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Corporate finance corner (M&A / capital raises)

• We finally have a confirmed offer by Remgro for Mediclinic, with the Stellenbosch-based investment holding company bidding alongside some of Johann Rupert’s European buddies. A subsidiary of large private business Mediterranean Shipping Company will be joining Remgro in this investment on a 50:50 basis. Remgro already holds a 44.56% stake in Mediclinic, so this deal takes the form of a scheme of arrangement to mop up the rest. The offer price is 504 pence in cash although the final price will be 501 pence, as existing Mediclinic shareholders are entitled to the 3 pence per share dividend that was declared in May 2022 (the offer price is reduced by this amount). The deal rationale is that Mediclinic will be better positioned to realise its long-term strategy and objectives if it operates as a private company rather than under public scrutiny. The structure sees Remgro contributing its existing Mediclinic shares to the special purpose vehicle set up for the deal (BidCo) and injecting around £201 million in cash to facilitate its half of the deal. This cash contribution is why the deal qualifies as a category 2 transaction under JSE rules, so no Remgro shareholder approval is required. Remgro will fund the deal from existing cash resources. From a Mediclinic perspective, the offer values the hospital group on an EV/EBITDA multiple of 11.2x and represents a premium of 35% to the price on the day before the initial proposal was made by Remgro. The independent directors of Mediclinic are recommending the offer to shareholders, which is why this is structured as a friendly scheme of arrangement rather than a hostile takeover. This will require 75% approval by Mediclinic shareholders, with the BidCo reserving the right to change the structure to a takeover offer if needed. This may be good news for Remgro’s traded discount to net asset value, as investors looking for exposure to this growth story have no choice now but to access it via Remgro if the deal goes through.

• Bauba Resources is currently under offer from Raubex and has announced the results of a shareholder meeting to vote on the delisting of the company. The delisting has been approved by shareholders, so it looks like Bauba Resources will be heading for the exit from the JSE.

• Trustco has announced that it has signed a term sheet in which SJSL Investments has the option to become up to a 70% shareholder in Meya Mining for a total subscription amount up to $50 million. Meya holds a diamond mining licence in Sierra Leone. This would allow Trustco to partially exit its investment in Meya and would enable the operations to be scaled at an accelerated pace. First diamonds are expected in the market by November 2022. This is a category 1 transaction for Trustco and so a circular will be distributed to shareholders as a shareholder vote is required.

• Most announcements regarding resolutions passed at the AGM are incredibly boring, with the usual story of institutional investors voting against remuneration policies and not much else to report. At the Afrimat AGM, the company withdrew the resolution that would grant a general authority to issue shares. This is due to the recent capital raise by the company which was strongly supported by the market. This is notable because it means that Afrimat does not intend raising additional capital in the next financial year.

Financial updates

• Sasol released a trading statement for the year ended June 2022 and the share price barely reacted. This means that the market expected these numbers, with favourable macroeconomic conditions offset to some extent by operational challenges in South Africa that drove lower production. Headline Earnings Per Share (HEPS) is expected to increase by between 8% and 28% (a wide range). The company also discloses adjusted EBITDA and core HEPS, with all kinds of adjustments ranging from hedging movements through to losses on significant capital projects that are still ramping up. Ultimately, I look at HEPS unless there are genuine once-offs in the numbers that aren’t related to the operations and aren’t excluded from HEPS. Focusing on HEPS is especially useful when there are large gains and losses on disposals of businesses, as is the case in Sasol for this period. Sasol’s share price is up more than 26% this year.

• Standard Bank has released a trading statement for the six months to June 2022 and it reflects the favourable conditions for banking that I’ve written about several times (demand for loans and higher interest rates). HEPS is expected to be 27% to 32% higher than the comparable period. Detailed results will be released on 19th August and I look forward to seeing the drivers of performance, particularly in terms of efficiency ratios (costs relative to income).

• Gold Fields has released a trading statement for the six months ended June 2022. It’s been a strong financial period for the business, with HEPS expected to be 24% to 33% higher than the comparable period. Production was 9% higher and the gold price has been favourable overall, though inflationary impacts on costs did put a slight damper on the party. All-in costs per ounce increased by 6%. Normalised earnings per share (usually the measure that management wants you to focus on) is only 10% to 18% higher than the comparable period. Results will be released on 25th August.

• Mondi’s share price dropped 5.8% after releasing results for the six months to June 2022. This is despite margin expansion in all businesses and total EBITDA (including Russia) up 65% year-on-year. The group is in the process of disposing of its Russian operations and has now disclosed them as a discontinued operation. These operations contributed EBITDA of €228 million in this period, around 19.5% of the group total. Group net debt has dropped from €1.9 billion to €1.2 billion, which is 0.8x to underlying EBITDA. The group is busy with €1 billion in expansionary projects, so there is significant investment in growth. Mondi’s interim dividend has increased by 8% year-on-year and is denominated in euros. The company has already announced the applicable exchange rate, so shareholders should note that the rand value is 370.74076 cents per share.

• Sappi released its third quarter results for the period ended June 2022, managing to time it perfectly alongside sector peer Mondi. Whether you look over three months or nine months as a year-to-date view, the numbers demonstrate an exceptional recovery vs. a very tough period. Over nine months, sales increased 40% and EBITDA increased 167%. The group has swung from a loss of $22 million to a profit of $510 million. Net debt has dropped by 26%. The period wasn’t without its challenges, like operational issues and maintenance in the dissolving pulp operations that mitigated some of the benefit of higher market prices. Inflationary cost pressures and uncertain supply-demand dynamics mean that these businesses are risky, which perhaps explains the 4% sell-off in the share price.

• MTN Uganda is the latest African subsidiary of the yellow telecoms giant to release results. For the six months to June 2022, mobile subscribers increased by 8.9%, active data subscribers increased by 21.8% and fintech subscribers grew by 14.1%. The data story is coming through strongly here, with data revenue up 36.8% and service revenue only 10% higher. EBITDA only increased by 7.2% so there are some margin pressures in this business, with EBITDA margin decreasing to 50.2%. Still, this is yet another country in which MTN is achieving EBITDA margins in excess of 50%. Capital expenditure increased by 30.7% as the business invests in the network. Profit after tax was up by a whopping 48.1% because depreciation was lower year-on-year.

• Glencore has released its results for the interim period and they reflect the benefit of the macroeconomic environment for a commodities group like this, with adjusted EBITDA up by $10.3 billion (a 119% increase). Despite a $5 billion drain on cash due to investment in working capital to support these numbers, net debt reduced from $6 billion to $2.3 billion and the company has announced a special dividend ($0.11 per share) alongside a new $3 billion share buyback programme that will be run by Citigroup Global Markets. Of course, the bankers will be tasked with buying back shares as cheaply as possible. The numbers for this period all look a bit silly on a year-on-year basis, like a 111% increase in funds from operations. Although the outlook is incredibly uncertain for commodities, Glencore’s much stronger balance sheet gives it a solid foundation going forward.

• Although Brimstone Investment Corporation’s share price was trading over 16% higher by late afternoon trade, only 100 shares had traded which means R700 changed hands. When dealing with illiquid companies, you always have to be careful with large percentage moves and tiny values traded. When you read the trading statement released on the day, the share price move looks even stranger. HEPS is down by between 85% and 95%, a really tough result based on downward revaluations of listed investments and a drop in share of profits from associates and joint ventures. Ouch.

• 4Sight Holdings has released a trading statement for the six months to June 2022. HEPS has shot up by between 126.8% and 145.9%. This is a technology company that manages to pack every single buzzword into its website, ranging from machine learning through to big data.

Operational updates

• Europa Metals has announced metallurgical results at Toral (the company’s lead, zinc and silver project in Spain) and has given an operational update. In the latest metallurgical testwork, grades achieved for lead and zinc are higher than in previous results. Drilling has been impacted by personnel contracting Covid. You really need to be a mining expert to interpret the detailed results released by the company, which is why I simply avoid investing in junior mining altogether.

Share buybacks and dividends

• Investec is in the process of repurchasing up to 20% of its issued preference shares, as this has become a less desirable source of capital for banks in recent times. 5% of the issued shares have already been repurchased for an aggregate value of R149 million.

• British American Tobacco is still busy with its share repurchase programme.

Notable shuffling of (expensive) chairs

• Hulamin CEO Richard Jacob will retire at the end of September after a 32-year stint at the company, of which the last 12 years were as CEO. It’s quite incredible that there seems to be no succession plan, with an independent non-executive board member appointed as interim CEO while a replacement is found. After 12 years, did he just wake up one morning and decide he was gatvol, taking everyone by surprise?

Director dealings

• The CEO of Alexander Forbes has elected to sell his shares into the partial offer, which will improve his bank account by around R11.4 million.

• The CEO of Spear REIT is still buying shares in the company for his kids, this time to the value of R28k.

Unusual things

• Mantengu Mining has announced the excellent news that its suspension has been lifted following the acquisition of Langpan Mining Co. This is a perfect example of a listed vehicle being resurrected on the market.