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The bittersweet truth about intellectual property

The irony behind the most recognisable violin hook in 90s alt-rock, and what it can teach us all about the cost of an original idea.

If you were following local business news last week, you probably already know that Pick n Pay received quite an embarrassing slap on the wrist courtesy of Checkers and the High Court of Cape Town. But in case you missed it, I’ll give you a quick summary of what happened.

In 2021, Pick n Pay decided to introduce a new premium range of products for its core upper customer, with the primary objective of establishing a “foodie brand” across multiple categories. The issue that landed them in court is that the packaging of said range is strikingly similar to the packaging on Checkers’ premium Forage and Feast range, which was launched at the end of 2020.

At a quick glance, you may not even be able to tell which packaging belongs to which retailer. Both feature a navy, white and gold colour scheme, with similar fonts and other design elements.

Following a tussle in the courts, Deputy Judge President Patricia Goliath has ordered Pick n Pay to “destroy all printed materials, product packaging and the like bearing the infringing get-ups, which are under its control, or alternatively to deliver all such material to Shoprite Checkers for destruction.”

Of course, Pick n Pay is denying any wrongdoing on their side, insisting that as a brand, they have always made extensive use of the colour navy. They will seek leave to appeal the judgement. I guess we’ll have to wait and see how that works out for them.

Originality: an expensive commodity

So why all the fuss?

In the competitive landscape of business, originality is not just a rare gem; it’s an advantage. Companies invest considerable resources in cultivating and safeguarding their unique ideas, as originality often serves as a crucial differentiator in the marketplace. Copyright, the legal mechanism designed to protect the expression of creative concepts, plays a pivotal role in this endeavour.

Now, Checkers can’t claim to have the copyright on navy blue packaging, but what they can do (and have successfully done) is to claim that Pick n Pay’s too-similar design is misleading to customers, who could potentially confuse the two brands.

Ultimately, the investment in preserving original ideas reflects a commitment to maintaining a competitive edge and ensuring that innovation remains a strategic advantage. This is why Checkers was willing to fight tooth and nail to make sure that their ideas remain only theirs.

Cue the violins

Perhaps one of my favourite examples of the intricacies of intellectual property comes from the world of music.

Even if you’ve never heard of a band called The Verve, odds are you’ve probably heard their breakout hit, “Bitter Sweet Symphony”, at least once in your life.

Refresh your memory and indulge in a little classic 90s alt-rock:

You probably don’t even have to make it more than two bars into this song to recognise it, thanks to that hyper-memorable violin melody that plays on repeat. And it’s exactly that violin melody that got The Verve into a lot of trouble in 1997.

That’s because the string section that opens “Bitter Sweet Symphony” was based off of a sample taken out of a Rolling Stones song called “The Last Time” – or to be more precise, the orchestral version of “The Last Time” that was recorded by the Andrew Oldham Orchestra in 1965.

You can hear the Oldham Orchestra version here:

What’s a sample, you ask? In music, sampling is like borrowing a snippet (or sample) from one recording to use in another. These samples can be bits of rhythm, melody, speech, sound effects, or even longer chunks of music.

But, here’s the catch – using samples without permission could land you in considerable copyright trouble. And getting the green light for sampling, known as clearance, can be a really complicated affair. If you are asked to pay to use the sample in question, it could also be quite expensive, especially if you’re eyeing samples from big-name sources.

What makes it all the more tricky is that there’s no law that specifically prohibits sampling, and different courts have different takes on whether sampling without permission is OK or whether it constitutes copyright fraud. Most issues are decided on a case-by-case basis.

In the case of The Verve, things did not end well. While lead songwriter Richard Ashcroft had negotiated use of the sample from copyright holder Decca Records, he neglected to obtain permission from the Rolling Stones’ former manager, Allen Klein, who owned the copyrights to all of the Stones’ pre-1970 songs, including “The Last Time”.

When “Bitter Sweet Symphony” was gearing up for its single debut, Klein, who was then at the helm of ABKCO Records, threw a curveball by denying clearance for the sample. He claimed that The Verve had exceeded the portion that they had agreed with Decca Records. A legal skirmish ensued, leading The Verve to surrender all royalties to Klein. As further salt in the wound, songwriting credits on “Bitter Sweet Symphony” were changed to Jagger–Richards (the lead members of the Rolling Stones).

Verve songwriter Richard Ashcroft walked away with his hit song under someone else’s name and a modest $1,000 in his pocket. The band’s bassist, Simon Jones, later went on to reveal that the band were initially promised half the royalties. However, when the single started flying off the shelves, they were given an impossible choice: hand over 100% of the royalties, or remove the song from circulation permanently.

“Bitter Sweet Symphony”’ reached No 2 in the UK and No 12 in the US in its year of release, and was even nominated for a Grammy. To this day, it remains one of the most recognisable songs of the 1990s, eclipsing every other track ever released by The Verve. In 2019, Billboard estimated that the single had generated almost $5 million in publishing revenue since its release. None of that revenue went to Ashcroft or any of the other members of The Verve.

If that isn’t the very definition of bittersweet success, then I don’t know what is.

Fortunately, this story does have a somewhat happy ending

Following the death of Allen Klein in 2009, Ashcroft approached Joyce Smith, who took over the management of the Stones, with an appeal to have his songwriting credits restored. He was successful – in 2019, ABKCO, Jagger and Richards agreed to return the “Bitter Sweet Symphony” royalties and songwriting credits to Ashcroft. There’s no back payment of the 22 years worth of royalties that the Stones pocketed on Ashcroft’s behalf, but he will receive all royalties going forward.

As businesses fight in the realm of innovation, the recent battle between Checkers and Pick n Pay serves as a cautionary tale. It underscores the notion that an original idea is not only a source of competitive advantage but a precious asset worth protecting. In a world inundated with choices and visual stimuli, the distinctiveness of a brand (or a piece of music) can be the deciding factor in capturing consumer attention and loyalty.

The lesson reverberates beyond the courtroom: originality is well worth fighting for. In the end, the battleground may differ, but the essence remains the same. The pursuit of originality is a journey that demands resilience, legal acumen, and an unwavering commitment to protecting the integrity of ideas in a world where imitation lurks just around the aisle or the musical note.

About the author:

Dominique Olivier is a fine arts graduate who recently learnt what HEPS means. Although she’s really enjoying learning about the markets, she still doesn’t regret studying art instead.

She brings her love of storytelling and trivia to Ghost Mail, with The Finance Ghost adding a sprinkling of investment knowledge to her work.

Dominique is a freelance writer at Wordy Girl Writes and can be reached on LinkedIn here.

Ghost Wrap #55 (Mr Price | Southern Sun vs. City Lodge | Sirius Real Estate | African Rainbow Capital | Sibanye-Stillwater)

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:

  • Mr Price released results that I felt were rather poor, yet the market took the stock over 8% higher by the close on the day of release. Either I’m wrong, or the market is wrong. Listen to my reasoning and decide for yourself.
  • Southern Sun and City Lodge are enjoying a resurgence in demand for hotel rooms, with the former doing as well as I expected and the latter surprising me to the upside.
  • Sirius Real Estate executed a successful capital raise on the market, demonstrating that investors are highly supportive of the strategy.
  • African Rainbow Capital has made sure once and for all that I’ll never touch the company with my money, as the latest capital raise is highly painful for minority shareholders.
  • Sibanye-Stillwater incurred the wrath of investors with the news of a convertible bond capital raise, but did the market overreact to this news? 

Ghost Bites (African Rainbow Minerals | Crookes Brothers | Deutsche Konsum)

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


African Rainbow Minerals acquires the other half of Nkomati Mine (JSE: ARI)

The mine has been on care and maintenance since 2021

African Rainbow Minerals currently has a 50% stake in the Nkomati Mine. This mine has a nickel sulphide orebody and established infrastructure, having been placed on care and maintenance in March 2021. It can quite quickly be put back into steady state production of class one compatible nickel sulphide concentrate, which is what battery manufacturers are looking for.

It also has other bi-metal products like copper, cobalt, platinum, palladium and chrome.

African Rainbow Minerals clearly likes the outlook here, which is why the company is buying the other 50% in the asset held by Norilsk Nickel Africa. The purchase price for the equity is just R1 million, but don’t let that fool you. There’s a much more complicated transaction in the background about environmental liabilities and other mine liabilities.

The transaction is expected to close during 2024.


Earnings at Crookes Brothers go bananas (JSE: CKS)

Is there anything more volatile than primary agriculture?

If you want a nice, steady investment that won’t cause you much stress, then stay right away from primary agriculture. Despite what certain political parties will tell you, farming isn’t a guaranteed road to riches.

The latest trading statement is proof of this. Crookes Brothers had a terrible time last year, but things look much better now. Headline earnings per share for the six months to September has come in at 321.2 cents, which is a whole lot better than a loss of 193.7 cents in the comparable period.

This massive improvement is mainly thanks to the sugar cane and banana operations, along with a drop in fertiliser and other agricultural input costs. The fertiliser price has been a headache for several other listed companies on the local market that play in that space.


You’ll struggle to trade Deutsche Konsum, but you can learn from it (JSE: DKR)

And the lesson is that European property doesn’t like higher interest rates

Deutsche Konsum is one of the most pointless listings on the JSE. This thing never trades. Despite this, they need to meet all the reporting requirements of the JSE, like releasing financial results.

Still, elements of the financials are interesting and potentially applicable to other companies that you might be looking at. Before we get into that, you need to know that Deutsche Konsum is a specialist REIT focused on German retail properties. In other words, don’t take these insights and try apply them to Poland.

Countries with historically low interest rates don’t like it when rates move higher. It does ugly things to property valuations, like the portfolio value dropping by 9% year-on-year. The devaluation of the properties and an impairment of loan receivables has moved the loan-to-value ratio from 49.7% to 60%. That’s not what anyone wants to see. In other bad news, funds from operations fell by 11.5%.

The company is currently in a fight about REIT status and hasn’t declared a dividend for this year.

Long story short: in any country in the world, property funds can get into trouble.


Little Bites:

  • Director dealings:
    • An executive director of Richemont (JSE: CFR) has bought warrants with a value of R335 million. The announcements never name the directors (in true Swiss style), but I’m sure we can guess who is doing derivative trades with that kind of underlying value. In a separate announcement, a director executed warrants to buy shares worth R7.7 million.
    • Pay attention to this one: an associate of the CEO of Southern Sun (JSE: SSU) has bought shares worth R4.8 million.
    • An executive of Mondi (JSE: MNP) received shares under a long-term incentive scheme and couldn’t sell them quickly enough, selling the whole lot for a total value of £160k.
    • I always treat purchases by Value Capital Partners with caution, as this is an institutional investor that has board representation, so this is more of an institutional purchase that comes through as director dealings. The quantum maybe isn’t comparable to other director purchases, but the direction of travel is useful. With that out the way, the news is that Value Capital Partners has bought nearly R2.8 million worth of shares in Altron (JSE: AEL).
    • A director of Kumba Iron Ore (JSE: KIO) has sold shares worth R1.77 million.
    • The company secretary of Nedbank (JSE: NED) has sold shares worth R181k.
    • The company secretary of Datatec (JSE: DTC) has sold shares worth R62.4k.
  • The rules around the release of trading statements are designed to give shareholders an early warning when financial results will differ significantly from the comparable period. In the case of a mess like Efora Energy (JSE: EEL) that is suspended from trading, I’m not sure that the rule should apply. Case in point: a daft situation where the company has released a trading statement for the six months ended August 2021!

Ghost Bites (African Media Entertainment | City Lodge | Delta Property Fund | Frontier Transport | KAL Group | Mahube Infrastructure | Mr Price | Spar | Trematon)

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


Covid didn’t kill this radio star (JSE: AME)

African Media Entertainment is bouncing back strongly

Although we were all forced to stay home and stay safe during the pandemic, it actually wasn’t a good time for radio stations. Many of the smaller stations are dependent on being part of the events ecosystem of their hometowns. During the pandemic, there were no events to be part of!

Things have thankfully improved tremendously for African Media Entertainment, with the six months to September reflecting revenue growth of 11% and operating profit growth of 34%. Headline earnings is up 27%. Even better, HEPS is up 39% to 207.3 cents.

Despite all this, the dividend is flat at 100 cents per share.

I always pay attention to the commentary around Moneyweb for obvious reasons. Digital and radio revenue is higher than the previous year, with that business looking at alternative business strategies to achieve revenue growth.

It’s worth highlighting that the company also has an indirect economic interest of 29.9% in Kaya FM, achieved through a 100% economic interest in Mokgosi Holdings.


City Lodge shows signs of life in its pricing (JSE: CLH)

The food and beverage strategy also continues to pay off

Earlier this week, I wrote about Southern Sun and how I prefer the leisure-style offering to a more business-focused offering, while also acknowledging the solid job done by City Lodge in pivoting the business in response to consumer changes.

A voluntary operating update by City Lodge shows that those management interventions are starting to really bear fruit. The comment that surprised me is a note that both leisure AND corporate travel have recovered to pre-Covid levels. The three months to September 2023 saw occupancies rise to 62%.

Now, occupancy is one thing, but pricing is quite another. It’s easy to fill rooms at a low price, which has been the issue plaguing City Lodge in the post-pandemic recovery. It’s good to see that average room rates in South Africa are 9% above the prior comparative period, after increasing 12% in FY23.

I like the 44% increase in food and beverage revenue for the quarter. I also like the net cash position, with R100 million in the bank and R70 million in debt. There are substantial undrawn facilities. The balance sheet is important, as there is significant reinvestment needed in the hotels, particularly after the pain of the pandemic and deferred projects.

Importantly, the group generates 16.3% of its energy requirements from solar renewable energy. And, not to scare you, but a water resilience strategy is a key focus area!

Unsurprisingly, the market liked this update.


Delta Property Fund sells a Port Elizabeth property (JSE: DLT)

This makes a very, very small dent in the debt

Delta has agreed to sell a property in Port Elizabeth known as Cape Road for R33 million. It has a 69.3% vacancy rate and was last valued at R36.6 million. Despite the vacancy rate, it was generating an operating income of just over R1 million.

Delta is trying to sell assets to reduce its loan-to-value ratio. This sale barely touches sides, with the loan-to-value down by 20 basis points from 61.4% to 61.2%. Vacancy levels will decrease by 20 basis points from 32.9% to 32.7%.

Transfer will hopefully be completed by March 2024.


Frontier Transport Holdings is a lesson in cost control (JSE: FTH)

Here’s a perfect example of how modest revenue growth can do big things

Frontier Transport is one of those companies that never seems to be on the radar for retail investors. Operating a bus service isn’t exactly a swashbuckling way to make money, yet here we are with Frontier reporting a jump in EBITDA of 42.6%. Most impressively, that’s been achieved off revenue growth of 6.9%.

How, I hear you ask? Expenses only increased by 1.1%, which really is an impressive outcome. Once you factor in net finance income and profit from the N2 Express service (which is equity accounted), there’s a 62.9% increase in attributable profit.

Perhaps the most important thing about Frontier is the role it plays in the transport infrastructure. The reality of the situation is that this is the only viable alternative to taxis in the broader Cape Town region. On top of that, Frontier has businesses that play in adjacent transport verticals like luxury coach tours.

Notably, the increase in the dividend has been far more modest than the 64% increase in HEPS. The dividend is up by only 10% to 24.2 cents.


KAL Group shows excellent cost control (JSE: KAL)

Like-for-like growth is hard to come by, though

This period saw the inclusion of a full year of performance at PEG Retail Holdings (the fuel business) being included in KAL Group’s results. In the prior period, it was only included for three months. This obviously limits comparability.

Instead of looking at revenue growth of 42.7%, I would focus on like-for-like growth of just 5%, which shows that things aren’t easy out there in the agri space. I did find it impressive that gross profit is up 45.7%, reflecting higher gross margin despite the lower margin fuel revenue playing such a role. This talks to improved margins within the retail business.

The real win is like-for-like expenses falling by 2.1%. They also calculate this metric excluding load shedding, in which case it fell 3.7%. That’s really impressive.

Headline earnings increased by 20.7% and recurring headline earnings grew by 14.7%. HEPS was only up by 11.1% though and the dividend for the full year was 7.1% higher. The difference between headline earnings growth and HEPS growth isn’t because of a change in the number of shares. It’s actually because of a large increase in non-controlling interest year-on-year. HEPS is calculated based on headline earnings attributable to ordinary shareholders of KAL Group.

Overall, KAL Group has done well, but the announcement sets out the many challenges being faced in the agri environment. The PEG fuel business is doing well, with the company showing a mature approach by disinvesting from four underperforming sites that don’t meet return on invested capital requirements.

The market liked it, with the share price closing 5.9% higher.


Mahube Infrastructure: powered by the sun and the wind (JSE: MHB)

A trading statement drove a jump in the share price – but watch the spread

Whenever you see a big jump in a small cap, make sure you check the intraday chart to see whether there were various trades or just one. Here’s the intraday Mahube Infrastructure chart from Moneyweb:

As you can see, it’s not the most liquid chart around. When it looks more like a tetris piece than a worm, you need to tread very carefully. The best bid is R4.03 and the best offer is R4.85.

This lack of liquidity is despite HEPS for the six months to August moving higher by between 56.6% and 73.1%, driven by higher dividends from the solar businesses in which Mahube is invested, as well as a positive fair value movement linked to the wind power plant investments. That move is based on an upward revision in long-term assumptions around the project.

I would give the dividend a lot more weight than the fair value moves.

Detailed results are due to be published on 30 November.


Read the Mr Price numbers very carefully (JSE: MRP)

This period was all about the inclusion of Studio 88 in the numbers

Whenever a group has executed a major acquisition, you need to be really careful with how you interpret the growth rates. Companies can literally buy growth in revenue etc. through acquisitions. That doesn’t tell you anything about how the rest of the group is performing.

For example, in the 26 weeks to 30 September, Mr Price’s revenue is up 26.4% including Studio 88 and just 3.5% without it. Comparable store sales fell 0.8% despite being in an inflationary environment, which means volumes were sharply negative.

There’s another nuance here. When a company makes acquisitions for cash, then headline earnings per share should be boosted by the acquisition, although funding costs can offset that benefit. When an acquisition has been paid for with shares, the rubber hits the road at headline earnings per share level, as there are more shares in issue. And of course, there’s still the core group business to consider and how it performed in the same year as the acquisition.

Mr Price paid for Studio 88 using existing cash resources, so one would expect to see a jump in HEPS because earnings have been bought for cash rather than shares. Instead, we see HEPS down by 9.3%. That’s a really poor outcome.

Reasons for this range from load shedding through to a highly promotional environment that hit gross margin. Mr Price also notes that Studio 88’s revenue is seasonal and weighted more towards H2. Another important point is that Studio 88 is a lower margin business than the rest of the group, contributing to a drop of 170 basis points in gross margin. If we exclude Studio 88, we see gross margin down 100 basis points for this period. It was a tale of two quarters, down 350 basis points in Q1 and up 190 basis points in Q2 as excess inventory was cleared.

Perhaps the gross margin trend is what the market liked about these results, as I can’t see much else to like. The fact that expenses excluding Studio 88 grew by 6.1% certainly doesn’t help.

Perhaps the market took some heart from the Apparel segment growing retail sales by 5.1% excluding Studio 88, although comparable sales only grew 0.5%, so that’s really clutching at straws. The Homeware segment saw sales drop 1% and comparable retail sales fall 5.5%, with the only real highlight being Yuppiechef with double digit growth because that business has strong market positioning. The rest of the players in this market are a dime a dozen, with ever-increasing levels of competition.

Another headwind is that Mr Price funded the deal using existing cash, so the net finance expense is up 88.3% to R336 million.

And on top of all this, there are huge issues at the ports that are likely to cause supply challenges over the festive season.

Despite all this, the market decided to put 10% on the Mr Price share price in morning trade. I’ve learnt enough hard lessons in the market not to ignore the price action. I just for the life of me cannot see the good news story here.


This year at Spar was not Good For You (JSE: SPP)

Hopefully, the worst is now behind them

Spar has released a trading statement for the year ended September 2023. Operating profit has fallen sharply from R3.4 billion to between R1.6 billion and R2.0 billion. Based on that, it’s little surprise that HEPS is down by between -53% and -43%. That’s an expected range of 545.4 cents to 661.5 cents, with the share price at R113 in morning trade.

Aside from the obvious competitive challenges and the state of the South African consumer, there was a disastrous SAP project at the KZN distribution centre. Spar reckons this had an impact of R720 million in lost profits.

Earnings per share is down by between -86% and -76%, with the bigger hit vs. HEPS coming from various impairments, including in the international operations.

And in addition to the operating profit pressures, there was an increase of R433 million in net finance costs due to higher interest rates. The group highlights that financiers are supportive of the group and have agreed to amendments to banking covenants.

When a company makes a comment like this, you know it’s been rough: “At this stage, the Group does not intend to raise any capital from Shareholders.”


Trematon is returning capital to shareholders (JSE: TMT)

The company is frustrated with the realities of being listed

Trematon makes it quite clear in its results for the year ended August that structural issues in the local market mean that investors in JSE-listed investment holding companies will find it difficult to exit at full value. In other words, the discount to intrinsic net asset value (NAV) is an unavoidable problem.

There’s a strong element of truth in this, although most investment holding companies on the JSE have brought these problems upon themselves with high management fees and mediocre performance. Trematon wants to get to the point where all the portfolio companies are self-funding, at which point the annuity income will either improve the market rating or the company will look at other ways to return value to shareholders.

Trematon’s intrinsic NAV is 439 cents and the share price is R3.00. I’ve seen far worse in the way of discounts on the local market. Generation Education and Aria Property Group make up 63% of the group’s intrinsic NAV.

For those interested in the Generation business, operating profit increased from R9.5 million to R17.1 million and the group has acquired a new school in Modderfontein, Gauteng. Despite this, the value of Generation in the intrinsic NAV has fallen based on a more conservative approach to revenue forecasts in the discounted cash flow model.

Unfortunately, much as Trematon may bemoan the structural issues on the JSE, the reality is that intrinsic NAV has fallen from 487 cents to 439 cents. It’s tough out there and investors know it. Here’s the breakdown:

In an effort to try narrow the gap, a capital distribution of 32 cents has been declared, down from 40 cents in the prior year.


Little Bites:

  • Director dealings:
    • The CEO of MTN (JSE: MTN) has bought the dip in a big way, investing R8.8 million in shares in the company. MTN is now back above R100.
    • The CEO of Life Healthcare (JSE: LHC) has bought shares in the company worth R3.5 million.
    • The Mouton family has bought more shares in Curro (JSE: COH), this time to the value of nearly R3 million.
    • A director of a major subsidiary of Woolworths (JSE: WHL) sold shares worth R1.4 million.
    • An associate of a director of Sanlam (JSE: SLM) sold shares worth over R900k.
    • Various directors of Richemont (JSE: CFR) have bought shares worth over R580k.
    • A prescribed officer of Barloworld (JSE: BAW) bought shares worth nearly R500k.
    • An associate of a director has disposed of shares in Wesizwe Platinum (JSE: WEZ) for R132k.
  • Mantengu Mining (JSE: MTU) released a trading statement for the six months to August. It reflects a headline loss per share of between 9.5 cents and 10.5 cents, which is worse than the headline loss of 5 cents per share in the comparable period.
  • There is yet another delay in the publication of the Tongaat (JSE: TON) amended business plan. It’s been pushed out by a week to a publication date of 29 November and a meeting date of 8 December.
  • There’s also an extension for the fulfilment of suspensive conditions for Conduit Capital’s (JSE: CND) disposal of CRIH and CLL. The date has been pushed out to 31 January 2024.

DealMakers AFRICA: Analysis Q1 – Q3 2023

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2023 has seen global capital markets dwindle, with higher borrowing costs and lower valuations leading to more frugal investments. For African countries, market size and liquidity have always been an issue, made even more so by the current challenging global conditions. Activity in these markets is few and far between (SA excluded), so the Latin saying, “fortune favours the brave” indeed applies to these three companies – Airtel Africa, Beltone Financial Holding and Oryx Properties – who defied market conditions, announcing an IPO and listing and capital raises respectively, during H2 2023.

Beltone – one of the fastest-growing investment banks in Egypt – successfully completed the issue and listing of 5 billion shares, raising EGP10 billion (c.US$323 million). The capital raise marked the largest in the history of the Egyptian Stock Exchange, with the second round of the rights issue oversubscribed by 5.49 times. Namibia’s largest property fund, Oryx Properties, raised N$312.85 million ($17,2 million) with unit holders subscribing for a total of 26,947,033 (82.4%) linked units. Airtel Africa, a provider of telecoms and mobile money services, undertook an IPO and listing of its Ugandan subsidiary on the USE. While disappointing – as the offer received only a 54.45% subscription rate – the company listed 4,36 billion shares, attracting some 4,600 investors and raising Shs211 billion (c.$56 million).

The JSE, Africa’s largest stock exchange, comparatively has an active ECM market; however, it is not immune to difficulties. In a move to ease the challenges faced by companies seeking to raise capital in South Africa, a new fintech company, Utshalo has just been launched to address the challenge.

The African M&A environment has faced similar challenges, such as economic and political instability, market fragmentation and limited availability of target companies, currency and exchange rate risks, and infrastructure constraints. The value of deal activity, as captured by DealMakers, for the 2023 year to end-September was 49% down, at $7,9 billion off 363 deals, when compared with 2022’s figure of $15 billion (522 deals) over the same period. Deal activity was highest in East Africa (110 deals), more specifically, Kenya (71 deals), followed by Nigeria (62 deals) and Egypt (47 deals).

According to the DealMakers’ private equity analysis, in cumulative terms, the value of deals in Africa (excluding South Africa) was $1,3 billion for the year to end-September 2023, a quarter of that recorded in the same period in 2022 ($4,1 billion) and $1 billion down on the value reported in 2021.

Of the top 10 deals for the period, six involved targets in the energy and resources sector. The largest deal by value remains the acquisition by China Natural Resources of Williams Minerals in Zimbabwe, announced in February 2023, with a deal value of $1,75 billion.

On a positive note, the slow growth in sub-Saharan Africa is expected to rebound in 2024 as tough financial conditions ease, inflation continues to come down, and as the global economy rebounds.

The latest magazine can be accessed as a free-to-read publication at www.dealmakersdigital.co.za.
DealMakers AFRICA is Africa’s corporate finance magazine.
www.dealmakersafrica.com

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

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Exchange-Listed Companies

PPC’s wholly-owned subsidiary PPC International is to dispose of its 51% stake in CIMERWA (Rwanda) for US$42,5 million. CIMERWA, which is listed on the Rwanda Stock Exchange, will be purchased by a privately-owned company, National Cement Holdings, which is part of the Devki group, one of the largest manufacturers of clinker and cement in East Africa.

Burstone Group (formerly Investec Property Fund) has, via its newly formed Australian joint venture with Irongate Group, acquired its first industrial property in New South Wales, Australia for A$57,25 million. The Irongate joint venture will provide the 20% co-investment equity, alongside APAC-focused private equity real estate investment group Phoenix Property Investors (80%), and the fund management capabilities for the deal.

Delta Property Fund has entered into an agreement with Slip Knot Investments to dispose of a property at the corner of CJ Langenhoven Drive and Cape Road in Gqeberha for R33 million. The disposal is part of Delta’s ongoing strategy to dispose of non-strategic assets. The proceeds will be used to reduce debt and the Loan to Value (LTV) by 0.2% from 61.4%.

Unlisted Companies

Payments24, a South African global payments platform provider specialising in payment and loyalty solutions in the digital and fuel payment ecosystem, has invested in Inergy 24, a Swiss-headquartered European-based technology service provider. The two businesses collectively will provide customers throughout Europe access to the Pay24 platform including fleet management, loyalty and rewards, mobile, retail and electric vehicle payments and Cloud Switch solutions.

24 Bit Games, a Unity focused technical game development studio based in Johannesburg, has been acquired by Annapurna, an American video game publisher and developer. The companies have worked together for many years and this next chapter will enable 24 Bit Games to grow its development team and existing technology toolkits for its client base and future projects.

Kgodiso Development Fund, an independent fund founded by PepsiCo South Africa, has invested into agri-tech digital platform Khula! The platform enables small and medium-sized agricultural enterprises, commercial farmers and distributors to participate in the agricultural value chain. The undisclosed investment will be used by Khula! to develop innovative ways to sustainably finance emerging farmers.

The asset management firm Anchor Capital is to merge with London-based boutique wealth manager Credo. The combined entity will have assets under management of R230 billion with Anchor shareholders owning 80% of the combined entity.

Springs Car Wholesalers (SCW Group) has acquired the SANI Car Rental brand and will operate as franchisees under the brand in South Africa and Namibia. Financial details were undisclosed.

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

Weekly corporate finance activity by SA exchange-listed companies

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Sirius Real Estate has undertaken a non-pre-emptive placing of new ordinary shares to raise gross proceeds of £146,6 million. The company issued 170,417,384 new shares at an offer price of 86 pence, representing a discount of c. 5.9% to the closing price on 17 November 2023. The capital raise will provide the company with the flexibility to pursue attractive acquisition opportunities which, it says, exist in Germany and the UK.

African Rainbow Capital Investments will undertake, a fully committed and underwritten, pro rata non-renounceable Rights Offer of R750 million. The company will offer 150 million ordinary shares at R5.00 per rights offer share in the ratio of 11.06579 rights offer shares for every 100 existing ordinary shares held. The rights offer price represents a 7.3% discount to the 30-day VWAP price as at 10 November 2023. The funds raised will be used to meet the medium-term funding requirements of the ARC Fund. Shareholders holding an aggregate 65% stake in ARC Investments have committed to subscribe with the balance of the offer fully underwritten by ARC.

The results of Sable Exploration and Mining’s Rights Offer, which was first announced in February, was all but ignored by shareholders with an uptake of just 1.38% of the rights shares offered. Fortunately, the capital raise was fully underwritten by various parties with the company raising the R52,2 million sought.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 13 – 17 November 2023, a further 5,793,624 Prosus shares were repurchased for an aggregate €174,97 million and a further 429,582 Naspers shares for a total consideration of R1,44 billion.

Following the announcement in October of its share buy-back programme, AB InBev has repurchased 1,570,232 shares at an average price of €56.26 per share for an aggregate €88,34 million. The shares were repurchased in the period 13 to 23 November 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 9,470,000 shares for a total consideration of £43,62 million.

WG Wearne will have its listing removed from the JSE from the commencement of business on 28 November 2023. The company’s listing was suspended in July 2018 for failure to submit its provisional report. Since its suspension, WG Wearne has failed to remedy the various non-compliances and did not appeal the removal decision by the JSE.

Steinhoff Investments, subject to shareholder approval, is proposing to change the company’s name to Ibex Investment Holdings to align with similar changes implemented through its holding structure. The company will remain listed in the ‘Preference Shares’ subsector of the main board of the JSE.

Four companies issued profit warnings this week: Stefanutti Stocks, Deneb Investments, The Spar Group and Mantengu Mining.

Three companies issued or withdrew a cautionary notice: Salungano, Telkom and Tongaat Hulett.

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

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

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DealMakers AFRICA

Nigerian Breweries has issued a circular to shareholders to approve the acquisition of an 80% stake in Distell Wines and Spirits Nigeria and 100% of Heineken Beverages (Holdings) import business in Nigeria for ₦7,01 billion. The deal follows the successful acquisition by Heineken of South Africa’s Distell Group.

Oriole Resources and Ghana-based BCM International have entered into two heads of terms (HoT) agreements to fast-track the development of the Bibemi and Mbe gold projects in Cameroon. The HoT for Bibemi is an earn-in of up to 50% by BCM for a US$500,000 cash payment and $4 million exploration expenditure, whilst the Mbe HoT is an earn-in of 50% for a cash payment of $1 million and $4 million exploration expenditure.

Ed Partners Africa, a Kenyan non-banking financial institution, has received commitment for a US$10 million loan guarantee facility from the United States’ Development Finance Corporation (DFC).

Nigerian online grocery store, Pricepally, has raised US$1,3 million in seed funding from Samurai Incubate, SOSV, ELEA, Hi2 Global, Chui Ventures and David Mureithi to expand within Nigeria.

Aquarech, a Kenyan fish farming startup founded in 2019, has raised US$1,7 million in equity funding to support small-scale farmers through its mobile app platform. Aqua-Spark led the investment and was joined by Acumen, Katapult and Mercy Corps ventures.

Nigerian fintech, FrontEdge, has raised US$10 million in a debt and equity round led by TLG Capital, which also included Flexport. FrontEdge provides SME exporters and importers with the working capital and software tools needed to facilitate their cross-border and international transactions.

Morocco’s B2B e-commerce and fintech startup Chari, has announced an undisclosed investment from Mohammed IV Polytechnic University’s investment fund, UM6P. This is the fourth investment announcement this year. In February, Orange Ventures invested US$1 million. In May, Plug and Play made an undisclosed follow-on investment and in June, Verod-Kepple Africa Ventures invested $1,5 million.

MMG Africa Ventures (Hong-Kong listed MMG Limited) has reached agreement with Cupric Canyon Capital, The Ferreira Family Trust, Resources Capital Fund VII and the Missouri Local Government Employees’ Retirement System to acquires all their shares in the target company that indirectly wholly owns the Khoemacau copper and silver mine in Botswana, for US$1,9 billion.

Egyptian sports equipment and apparel marketplace, WayUp Sports has raised an undisclosed seed round led by Beltone Venture Capital and Index Sports Fund. Other strategic angel investors also participated.

Africa Healthcare Network has raised US$20 million in debt and equity funding from Africa50, AfricInvest and Ohara Pharmaceuticals Co to accelerate its growth.

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

The rise of Artificial Intelligence in corporate finance: deciphering value, navigating risk

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In a rapidly evolving digital world, corporate finance is witnessing the dawn of a transformative era, with artificial intelligence (AI) at the helm. No longer are decisions exclusively grounded in Excel analyses and instinct. Today, AI offers a fresh lens, redefining how we pinpoint corporate finance transactions and assess them within the context of shifting economic and geopolitical landscapes.

A Testimony to AI’s Growing Role

A recent EY study of 1,200 CEOs unveiled some interesting trends. CEOs overwhelmingly (65%) view AI as a force for good, attributing its potential to both enhance business efficiency and foster societal improvements, such as healthcare advancements. More than a quarter (27%) of respondents are already harnessing the power of AI in their mergers and acquisitions (M&A) processes.

However, this optimism is tempered by concerns. The majority of CEOs believe that more work is needed to mitigate the social, ethical and criminal challenges that AI might introduce, from cyber threats to the spread of deepfakes. Yet, despite these apprehensions, business leaders remain positive.

Ask the Right Questions: The Art of Prompt Engineering – The better the question, the better the answer, the better the world works.

While AI’s prowess in data analysis is widely celebrated, the essence of obtaining actionable insights lies in asking the right questions. This is where prompt engineering, our ability to articulate the question in a manner that is understandable to the AI model, becomes invaluable. By finely tuning our queries and prompts, we can guide AI systems to extract precise, valuable insights from heaps of data.

From Vast Data to Valuable Insights: AI in Action

The real-world applications of AI, particularly when paired with adept prompt engineering, are vast. Machine learning algorithms and natural language processing enable rapid identification of investment opportunities, risk assessments and market trend analysis.

Target Identification
Consider an investment bank using AI to screen global news and financial reports. By engineering the right prompts, the system can not only flag potential merger candidates, but also assess how these targets align with larger strategic goals or macroeconomic indicators. Refinitiv, a global provider of financial market data, has developed a quantitative prediction of M&A targets by analysing text, patent and fundamental content.

AI can also be used to evaluate the cultural compatibility of merging entities. Salesforce’s acquisition of Slack is a great instance of aligning culture and product offerings. Tools like CultureX, an AI platform backed by MIT, provides insights into company culture using employee reviews on platforms like Glassdoor.

Due Diligence and Valuation
AI expedites and enhances due diligence processes by rapidly analysing data sets, ensuring comprehensive risk identifi-cation and offering dynamic, real-time valuations of target companies. Tradition-ally, transaction professionals grappled with vast amounts of siloed data manually. EY’s “Diligence Edge”, powered by AI, is revolutionising this approach. By harnes-sing the capabilities of IBM Watson’s Knowledge Studio and Discovery, EY Diligence Edge offers a panoramic view of target companies and their competitors.

The AI-driven “smart data room”, within and powered by Watson, streamlines data ingestion and analysis, allowing profes-sionals to swiftly identify and analyse pertinent information. The final layer of this tech stack is its presentation capabilities, which allow findings to be showcased in intuitive, interactive dashboards.

Predictive Analytics and Financial Modelling
AI models optimise capital allocation by predicting high-return investments and forecasting market trends, guiding financial decisions. BlackRock leverages Aladdin, an AI system, to analyse risks and make investment decisions. The platform provides an end-to-end picture of portfolios, assisting in capital allocation.

Real-time Monitoring

AI continuously monitors stock markets and other financial indicators, alerting businesses to potential acquisition targets or market shifts that align with predefined criteria. Goldman Sachs uses its Marcus platform, which incorporates AI, to continually monitor financial markets and offer real-time insights. Such platforms can be tailored to identify potential M&A targets based on predefined criteria and real-time market dynamics. Cisco, when it acquires companies, uses AI and machine learning tools to help integrate the acquired company’s products, technology and team, ensuring a smooth transition.

Regulatory & Contractual Oversight
AI tools ensure compliance with evolving international business laws during cross-border M&A deals, and assist in analysing contracts for potential risks and obligations. EY uses Kira, an AI-powered contract analysis tool, to assist in identifying and extracting regulatory clauses and requirements from legal documents.

Risks to Consider: The Other Side of the AI Coin

The marriage of AI and prompt engineering in corporate finance promises efficiency, precision, depth of insight, and evolving accuracy. But as with all powerful tools, it must be wielded with care, understanding both its potential and its pitfalls.

As promising as AI is in reshaping corpor-ate finance, it is not without its challenges:

Data Quality
AI models are only as good as the data fed into them. Inaccurate or biased data can lead to flawed insights, potentially causing significant financial repercussions.

Over-reliance
An over-dependence on AI without human oversight can be risky. It is essential to strike a balance between automated insights and human judgement.

Security Concerns
AI systems, like any digital platform, can be vulnerable to cyberattacks. Ensuring robust cybersecurity measures is paramount.

Ethical Implications
From data privacy issues to the potential biases in AI algorithms, there are several ethical considerations to be addressed.

Regulatory Challenges
As AI becomes more prevalent, regulatory bodies worldwide are grappling with creating frameworks to govern its use, which could impact its application in corporate finance.

Closing Thoughts

The potential of AI to reshape corporate finance is evident. As the tools become more sophisticated, so does the importance of crafting the right questions. In a domain where strategic decisions have monumental consequences, the synergy of AI and adept prompt engineering can be the much-needed ace up the corporate finance professional’s sleeve.

Brian Vaddan is an Associate Director in the EY Strategy and Transactions Team, focusing on Financial Modelling and Data Analytics.

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

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

Kenya’s path to economic supremacy in Africa

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Since gaining independence in 1963, Kenya has evolved to become a major economic force in East and Central Africa, so much so that it has been compared to Singapore’s extraordinary rise in Asia.

Like Kenya, in the 1960s, Singapore was a nascent state grappling with its newfound independence and the various challenges that it presented. But fast forward to today, and Singapore is a beacon of economic prosperity – its transition from a humble port city to a universally acclaimed financial nucleus is a compelling tale of transformation.

Singapore’s success story, underpinned by strategic positioning, stalwart legislation and a pro-business environment, offers a replicable model for burgeoning economies. It is in this proven blueprint that Kenya – with its robust policies; booming fintech, ICT and renewables sectors; young and capable workforce; and strategic geographic location – can find inspiration, and how it could well become Africa’s own version of Singapore.

FROM GOOD TO GREAT

Kenya’s thriving economic climate is testament to the strength of its 2010 Constitution, effective legislative frameworks and forward-looking regulatory policies – all contributing to a competitive business landscape that propels economic development.

According to the World Bank, Kenya’s economy achieved broad-based growth averaging 4.8% per year between 2015 and 2019, significantly reducing poverty from 36.5% in 2005 to 27.2% in 2019.

Real GDP is anticipated to rise to 5% in 2023 and 5.2% on average in 2024 and 2025. Moreover, the World Bank’s Ease of Doing Business index placed Kenya 56th out of 190 economies in 2020, a substantial climb from its 113th rank in 2013.

That said, there is room for improvement.

98% of all Kenyan businesses are small and medium enterprises (SMEs). Given that these SMEs provide livelihoods for the majority of Kenya’s working populace, any policy modification bolstering this sector’s growth promises profound economic dividends. For example, adjusting antitrust and competition regulations by tweaking the thresholds for compulsory reporting or approvals could reduce investment barriers and benefit smaller ventures.

The pursuit of inclusive growth is also key. While the country’s constitution advocates fairness and inclusivity, corruption is an issue. Transparency International’s 2022 Corruption Perceptions Index ranks Kenya at 123 out of 180 countries, which highlights the need to rein in corruption.

Kenya must also scrutinise its constitutional expenses. A rationalised approach to expenditure would contribute to fiscal prudence and further solidify the country’s economic health.

An evaluation of Kenya’s existing legal framework reveals the need to revise and update certain laws. By doing so, inconsistencies that pose potential hurdles to investors can be mitigated. This would involve investing in capacity building for legal and regulatory bodies. Strengthening these institutions is a key step towards ensuring the uniform resolution of complex legal issues and fostering consistency in decision-making. In addition, there is a real opportunity for Kenya to further the development of an independent and competent judiciary.

Although already on the path to digitise government services and registries, a sharp focus on completing the digitisation of lands and business related registries will increase efficiencies.

The role of public-private partnerships (PPPs) in infrastructure development is also pivotal. To reap the full benefits of PPPs, however, Kenya should revisit the current legal framework governing these partnerships. Simplifying processes and enabling swift project implementation would make PPPs more attractive, fuelling infrastructure growth.

On the human side, investment in education and vocational training is key. Kenya’s public universities need to offer modern and fit-for-purpose curricula. Vocational training in sectors such as healthcare, tourism and manufacturing will make the human capital in Kenya even more competitive, and attract more investment into the country.

Finally, a significant aspect of Kenya’s path forward involves reforming its complex and aggressive tax laws. A clear and equitable tax structure would expand the tax net, foster a conducive business environment, and amplify Kenya’s appeal to local and foreign investors.

LOOKING FORWARD

Kenya has positioned itself at the forefront of green growth in Africa. 93% of the country’s electricity generation capacity in 2020 hinged on renewable energy. However, like other developing nations, the financing of green initiatives presents a challenge that needs to be confronted.

Kenya’s blossoming technology industry also requires a supportive legislative environment. An astute ‘light-touch’ regulatory approach would enable industry growth while ensuring regulatory compliance.

The African Continental Free Trade Area (AfCFTA) offers the prospect of pan-African economic integration. To capitalise on this opportunity, Kenya needs to harmonise its national legislation with AfCFTA provisions. With approximately 40% of the East African Community’s GDP credited to it, as well as its experience fostering regional integration within the East African Community, Kenya is well positioned to shepherd the AfCFTA agenda.

Kenya’s quest for success hinges on steadfast action and unwavering commitment to economic competitiveness, inclusive growth, sustainability and regional integration. The challenges are daunting, but not insurmountable. The Government has demonstrated a readiness to confront these hurdles head-on, laying a robust foundation for the country’s future.

The road ahead for Kenya is illuminated with promise. With sustained efforts and strategic interventions, Kenya’s vision of replicating Singapore’s success story on African soil is within reach.

Paras Shah is the Managing Partner | Bowmans Kenya

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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