (FSCA) declaration and regulation of crypto assets as a financial product – in terms of the Financial Advisory and Intermediary Services Act 37 of 2002 (FAIS) – late last year, the Financial Surveillance Department (FinSurv) of the South African Reserve Bank (SARB) has still not shared its position regarding crypto assets.

Crypto assets undoubtedly qualify as capital in terms of Exchange Control Regulations issued under the Currency and Exchanges Act 9 of 1933 (Exchange Control Regulations). Regulation 10 of the Exchange Control Regulations prohibits the transfer or exportation of capital or any right to capital from South Africa, unless such transfer or export has been approved by FinSurv (per its authority delegated by the National Treasury).

FinSurv has indicated that this prohibition extends to transactions where an individual purchases crypto assets in South Africa and uses them to externalise any right to capital.

The qualification of crypto assets as ‘capital’, and therefore Regulation 10’s application to crypto assets, does not mean that cross-border transactions pertaining to crypto assets are prohibited. It simply means that South African residents require exchange control approval from FinSurv to transfer crypto assets or rights to crypto assets offshore or cross-border.

A challenge is FinSurv’s position that it does not approve crypto asset-related transactions because such transactions are currently not reportable on the FinSurv Reporting System.

FinSurv’s position does not only restrict the transfer of crypto assets or right to crypto assets offshore, but it also restricts the offshore transfer of actual money to purchase crypto assets offshore. The only exception to this restriction is that individuals (natural persons) are permitted to transfer money using their annual allowances (R10 million foreign investment allowance and R1 million foreign discretionary allowance) for purposes of buying crypto assets offshore.

Corporates and institutional investors (including asset managers or discretionary financial services providers licensed under FAIS) are restricted from using their foreign investment allowances to transfer money offshore to buy crypto assets.

The above stance was sensible at the time when it was made, as it was understandably driven by the fact that there were no dedicated laws or regulations specifically governing the use of crypto assets in South Africa.

However, it has now been almost a year since the FSCA declared crypto assets as regulated financial products in South Africa, making the providers of crypto asset-related services subject to the FAIS regulatory framework, and FinSurv has yet to communicate to the public its response to the regulatory developments from an exchange controls perspective.

This begs the question whether FinSurv will update its Reporting System to allow Crypto Assets Service Providers (CASPs), regulated as financial services providers under FAIS, pursuant to the declaration of crypto assets as financial products, to be involved in transactions where crypto assets or the right to crypto assets are directly or indirectly exported from South Africa.

Another question is whether FinSurv will allow institutional investors, particularly CASPs regulated under FAIS, to transfer funds that they hold on behalf of their clients (assets under management) for purposes of buying crypto assets offshore.

Sooner rather than later, FinSurv will have to communicate its plans to address what one can consider to be a regulatory disconnect / lacuna with regards to crypto assets (regulation of crypto assets under FAIS v exchange controls).

Bright Tibane is a Partner, and Andani Thovhakale a Candidate Attorney | Bowmans South Africa.

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

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

ESG dispute resolution in Africa: trends and strategies

Sandra Sithole, Chandni Gopal and Thandekile Mbatha
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ESG dispute resolution in Africa: trends and strategies

Global litigation and regulatory enforcement actions and threats related to Environmental, Social and Governance issues are on the rise, and Africa is no exception.

While Africa is the world’s second largest and second most populous continent, it has and continues to contribute the least to global carbon dioxide (CO2) emissions (according to Statista, Africa contributed 3.8% of global CO2 emissions in 20221). Despite contributing the least to global warming, however, the continent continues to suffer disproportionately from climate change.

The World Meteorological Organisation’s 2022 report on the State of the Climate in Africa cited withering droughts; heatwaves and associated wildfires, violent tropical storms, and catastrophic flooding as the extreme weather events which took centre stage in 2022. Most recently, in September 2023, Cyclone Daniel unleashed 400 mm of rain in a mere 24 hours in Derna, Libya2 (where historical average rainfall for September is no more than 1.5mm). This resulted in the collapse of the Derna Dam, causing catastrophic flooding which resulted in the death of 4 000 people, with 10 000 reported missing.

Africa is rich in mineral, oil and other natural resources, making it a popular destination for foreign investment in large-scale engineering and infrastructure development projects. While the citizens of African countries often stand to benefit from these projects, they are the most affected by environmental disasters linked to them.

The above factors have contributed to a significantly more socially conscious, reactive and community-focused citizenry, government and regional leadership.

There are several cases outlined in which Africa-based projects are being litigated and arbitrated in courts and tribunals seated outside of Africa.

Philippi Horticultural Area Food & Farming Campaign (PHA) and Another v MEC for Local Government, Environmental Affairs and Development Planning: Western Cape and Others 2020 (3) SA 486 (WCC)

The PHA challenged the MEC’s decisions relating to a proposed development on a portion of farmland, considering that there is an underlying aquifer.

The court remitted the MEC’s decision to dismiss an appeal of the environmental authorisation granted to the developer and sent the matter back for redetermination by the MEC. The MEC was instructed to reconsider the appeal, considering new evidence and reports relating to the impact of the proposed development on the underlying aquifer, and to consider water scarcity and supply in the City of Cape Town, in the context of climate change.

Okpabi and others v Royal Dutch Shell plc and another [2021] UKSC 3

40 000 citizens in the Niger Delta brought a claim against Royal Dutch Shell, which arose from alleged oil leaks from pipelines and associated infrastructure operated, and human rights abuses committed by Shell’s Nigerian subsidiary (SPDC). The claimants allege that the oil spills caused significant environmental damage, and rendered the natural water sources unsafe for drinking, fishing, agricultural or recreational purposes.

While the merits of this claim are yet to be decided, the UK Supreme Court determined that it was at least arguable, based on the degree of control and management of SPDC, that the parent company (Royal Dutch Shell) owed a duty of care to the claimants.

Sustaining the Wild Coast NPC and Others v Minister of Mineral Resources and Energy and Others 2022 (6) SA 589 (ECMk) (1 September 2022)

In September 2022, the High Court handed down a judgment in an application to review and set aside a decision by the Minister of Mineral Resources and Energy to grant an exploration right to Impact Africa Ltd for the exploration of oil and gas in the Transkei and Algoa area. As a precursor to the exploration, the exploration company (Shell) would need to conduct a seismic survey off the Eastern Cape coast.

The court found that the consultation process undertaken by Impact was procedurally unfair, in that key stakeholders, such as those who hold customary law rights, had not been consulted. In addition, the court found that the potential harm to marine and bird life, and communities’ spiritual and cultural rights, had not been considered.

Overall, the exploration rights granted by the Minister to Impact were unlawful and were set aside, effectively putting an end to any seismic survey in the ocean off the Wild Coast of South Africa.

Friends of the Earth et al. v. Total

In 2019, six civil society organisations filed a lawsuit against Total (now TotalEnergies) in France, for allegedly failing to comply with the 2017 French Duty of Vigilance law. This law requires French companies to establish and implement reasonable vigilance measures to identify risks and prevent severe impacts on human rights, the health and safety of individuals, and the environment. The plaintiffs alleged that Total failed to adequately assess the human rights and environmental impacts of its Tilenga oil project in Uganda and Tanzania. The project was expected to displace around 100 000 people and affect numerous endangered species in the area.

In December 2021, the French Supreme Court rejected the jurisdiction of the commercial court but recognised the jurisdiction of the civil court. In February 2023, the latter court dismissed the case on procedural grounds. The merits of the case have not been adjudicated by any of the courts. The plaintiffs have, however, lodged an appeal to the Court of Cassation – France’s highest court.

Mbabazi & others v. The Attorney General and another

In September 2012, four citizens and a Ugandan NGO brought their claim against the Ugandan Attorney General and environmental authority before the High Court. The claimants alleged that extreme weather events linked to climate change inaction on the part of government had resulted in damage and loss of life.

The claimants based their claim on the Ugandan Constitution, which makes the Ugandan government a public trustee of the national resources (including its atmosphere) and imposes a duty to preserve those resources from degradation for present and future generations, stating that unless urgent action was taken, climatic patterns of prolonged droughts, floods, hurricanes and crop losses will escalate into human catastrophe for both present and future generations.

After a preliminary hearing, the High Court ordered the parties to undertake a 90-day mediation process; however, no further action has been taken since then.

These cases, among many others, allude to several trends and strategies in ESG dispute resolution in the African continent, including:

•Disputes that demand that governments adopt “climate adaptation” strategies to proactively strengthen their capacity to meet the needs of communities directly affected by climate change; for example, providing flood defense infrastructure, and putting disaster response and migration systems, and social safety nets in place.
• A more engaged and active citizenry that will demand strict compliance with environmental, procurement and consultation laws.
• Shareholder activism, where shareholders seek to mitigate ESG-related risks by holding companies accountable and influencing their behaviour through governance mechanisms and shareholder rights.
• Use of human rights and sanctions litigation by States seeking to act against those who violate internationally recognised human rights.
• Increase in colourwashing claims, where consumers and stakeholders bring claims against companies that deceptively describe their products or services as having unsubstantiated values and qualities (for example, “sustainably sourced” or “cruelty free” labels).
• Climate change litigation, where parties use “attribution science” to show a connection between impugned activities and the harm that ensued.
•The use of third-party litigation funding to finance large class actions, and community or NGO-initiated claims against large multinationals with comparatively deeper pockets.

With African countries and their citizens disproportionately affected by climate change, environmental disasters and corporate governance shortcomings, the need for ESG dispute resolution is inevitable.

  1. https://www.statista.com/statistics/205966/world-carbon-dioxide-emissions-by-region/
  2. https://floodlist.com/africa/climate-change-libya-floods-sepotember-2023#:~:text=When%20Storm%20Daniel%20made%20landfall,reported%20by%20Nasa’s%20Earth%20Observatory

Sandra Sithole and Chandni Gopal are Partners and Thandekile Mbatha an Associate | Webber Wentzel

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

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

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