Barloworld is struggling – and the CEO is part of a plan to take it private (JSE: BAW)

This very quickly becomes a dangerous corporate governance situation

Usually, shareholders sleep at night knowing that the CEO of the company they have invested in is working day and night to try and grow the value of the share price. When the CEO is potentially looking to make an offer for those shares, the incentive to increase the value suddenly disappears. In fact, the incentive is arguably the exact opposite!

Now, this isn’t to say that it is never appropriate for a CEO to lead a consortium to take a company private, or that this is an outcome that we don’t want to see in the markets. It’s certainly a sensitive situation though and one that needs to be carefully managed. Nobody at Barloworld wants to see a similar situation to the blow-up we saw at Ascendis this year. The independent board at Barloworld has made an explicit statement that “sufficient safeguards” have been put in place in this regard.

The inherent conflict of interest isn’t helped by the recent performance, with a trading statement for the year ended September noting a drop in HEPS from continuing operations of 10.7% to 12.5%. Barloworld is a cyclical business and has some tricky exposures to manage, but it’s still not a great look right now.

Of course, if a massive offer comes through for shareholders, then nobody will be upset. The company is in negotiations with a consortium that includes Dominic Sewela (the current CEO) and Gulf Falcon Holding, part of a Saudi Arabian conglomerate that already has an effective 18.9% in Barloworld.

Even though this is only a potential offer at this stage, the share price is up 6% in anticipation.

Clientèle releases the circular for the Emerald Life acquisition (JSE: CLI)

There’s a lot of private equity thinking going on here

Clientèle wants to acquire 100% of Emerald Life, a micro-insurer focused on funeral insurance products. With 380 permanent employees, 3,500 independent sales advisors and an embedded value of R600 million, Emerald is a sizable business in the mass market segment.

Clientèle wants to create preference shares to fund the deal. They are priced at 69% of prime. It’s quite common to see pricing of 73% of prime, reflecting the tax differences between a preference dividend and interest. Pricing at 69% of prime means that in reality, this is a finance raise at below prime. Investec is subscribing for R600 million worth of these preference shares if the deal goes ahead.

It’s no coincidence that the embedded value of Emerald Life is the same as the value of the preference shares. The deal price has been agreed as a base consideration of R597.5 million, plus various smaller adjustments and a potential agterskot amount (conditional payment) of R50 million. The agterskot is based on the number of defined new funeral policies written and premiums collected, at a rate of R312.50 per policy. I do appreciate seeing such a clearly defined conditional payout.

Emerald Life managed profit after tax of R50.2 million for the year ended February 2024. The preference shares priced at 69% of prime (i.e. 7.935%) carry an annual financing cost of R47.6 million. This deal is therefore accretive to earnings, but with little room for error, especially if interest rates stay stubbornly high.

The preference shares are redeemable after five years. They can potentially be extended for a further five years.

This is effectively a highly leveraged deal in which Clientèle is paying a full price for Emerald Life in the hope that they can lock in a return above the preference share funding cost and therefore turbocharge the return on equity for shareholders. This is classic private equity thinking, which comes with plenty of risk. They must be feeling confident of what Emerald can achieve.

Novus swings for Mustek with a mandatory offer (JSE: NVS | JSE: MST)

This isn’t a delisting of Mustek – at least not at this stage

In takeover law, when a shareholder and its concert parties move through the 35% ownership threshold of a listed company, they need to then make an offer to all the other shareholders. This is totally different to a scheme of arrangement, which is an expropriation mechanism where all shareholders are forced to sell their shares if the scheme meets the required approval. In a mandatory offer, the “mandatory” description refers to the offeror being forced to make the offer, not to the offerees being forced to accept it.

The price on the table is R13 per Mustek share, or R7 cash plus 1 Novus share, or no cash and 2 Novus shares. Novus is currently trading at R7.810, so there’s a bit of a deal sweetener there for Mustek shareholders who are happy to swap for Novus shares.

Mustek was trading at R13.70 on Thursday before the announcement came out. It closed at R14.71 on Friday as the market priced in the Novus share sweetener.

Holders of 20.29% in Mustek, including key executives, have given undertakings that they will not accept the offer.

The percentage holding that Novus will end up with will depend on how many Mustek shareholders are willing to accept the offer. Although there’s no indication right now that Novus could go all the way and try take Mustek private, the market will certainly consider that possibility when valuing Mustek going forward.

We need to wait for full details from Trematon (JSE: TMT)

The trading statement leads to more questions than answers

Trematon is an investment holding company that has seen a busy period of corporate actions, including important asset disposals. This always leads to all kinds of accounting distortions. Also, as an investment holding company, measures like HEPS aren’t as helpful as intrinsic net asset value (INAV) per share, which speaks to the value of the underlying investments.

A trading statement for the year ended August suggests that INAV is down between 18% and 20% year-on-year. In the interim results, it was down 7%, attributed to a distribution paid to shareholders. That will be part of why the full-year INAV is lower, but it doesn’t explain the full percentage move.

We therefore have to wait for the detailed numbers to understand this drop, as I wouldn’t draw conclusions just based on the percentage move. Those details are due for release on 29 November.

Nibbles:

• Director dealings:
  • A director of WBHO (JSE: WBO) sold shares worth R6.2 million.
  • An associate of a director of Sea Harvest (JSE: SHG) acquired shares worth R31.8k.

• Richemont (JSE: CFR) released its interim results on 8 November and I covered them at that stage in Ghost Bites. Those who want to dig deeper can now refer to the interim report which has been published.

• Lesaka Technologies (JSE: LSK) shareholders may be interested to know that the company is moving ahead with an employee share ownership plan (ESOP). This can become expensive for listed companies, but can also be a useful staff retention and incentivisation mechanism when correctly structured and managed. Importantly, given the recent acquisitions by the group, staff of those companies will also qualify for this plan.

• The JSE has censured Thabi Leoka after she was unable to prove her claim that she has a PhD in Economics from the London School of Economics and Political Science. This results in a fine of R500,000 and a disqualification from holding the office of a director for five years. She previously served as a non-executive director of Remgro (JSE: REM), Netcare (JSE: NTC) and Anglo American Platinum (JSE: AMS). Clearly, the quality of background checks done by listed companies needs to improve.

• The Brazilian court has ruled that there is no criminal liability for the Samarco Dam failure, as the evidence did not support a causal link between the companies and the way in which the dam failed. This is relevant to BHP (JSE: BHG), as the group also recently settled the civil claims.