Anglo American’s Jellinbah disposal closed earlier than expected (JSE: AGL)

You don’t often see deals closing this quickly

Anglo American announced the disposal of its 33.3% interest in Jellinbah Group in early November 2024. That’s not very long ago at all, so it’s really surprising to see that the deal has now closed – especially with the festive season in the middle of that period!

The underlying assets are Australian steelmaking coal mines, with Anglo American saying goodbye to these types of assets as part of its plan to move towards a focused portfolio of copper, premium iron ore and crop nutrients businesses. Anglo American had already received A$228 million and has now received the remaining A$1.4 billion, taking total cash proceeds to over A$1.6 billion – or roughly $1 billion at current rates.

The buyer is Zashvin, an existing 33.3% shareholder in Jelinbah. Anglo had no role in operating these mines or marketing the production volumes, so the shareholders in Jellinbah have essentially gotten rid of a silent partner here.

The balance of the steelmaking coal portfolio is being sold to Peabody for $3.8 billion, so Jellinbah was just the appetiser before the main event.

Barloworld has released the take-private circular (JSE: BAW)

If you’re a shareholder, you have 106 pages to flick through

A circular is a monstrous thing and the latest example at Barloworld is no different. Luckily, a number of pages are filled with boilerplate content, which means legal paragraphs or clauses that are replicated with little or no modification. This is the standard stuff you’ll find in every circular, like disclaimers. There are also various pages dealing with the action you should take as a shareholder, most of which won’t apply unless you found your Barloworld shares in your grandparents’ basement and you own certificated rather than dematerialised shares.

The timetable on page 16 of the circular (page 18 of the PDF) is important. It shows how long the process takes and exactly what the steps are. The meetings of ordinary and preference shareholders will be on 26th February and the results will be announced on the same day. Then, if all goes well, the termination of Barloworld’s listing will only happen on 24th June! These things take a long time.

There are then several pages of definitions. Reading those pages is like reading the dictionary – don’t do it in order. Instead, refer back to defined terms as you come across them in the main section. This brings us neatly to page 28 as marked (page 30 in the PDF), which is where the good stuff starts.

We quickly learn that Newco (corporate advisors like to keep it simple) has been set up to make the offer to Barloworld shareholders. Newco is controlled by Barloworld CEO Dominic Sewela (hence the corporate governance hornet’s nest that had to be navigated) and the Zahid Group. The Zahid Group currently has 18.9% in Barloworld, so the buyers of the business are all extremely familiar with it.

An interesting nuance in this deal is that it is structured as a scheme of arrangement (an “expropriation” mechanism in which the deal applies to all shareholders provided enough say yes to it), with a standby offer that triggers if the scheme fails. In that case, those who wanted to sell their shares can still do so. This shows that Newco is happy to buy up any amount of Barloworld shares at this price, but would prefer to get everything. They do however have an exit clause where the standby offer is only completed if at least 90% of holders accept that offer. As the scheme is a 75% approval, it’s unlikely that 90% would accept the offer after the scheme fails. This gives Newco a clever way to walk away from the deal, as they have to specifically choose to waive the 90% rule to go ahead with the offer.

In a case where the waiver applies, it would mean that Barloworld isn’t delisted from the JSE and A2X. This is important, as I avoid holding unlisted shares as a general rule. Liquidity is your friend and unlisted shares are less liquid than the Saudi Arabian deserts from where Zahid Group hails. Of course if the scheme goes ahead or holders of 90% of the shares accept the offer, then we are in delisting territory, but the use of squeeze-out provisions related to a 90% acceptance would likely mean that shareholders probably won’t even have the option to move into an unlisted environment. Not all deals are structured this way.

For those who are interested in the Barloworld Foundation, the circular confirms that it will remain a shareholder of Barloworld after the implementation of the offer. The same cannot be said for Khula Sizwe, the B-BBEE property investment scheme, as its Barloworld shares would be included in this deal.

South Africa’s Competition Commission just loves overreaching into areas that have very little to do with competition, so Barloworld actually felt compelled to make this statement in the circular: “In light of the Newco Offer, the black ownership of Barloworld will improve for purposes of the Competition Act.” They missed a trick on the capitalisation though, as Black Ownership is a defined term in the B-BBEE legislation and is well understood in that context.

Let’s get to perhaps the most important thing: the price on the table. The scheme price is R120 per share, which is a premium of 66% to the price on 12 April 2024 (the day before the first cautionary announcement) and a premium of 83% to the 30-day volume weighted average price calculated with reference to the same date. The standby offer is also priced at R120 per share.

What does this add up to? Well, Newco has had to furnish a bank guarantee of R17.2 billion. Without the bank guarantee, the Takeover Regulation Panel doesn’t allow circulars like these to be issued to shareholders. Think of it as a pre-approved bond for a house vs. the usual approach of making an offer and then seeing if you can raise the finance. R17.2 billion is a big number!

There are a bunch of other sections related to deal exclusivity and restrictions on actions that Barloworld can take in the meantime. There’s also a material adverse change clause, which is always very important. In fact, Barloworld invoked such a clause during the pandemic to try and wriggle out of the acquisition of Ingrain from Tongaat Hulett, a deal which eventually went ahead! The material adverse changes are usually defined as being financial in nature, with Barloworld having the unusual addition of any changes related to violations of sanctions. This obviously stems from the risks of the Russian business.

The Independent Expert Report on page 51 (page 53 of the PDF) sets out the way in which Rothschild & Co went about earning their delicious fees. Interestingly, the Russian business was not valued on a going concern basis, but rather based on Barloworld’s ability to extract cash. The likely valuation range as determined by the expert is R105.53 to R119.43. Of course, the offer has come in just above the top of that range. Isn’t that convenient?

Finally, given the related parties in this deal and the fact that the CEO is spearheading it, Annexure 8 (page 76 as marked or page 78 of the PDF) deals with frequently asked questions around the governance processes. It’s a good read, dealing with issues like the timing of the release of announcements and why the CEO stayed in his role throughout the process, despite the obvious conflict of interest.

I highly recommend that you look through the circular armed with this knowledge of how to navigate it, as you’ll learn so much about M&A from just reading it.

Trading density was the highlight at Hyprop (JSE: HYP)

Foot count growth is harder to come by for malls in high income areas

With the ever-increasing popularity of online shopping, malls in high income areas are going to find it harder every year to grow or even maintain foot count. Now, in theory, that’s fine as long as trading density (tenant sales per square metre) grows sufficiently. After all, tenants survive based on money through the till, not feet through the door. Fewer trips of higher value by shoppers would be acceptable.

For the six months to December, that’s what happened at Hyprop. In the South African portfolio, foot count was up just 0.4% but trading density was up 4.4%. Total tenant turnover was up 4.9%.

As we’ve seen at the likes of Attacq, growth in December was much slower than in November due to the popularity of Black Friday and the way the calendar worked out with weekends in December.

Over in Eastern Europe, the situation with weekends is more complicated. In Croatia, they have the Sundays Trade Act which allows retailers to only operate on 16 Sundays per calendar year and prohibits them from trading on public holidays. Interesting, right?

Luckily growth in that region remains strong, with foot count up 0.8% and trading density up 7.2% in euros. Tenant turnover (also in euros) grew 8.8%.

Results are due for release on 13 March. Hyprop’s share price is up 41% in the past year, with the market feeling a lot more confident about the look-through exposure to Pick n Pay.

Octodec has reduced its asset management fee (JSE: OCT)

This is an old-school structure that has fallen out of favour on the JSE and with good reason

In the heydays of new property listings on the JSE, the trick was to list a fund and then put the management team in a management company that had a contract with the fund linked to the value of properties being managed. Of course, this created a far more expensive structure than was ever necessary, as managers in operational businesses shouldn’t be paid based on percentage of assets. It creates terrible incentivisation to grow at any cost.

To get rid of those legacy structures, many funds entered into expensive management buyouts where they then paid a multiple of the asset management fee to get the structure to go away. The only winners in these situations were the management teams, not the shareholders. Imagine being paid a multiple of your salary and then still arriving for work the next day as though nothing happened?

Most of the structures are now gone from the JSE. Octodec is one of the few remaining ones and even that group has now taken a step towards normalising the situation. CFO Riaan Erasmus has been employed by Octodec rather than the asset management company, which means that the fee charged to Octodec by that company will now be reduced to take that into account.

The announcement doesn’t say whether the reduction in fee is equal to Erasmus’ cost-to-company or a multiple thereof. This is important, as if the management fees were always equal to the cost of employing these executives, then these structures wouldn’t have been an issue in the first place.

Nibbles:

• Director dealings:
  • The chairman, CEO and a person closely associated with the CEO all bought shares in Sirius Real Estate (JSE: SRE) in their self-invested personal pension structures. We can only dream of such structures in South Africa! The total purchases came to around £150k.
  • Acting through Titan Premier Investments, Christo Wiese has bought ordinary shares in Brait (JSE: BAT) worth R1.4 million.

• I don’t normally focus on changes to holdings by major institutional investors, but occasionally you see something unusual or interesting. Santova (JSE: SNV) announced that Barca Capital, LLC has now taken its stake in the company up to 15%. Barca is a US-based investor that has a one-page website on which it describes itself as a value-oriented investor.

• Supermarket Income REIT (JSE: SPR) announced that Fitch has affirmed its investment grade rating of BBB+ with a stable outlook. As property companies tap the debt markets so often in the regular course of business, this investment grade rating is critical.

• Coronation’s (JSE: CML) chairperson, Professor Alexandra Watson, will be retiring with effect from 30 September 2025. Saks Ntombela will take on that role, having served as lead independent director since August 2021. If we are lucky, perhaps he can twist their arm to get the disclosure basics right, like including comparable AUM in their regular AUM updates!