Friday, July 18, 2025
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GHOST BITES (African Rainbow Capital | Boxer – Pick n Pay | Labat Africa | Nedbank | Renergen | Sabvest | South32 | Thungela)

The Finance Ghost
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GHOST BITES (African Rainbow Capital | Boxer – Pick n Pay | Labat Africa | Nedbank | Renergen | Sabvest | South32 | Thungela)

African Rainbow Capital gives a portfolio update – and Tyme still looks exciting (JSE: AIL)

As for problem child Kropz, they are still putting in more money

African Rainbow Capital has released an update on the performance of the portfolio and the capital allocation activities in the three months to September. This was obviously a far more bullish period than before, with GNU-inspired improvements to sentiment and interest rates starting to come down.

The announcement is generally big on narrative and low on numbers. For example, rain is described as having continued growth and momentum, along with growth in mobile customers. Bluespec is meeting the demanding budgets set for the business, with Weelee noted as a highlight. At Upstream Group, which operates in the debt recovery industry, EBITDA is up 13% overall but there are major differences in performance across the various units of that business, giving them an opportunity to invest in the stuff that is working. The agri portfolio is in line with projections, although they note challenges there based on costs and logistics.

The one I haven’t mentioned yet in the diversified investments portfolio is Kropz Plc, where production at Elandsfontein was slowed to reduce costs and modify the process. They hope for production efficiencies going forwards as a result. This business has been a headache, with ARC putting in R140 million during the quarter and another R270 million since September. Good money after bad? Hopefully not.

Moving on to the financial services portfolio and dealing with Tyme Group as the most important and exciting part, they now have 14.4 million customers! 10 million are in South Africa and 4.4 million are in GoTymeBank. TymeBank in South Africa achieved sustainable profitability in September and GoTymeBank is on track. They have acquired Savii, a Philippine payroll lender, with integration underway. There’s a new CEO in the local business to keep supporting growth and Tyme Group is now pursuing a Series D capital raise. A listing of Tyme cannot be far away. I just hope it will be on the JSE!

Ooba is enjoying a jump in home loan applications thanks to lower interest rates, with “bond production” in October up 18.7% year-on-year! Crossfin is showing solid growth, with the major milestone this quarter having been the sale of Adumo to Lesaka Technologies for R1.6 billion. This gave ARC a shareholding in Lesaka.

And finally, Capital Legacy has been boosted by the deal with Sanlam that saw Sanlam Trust become part of the Capital Legacy group in exchange for a 26% stake for Sanlam.

Overall, things are firmly on the up and African Rainbow Capital’s share price has enjoyed a return this year of 57%!

The Boxer listing has truly been a success (JSE: BOX | JSE: PIK)

The price didn’t need to be stabilised in the end and another R500 million has been raised

The Boxer share price has traded consistently above the IPO price since listing, so the bank that was appointed as stabilisation manager thankfully didn’t need to undertake any stabilisation activities to settle the market. They are confident that this situation won’t change, so they’ve agreed that no stabilisation activities will be possible going forward.

The stabilisation manage has exercised the overallotment option, which means Boxer has issued another R500 million worth of shares for the stabilisation manager to close out its short position. This takes the final size of the offer to R8.5 billion and it means that Pick n Pay holds 65.6% in Boxer. It’s going to be really interesting to track the performance of both companies going forwards!

Labat Africa has lost a ton of money (JSE: LAB)

It might be a going concern, but it’s also an ongoing concern

Labat Africa finally released results for the year to May 2023. That isn’t a typo – they have been terribly behind on their financial reporting. Despite revenue having more than doubled to nearly R50 million, they still managed a headline loss per share of 7.14 cents – similar to the previous year. I must note that the comparative period was only nine months rather than twelve, so this would’ve affected the revenue growth.

The net asset value per share fell all the way down from 15.4 cents to 1.58 cents. To add to this, they had operational cash flow challenges based on disputes with SARS. We will need to wait for the 2024 financials to see what the current position looks like.

Single-digit growth at Nedbank (JSE: NED)

The share price has certainly done far more than that this year

Despite the decreasing interest rates and what this will likely mean for banking margins going forwards, the market has been celebrating renewed confidence in South Africa with an excellent rally in Nedbank. The share price is up 42% this year, finally breaking out of the channel it was stuck in for a long time:

A pre-close update now gives us an updated view of the underlying business performance for the ten months to October.

Household credit growth was just 3.2%, which Nedbank reckons is the bottom of the cycle as interest rates have now started to ease and demand for credit should pick up. Corporate credit growth was up 5.6%, with hopes for this to increase in 2025 as business confidence improves.

Headline earnings growth is above mid-single digits, driven by lower impairments and strong growth in non-interest revenue (NIR), with the net interest income (NII) growth as a drag. Although they expect an improvement in NII in 2025, they will need decent growth in the book to offset the lower margins that are the inevitable outcome of decreasing interest rates.

The credit loss ratio is down year-on-year and is now within the top half of the approved through-the-cycle range of 60 to 100 basis points.

The cost-to-income ratio has unfortunately increased, so operating margins went the wrong way. This is why HEPS growth will only be mid-to-upper single digits. Still, that means growth ahead of inflation and that’s a decent outcome! An improvement in return on equity vs. last year is also good news for the share price.

Renergen released a short story on SENS, not just an announcement (JSE: REN)

And it all deals with the “implied threat to mineral rights”

If you’ve been following Renergen, you’ll know that they are currently having a large fight with a solar company that is busy developing a project on land where Renergen has a petroleum production right. There are a bunch of technical arguments here, with the solar company even appealing Renergen’s right to helium! Renergen’s argument is that helium cannot be separated from petroleum underground prior to extraction, so that is a moot argument as they have the petroleum right.

The timing of this is extremely inconvenient for Renergen, which I’m sure is no accident in terms of the solar company’s strategy. Renergen is looking to raise capital in the US and any question marks around the fundamental legal rights of the business make that very difficult.

Renergen has released a very long SENS announcement setting out the alleged behaviour of the solar group and the lack of meaningful engagement, along with the impact for the broader mining industry if construction is condoned by the DMRE without consent from existing mineral and petroleum right holders. Renergen is looking for an ability to co-exist with the solar group, provided their access to the known gas-bearing fault lines is protected.

It certainly doesn’t sound like an outrageous expectation from Renergen. With the share price down 48% this year, they really can’t afford any nonsense around their legal rights.

Sabvest takes broader exposure in moulded plastic products (JSE: SBP)

This is an example of how broad the portfolio is

Sabvest Capital is one of the more interesting investment holding companies on the JSE, with a broad portfolio of unlisted assets that investors cannot otherwise gain access to. This is how investment holding companies should work, as there’s really no point in a listed company having large stakes in other listed companies.

The latest news in the portfolio is that Sabvest is swapping its 47.5% holding in a company called Flexo line Products for a 23.75% stake in Amicus Investments. Flexo is the largest manufacturer of high quality injection moulded plastic products for the food industry. Amicus is a holding company for business operating in this space, so they are piecing together complementary businesses here in the hope of creating value.

It’s far too small a deal in the Sabvest context to require detailed disclosure, so we have no sense of numbers here.

South32 is being impacted by civil unrest in Mozambique (JSE: S32)

Production guidance for Mozal Aluminium has been withdrawn

South32 has released an announcement based on escalating civil unrest in Mozambique. The issue is road blockages, which are making it difficult to transport raw materials to Mozal Aluminium.

Given the uncertainty around the issue, the group has withdrawn guidance for Mozal Aluminium. There have thankfully been no security incidents at the facility thus far, so this is purely a logistics problem at the moment.

A far more bullish narrative at Thungela around production (JSE: TGA)

They even have nice things to say about Transnet!

If this Thungela update is anything to go by, then finding a lump of coal under the Christmas tree might not be so bad this year – especially if it takes the form of a share in Thungela! In a pre-close update, they note that full-year export saleable production is expected to exceed guidance in both South Africa and Australia. That’s a big deal!

To add to the cheer, they expect the FOB cost per export tonne to be below the guided range, thanks to higher production and cost efficiencies.

Perhaps the best news of all in this update is that things are getting better at Transnet Freight Rail, admittedly thanks to a lot of support from the coal industry that depends on this infrastructure. On an annualised industry basis, performance has improved from 47Mt in the first half of the year to around 56Mt at the moment.

The production side of the update is clearly positive. As for pricing, although there are factors supporting the coal price, the direction of travel in the past year has been downwards. For example, the Richards Bay Benchmark is down from $121 per tonne to $105.21 per tonne. The Newcastle Benchmark has dropped from $172.79 per tonne to $135.59 per tonne.

The benchmark price isn’t the same as the price that Thungela gets. The big swing there is on the Newcastle Benchmark, where they got 92% of the benchmark price this year vs. an 11% premium last year thanks to fixed price contracts that were part of the acquisition. The current discount is being driven by disappointing demand in Asian markets, so Chinese stimulus would help here.

Another important metric is capital expenditure. Total capital expenditure in South Africa for the year is expected to be R2.7 billion, of which R1 billion is maintenance capex and R1.7 billion in expansionary capex. Both numbers are within range. In the Australian business, maintenance capex of R550 million came in slightly below guidance.

With expected net cash of between R8 billion and R8.5 billion by the end of December and this positive outlook, things are on track for the dividend policy of distributing at least 30% of adjusted operating free cash flow to shareholders.

Nibbles:

  • Director dealings:
    • Ready to feel poor? After exercising options in the stock, a director of Naspers (JSE: NPN) sold shares worth R187 million!
    • The Chief Customer Officer of Powerfleet (JSE: PWR) sold shares worth a meaty $1.84 million. This works out to over 80% of the executive’s total position in the stock, so this is a major sale.
    • The CEO of Lewis (JSE: LEW) sold shares worth around R6.4 million. Given the focus on buybacks over the years, seeing the top executive selling into the market is an important signal.
    • Two directors of DRA Global (JSE: DRA) have bought shares worth roughly A$180k in total. This an Australian company, hence the reference to Australian dollars.
    • The outgoing CFO of AfroCentric (JSE: ACT) has sold shares worth R660k.
    • A director of MTN (JSE: MTN) has sold shares worth R632k.
  • Astoria Investments (JSE: ARA) has renewed the cautionary announcement regarding the potential sale of the 49% stake in ISA Carstens. An indicative non-binding offer has been received and negotiations are ongoing.
  • The scheme of arrangement for the deal that will see Capital & Regional (JSE: CRP) merge with NewRiver REIT has become effective. Capital & Regional will now delist and local investors in Growthpoint (JSE: GRT) will have indirect exposure to the merged portfolio.
  • Marshall Monteagle (JSE: MMP) has very little liquidity, so it only gets a mention down here. A trading statement for the six months to September reflects a jump in HEPS from 2.2 US cents to 6.2 US cents. They attribute this mainly to higher profits in the trading and property operations. They also note disposals of investments, although this would normally not fall into HEPS.
  • Super Group (JSE: SPG) announced that S&P Global Ratings has affirmed the company’s credit ratings. Given some of the recent changes at the company, ranging from disappointing performance in Europe through to the positive news of the deal in Australia, this is useful.
  • It never rains but pours in the platinum industry, with Wesizwe Platinum (JSE: WEZ) announcing a potential cybersecurity breach. Systems have been shut down and experts have been brought in to investigate the breach and recovery solutions. At this stage, there’s no indication of how severe the breach has been or whether there could be financial impacts (beyond the costs of expensive experts).
  • Sable Exploration and Mining (JSE: SXM) announced that the board has received a demand from holders of 10.74% of the company’s issued share capital to call a shareholders meeting. They are considering the demand and will update the market accordingly.

GHOST BITES (Italtile | Nictus | Sibanye-Stillwater | Transaction Capital)

The Finance Ghost
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GHOST BITES (Italtile | Nictus | Sibanye-Stillwater | Transaction Capital)

The Italtile share price momentum is beyond me (JSE: ITE)

The market is definitely applying rose-tinted glasses here

On paper, Italtile is well positioned to benefit from improved trading conditions and sentiment in South Africa. Decreasing interest rates will help with disposable income and the generally improved mood in the aftermath of the elections will help with the confidence needed to take that income and use it on home improvements. The disappearance of load shedding also plays a major role here. These are all the reasons why I’m sitting with a long Cashbuild position, as that business has many of the same underlying drivers.

The market has latched onto these concepts, giving the Italtile share price a massive boost since the election:

So, what’s the problem? Well, here’s the first clue: in the five director dealings announcements since the start of October, every single one has been an update of directors selling shares. They are selling into this strength that everyone else seems to be buying, which is a red flag for investors.

Is there a good reason for this selling? There absolutely is, with Italtile having told the market several times that the manufacturing side of the business is facing a substantial problem of over-capacity in the local industry. This is exactly why I hold Cashbuild instead of Italtile, as Cashbuild doesn’t have a manufacturing business.

In a voluntary sales update covering 1 July 2024 to 30 November 2024, Italtile has noted system-wide retail turnover growth of 2.2%. That’s not exactly exciting, but at least it’s green. The real benefits of lower interest rates and the two-pot system will take time to filter through to consumers.

As for the manufacturing business, revenue fell by 1.6%. This comes after a decline of 5.9% in the base period. You can be sure that costs aren’t decreasing, so you can imagine what this means for margins. They are talking about “predatory pricing” in the market, which isn’t good.

Results for the six months to December will be published by March. I really wouldn’t be surprised to see more director selling before then.

Nictus has had a year to remember (JSE: NCS)

Profits are nearly 4x higher than last year!

With a market cap of around R70 million, Nictus is really tiny by listed company standards. The market cap used to be even smaller if you can believe it, with the share price up strongly this year. The starting date for the share price return makes a huge difference which is why I didn’t include a percentage. This is an illiquid stock that can very easily double and then halve again over just a few days!

Illiquidity aside, the trajectory has been upwards. The share price is R1.40 at time of writing and it traded all the way down at 50 cents for most of January this year. Those who somehow navigated the bid-offer spread made solid gains.

These gains have been supported by a huge jump in HEPS for the six months to September from 6.94 cents in the comparable period to 26.51 cents in this period. The cause of this jump was a R14.5 million increase in investment income in the insurance business. Considering that profit before tax for the period came in at R20.2 million vs. R5.1 million in the prior year, you can see that the rest of the business was flat.

Sibanye-Stillwater finds a developer for the Beisa uranium project (JSE: SSW)

They retain exposure through royalties and an indirect shareholding

Sibanye-Stillwater is fighting the good fight against a PGM market that continues to create many sleepless nights for those involved. The company also has frequent examples of bad luck, which certainly don’t help. It therefore makes sense that they are entering into a deal that will see Neo Energy Metals acquire the Beatrix 4 shaft and therefore the Beisa uranium project. This puts the development risk onto Neo Energy’s balance sheet, allowing Sibanye to focus on the rest of its business.

Beatrix 4 was placed on care and maintenance in 2023 based on the declining gold reserves and pressure on uranium prices. With uranium prices having moved higher and enjoying a positive outlook, Neo Energy is swooping in to pay Sibanye R500 million for the shaft. This will be paid 50% in cash and 50% in newly issued shares, giving Sibanye a 40% stake in Neo Energy and thus significant indirect exposure to Beatrix 4.

Sibanye will also be paid royalties based on the spot uranium price, with a maximum of $5.00/lb. For context, the current price is $77/lb and it peaked in 2024 at $106/lb.

It sounds like a great deal for Sibanye then, as the group can enjoy long-term exposure to the asset without having to fund either the development or the rehabilitation and environmental liabilities of Beatrix 4. The parties just need to jump through a few regulatory hoops to get the deal across the line.

Brace yourself for the Transaction Capital results, when they eventually come (JSE: TCP)

They have been delayed due to changes to the disclosure notes related to SA Taxi

Transaction Capital is on the verge of releasing another horrible set of numbers. To give you some idea, the “core loss” – and this is the most favourable view of things after adjusting for discontinued operations and other distortions – will be between R82 million and R102 million for the year to September 2024. The headline loss without any adjustments and including total operations is between R2.18 billion and R2.36 billion!

With Nutun as the main business going forward, the market is going to place a lot of attention on those numbers when they come out. The financials were actually due for release already, but have been delayed due to disclosure changes in the notes for SA Taxi.

Every year in December, there’s a set of numbers somewhere on the market that are very ugly. Will Transaction Capital be the coal under the Christmas tree this year? It seems very possible.

Nibbles:

  • Director dealings:
    • The huge trades by Discovery (JSE: DSY) directors related to their derivative structures continue, with Adrian Gore selling shares worth R105 million and Barry Swartzberg selling shares worth around R195 million. In both cases, these are forced sales as part of the structures rather than sales by choice.
    • A prescribed officer of Gold Fields (JSE: GFI) acquired shares worth R2.1 million. Notably, this is towards the company’s minimum shareholding requirement, so it’s not as bullish a signal as would normally be the case.
  • Vodacom (JSE: VOD) and Remgro (JSE: REM) are keeping their options open just in case something major comes up in the Maziv fibre deal. They are therefore extending the longstop date by just a few weeks at a time, while they navigate the process of trying to get the regulators across the line. The latest extension is to 15 January 2025.
  • The Datatec (JSE: DTC) scrip dividend alternative was a success for the company, although I’m sure the extent of management shareholding in the group played a role here. The cash dividend came to R58.6 million and the company retained R116 million in cash by issuing shares in lieu of a dividend to shareholders who elected that alternative.
  • Oasis Crescent Property Fund (JSE: OAS) announced that holders of 41.1% of units elected to reinvest their distribution and the remaining 58.9% chose to receive cash distribution. I’m not sure if I’m missing a tax trick here, but considering the reinvestment price is the NAV of the units rather than the share price (and the NAV is a lot higher), I’m not sure why people would choose to reinvest.
  • Never heard of Assura plc (JSE: AHR)? Don’t worry, me neither! It popped up on SENS with an announcement of directors buying shares under a matching shares plan (a common incentivisation mechanism in the UK), forcing me to go find out how I somehow missed this company. As it turns out, this is a UK REIT that listed very quietly on the JSE on 21 November as part of a fast-track secondary listing process. It’s a large company, although local liquidity is close to zero.
  • Sable Exploration and Mining (JSE: SXM) planned to transfer certain subsidiaries to James Allan, the previous CEO. This will no longer proceed and the subsidiaries will be deregistered instead.

GHOST BITES (Brait | NEPI Rockcastle | RMB Holdings | Schroder European Real Estate)

The Finance Ghost
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GHOST BITES (Brait | NEPI Rockcastle | RMB Holdings | Schroder European Real Estate)

At Brait, Virgin Active is still on the up and New Look is getting worse (JSE: BAT)

But why is this trading update so hidden?

I’ve learnt the hard way on the market that it’s not a good idea to skip over any announcements, especially based on the trust you place in me each day to bring you Ghost Bites. I therefore looked at the Brait announcement regarding the repurchase of exchangeable bonds, even though it seemed like a pretty generic capital structure announcement at the outset.

Brait is sitting on a lot of cash after the Premier placement. They are therefore looking to reduce the number of exchangeable bonds in issue. In fact, they want to repurchase 17.8% of outstanding bonds, which is a lot! If not enough bonds are tendered by bondholders to reach R400 million, then Brait will declare a special dividend to bondholders of whatever the balance is.

With that out the way, I find it annoying to be honest that the announcement also includes a brief trading update. Yes, I’m glad I saw it, but there was no indication in the heading of the SENS announcement that it was in there. How many shareholders have therefore missed it?

The trading update is that Virgin Active is trading positively since the update to the market on 13 November, so the momentum in the gyms is solid. As for Premier, the interim performance (which was very good) has continued into the second half. Finally, New Look is struggling in the UK, with a 7.9% decrease in fashion retail sales in that market in November and New Look trading in line with the rest of the market.

They are talking about a “significant impact” on profitability of New Look in FY25 “before mitigating actions” – so you can expect New Look to become an even smaller percentage of the Brait NAV than it already is.

This isn’t a great read-through at all for other listed clothing groups that have been having a tough time in the UK recently. The Foschini Group (JSE: TFG) springs to mind.

NEPI Rockcastle acquires another mall in Poland (JSE: NRP)

They property sits in a high-income part of Poland

NEPI Rockcastle has pulled off another deal at this late stage in the year. They are acquiring 100% of Silesia City Center, as well as two companies that provide services for tenants in the property.

The mall is in Katowice in southern Poland, a city that NEPI notes has average spending power that is 35% higher than the national average on a per capita basis. That’s good news for a retail property! It also explains why the occupancy rate is up at 98.4%.

It’s a large deal, with a meaty ticket price of €405 million for the mall and an extra €1.5 million for the services companies. NEPI can fund this deal using the proceeds of the equity raise in October 2024.

They believe that the net operating income for the property and the two companies will stabilise at €32.3 million. The net initial yield for the acquisition is therefore 7.2%. The company that holds the property actually recorded a statutory loss for the 2023 financial year, with no further information on why that might be the case. I would expect debt to be a major contributing factor. It seems as though all the debt attached to the property is being settled as part of the €405 million purchase price.

This is a Category 2 transaction, so NEPI Rockcastle shareholders won’t be asked to vote.

RMB Holdings’ NAV has decreased – and not just because of special dividends (JSE: RMH)

Unlocking the value of the tail of this portfolio won’t be easy

For the longest time now, RMB Holdings (which has absolutely nothing to do with the bank anymore) has been talking about selling off its property exposure and returning the proceeds to shareholders. This tends to take far longer than most people expect, particularly when things aren’t so simple in this portfolio.

For example, one of the negative hits to the net asset value of RMB Holdings was the repurchase of the shares it held in underlying portfolio company Divercity. There aren’t exactly tons of buyers lining up for the stake, so RMB Holdings took a R37 million bath on that disposal.

They have also suffered a R77 million decrease in the carrying value of Atterbury, an asset that has been a bone of contention in the past couple of years. The relationship between RMB Holdings and the Atterbury board hasn’t exactly been smooth sailing, adding to the complexity of turning these investments into cash and then dividends.

For context to these numbers, special dividends during the period came to R428 million. The dividends were obviously the main reason why the net asset value fell from R1.449 billion as at September 2023 to R919 million as at September 2024, but those other factors certainly shouldn’t be ignored.

The net asset value per share excluding cash earmarked for a special dividend is 66 cents and the current share price is 42 cents.

Schroder European Real Estate’s total return is now slightly in the green (JSE: SCD)

The past two years haven’t been pleasant

In the year ended September 2023, Schroder European Real Estate produced a -5.0% total return (i.e. the dividend plus NAV move). Those hoping for a strong recovery have been somewhat disappointed, with a total return of just 0.4% for the year ended September 2024. This means that over two years, shareholders have lost money in nominal terms even before we think about inflation.

The reason for the pressure on the total return is that the net asset value (NAV) per share decreased from 128.2 euro cents as at September 2023 to 122.7 euro cents as at September 2024. The total dividend for the year was 5.92 euro cents.

The decrease in the NAV is thanks to valuation pressure in the first half of the year, with the fund not seeing a meaningful improvement in valuations in the second half despite the decreasing interest rates environment.

Although one would hope that the worst is now behind them, it’s worth noting that the French tax authorities are going ahead with a tax audit with potential exposure of €12.6 million excluding penalties. Although the group hasn’t raised a provision as they believe that it isn’t probable that they will need to pay more taxes, this is a big number. For context, earnings for the year ended September 2024 were €8.2 million!

Given everything that is going on in Europe right now, it just doesn’t feel to me that broad exposure to European property is a smart idea. There are pockets of excellence and some really strong operators out there, but the macro view is dicey.

Nibbles:

  • Director dealings:
    • A member of the Saltzman family sold shares in Dis-Chem (JSE: DCP) worth around R20 million.
    • Acting through Titan Fincap Solutions this time, Dr. Christo Wiese has bought exchangeable bonds in Brait (JSE: BAT) to the value of R6.8 million. The nuance here is that whilst his recent purchases have generally been of the ordinary shares in Brait, this time he’s buying the exchangeable bonds which are different listed instruments.
    • The company secretary of Tiger Brands (JSE: TBS) received shares and sold the whole lot worth R1.8 million.
    • A director of a major subsidiary of PBT Group (JSE: PBG) bought shares worth R1.25 million.
    • A director of a major subsidiary of Stefanutti Stocks (JSE: SSK) purchased shares worth R98k.
  • Capital & Regional (JSE: CRP) announced that the courts have sanctioned the scheme of arrangement for the cash and share offer by NewRiver REIT. This effectively gets the major remaining condition out of the way, with only a formality remaining. This is also important for Growthpoint (JSE: GRT) shareholders, as this deal gives Growthpoint exposure to a much more diversified UK portfolio than before.
  • In case you’re keeping track, the Prosus (JSE: PRX) stake in Tencent is now down to 23.995%. They have been selling down that stake to fund the repurchase of shares, including in Naspers (JSE: NPN) as well.
  • Europa Metals (JSE: EUZ) is currently suspended from trading on the London exchange as they are busy with a potential deal with Viridian Metals Ireland. There’s an odd regulatory loophole here, as the shares are not suspended from trading on the JSE. Either way, they are still working through the conditions precedent that were agreed to in the binding term sheet back in September. They are also in discussion with funding parties regarding the Tynagh project.
  • There’s another change to the Murray & Roberts (JSE: MUR) board of directors. Independent non-executive director Alexandra Muller has resigned. I usually completely ignore changes to independent non-executive directors, but this is relevant given the current state of affairs at the group.

Of ghost ships and giant squid

Dominique Olivier
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Of ghost ships and giant squid

I love a good ghost story – and ghost ships provide some of the best material. Maybe it’s the added mystery that comes from the vastness of the ocean and all that we still don’t know about it. It reminds me a lot of outer space, but within our reach. Who knows what’s really out there except the unfortunate crewmembers who disappear like mist, leaving their ships to sail the seas unmanned?

Most of us associate the idea of a ghost ship with the spectral masts-and-sails image (typically modelled after the Flying Dutchman), but the term actually applies to any ship, boat or other water vessel found adrift. In some instances, that means that the entire crew is deceased but still on board. In other, more mysterious circumstances, a vessel will be found adrift and completely abandoned. Such is the case with the puzzling story of the Mary Celeste.

Mysterious Mary

At about 1 PM on December 4, 1872, the brigantine Dei Gratia came across something strange between the Azores and Portugal. Captain Morehouse was called to the deck and told that the helmsman had spotted a vessel behaving strangely, its course unsteady and its sails oddly set. From almost 10 kilometres away, the sight already suggested something wasn’t right. As the two ships drew closer to each other, it became clear that there were no signs of life aboard the mystery vessel, and attempts to signal her went unanswered. Concerned, Captain Morehouse ordered first mate Oliver Deveau and second mate John Wright to row over and investigate.

The name on the stern confirmed it: this was Mary Celeste, a merchant brigantine that had embarked from New York just eight days before the Dei Gratia itself had set sail. The two ships had received their cargo from the same port, and their captains knew each other. But the ship’s condition presented a puzzle. Her sails were partly set but in poor shape, with some torn and others missing entirely. Rigging dangled in disarray, with ropes trailing over the sides. The main hatch was securely in place, but the fore and lazarette hatches were wide open, their covers lying nearby. Passengers, captain and crew were completely absent, and the ship’s single lifeboat was gone.

Below deck, water about one metre deep sloshed in the hold. While this was not ideal, it was far from catastrophic for a ship of her size, and nowhere near enough to cause her to be in danger of sinking. An improvised sounding rod, which would have been used to measure the amount of water in the hold, lay abandoned on the deck, as if whoever had used it had left in a hurry.

In the mate’s cabin, Deveau found the ship’s log, with its final entry dated nine days earlier, on November 25. At that time, the Mary Celeste had been near Santa Maria Island in the Azores, some 400 nautical miles (about 740 kilometres) away. No issues with either the ship or the crew were noted.

The cabin interiors were damp and untidy from seawater seeping through open doorways and skylights, but otherwise intact. Captain Briggs’ cabin still held personal items, including a sheathed sword under the bed. The ship’s papers and navigational tools, however, were missing. The galley offered more clues. While the equipment had been tidily stowed, there was no food in preparation or evidence of a recent meal, despite the stores being well-stocked with provisions. There were no obvious signs of violence, fire, or any other calamity. Everything suggested the crew had departed in an orderly manner, taking the lifeboat with them. They were never seen or heard from again, and the lifeboat was never retrieved.

Yet the unanswered questions hung heavy: why would an experienced captain abandon a seaworthy vessel with ample supplies? Why were the hatches open, and what was the significance of the sounding rod on the deck? What had happened in the nine days since the last log entry? For Morehouse and his crew, what started as a chance encounter with a drifting ship became one of the most baffling maritime mysteries of all time. And where mystery presented itself, theory soon followed.

Hazard a guess

In the 152 years since the discovery of the Mary Celeste, there have been no real answers to the questions about what happened to her or her crew. There are plenty of guesses though, ranging from the political to the paranormal:

  • Alcohol explosion (or the threat of one): The Mary Celeste was transporting a cargo of 1,701 barrels of alcohol on her last voyage. A common theory is that the barrels of denatured alcohol in the hold released fumes, leading the crew to fear an imminent explosion. Although there was no evidence of fire, the panic might have driven them to abandon the ship hastily in the lifeboat.
  • Piracy: Some suggest the crew might have been victims of piracy or mutiny, though no signs of struggle or violence were found on the vessel and nothing was stolen. The ship’s valuable cargo of alcohol was found intact and untouched.
  • Natural phenomena: Hypotheses include rogue waves or waterspouts, which could have damaged the ship or swept crewmembers overboard. Due to the fact that the ship’s hull was found in perfect condition, this seems unlikely. This theory also doesn’t explain the missing navigational instruments, which would have been safe from the elements in a cabin.
  • Insurance fraud: Some speculate that the abandonment might have been staged to commit insurance fraud, although this remains unproven. While the ship’s cargo was valuable and heavily insured as a result, no insurance claim was ever made. The ship’s owner was also her captain, and he was never heard from again.
  • The paranormal: Supernatural accounts, though less credible, propose the involvement of alien abductions, ghostly forces, and even the Bermuda Triangle (which is in a completely different part of the Atlantic ocean and nowhere near where the Mary Celeste was found).
  • Giant squid: In Chambers’ Journal, dated September 17, 1904, the fate of the Mary Celeste’s crew is attributed to a squid of legendary proportions. The suggestion is that the crew was supposedly picked off, one by one, by an enormous marine predator lurking beneath the waves. The Natural History Museum lends some credibility to the popular maritime monster myth, noting that giant squid (Architeuthis dux) can grow up to 15 meters in length and have been known to lash out at ships. Still, the giant squid makes for an unlikely villain in the Mary Celeste’s story. As maritime historian Begg aptly points out, even if such a creature had managed to snatch a crew member or two, it wouldn’t explain the missing lifeboat, or why a sea monster would run off with the captain’s navigational instruments.

The many modern Mary Celestes

It’s easy to place the Mary Celeste in the past. Her story seems to belong so naturally in an era of wooden ships and navigation by instrument, not app. The world before global positioning seems like the right setting for people to just disappear without a trace.

And yet, a version of the same story is still playing itself out today.

Every year, Japanese shores are met with the haunting arrival of hundreds of derelict vessels. These modern ghost ships are often battered and barely seaworthy. Sometimes they carry the remains of their crew, and other times they are completely abandoned. Their markings identify the vast majority of these ships as North Korean.

The prevailing belief is that these modern ghost ships are a result of North Korean fishermen venturing too far from shore. Squid, a staple of the North Korean diet, is becoming harder and harder to find, due to illegal Chinese fishing activity depleting stocks along the North Korean coast. The Chinese squid fishing fleet in North Korean waters has at times numbered up to 800 vessels and has caused a 70% decline in squid stock in those waters. According to Global Fisheries Watch “This is the largest known case of illegal fishing perpetrated by a single industrial fleet operating in another nation’s waters.”

As a result, North Korean fishermen are travelling further from shore in boats that are old, lacking in powerful modern engines, and usually with no GPS. Without adequate supplies or proper navigational equipment, they may become stranded, succumbing to exposure, starvation, or harsh sea conditions before drifting to the nearest shore. Hence, the ghost ships of the modern age.

While this is undeniably a tragic outcome (and a grim look at the real-life consequences of overfishing and lax regulations at sea), there is a part of me that is tickled by the fact that squid are once again suspected to be the cause for the ghost ship phenomenon. While the squid at the heart of the North Korean story are regular-sized, I wouldn’t be too quick to rule out the giant-sized variety, perhaps waiting for a meal just off the coast of Japan in a game of reverse-sushi.

About the author: Dominique Olivier

Dominique Olivier is the founder of human.writer, where she uses her love of storytelling and ideation to help brands solve problems.

She is a weekly columnist in Ghost Mail and collaborates with The Finance Ghost on Ghost Mail Weekender, a Sunday publication designed to help you be more interesting.

Dominique can be reached on LinkedIn here.

GHOST BITES (Absa | Nampak | Trustco | Vukile Property Fund)

The Finance Ghost
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GHOST BITES (Absa | Nampak | Trustco | Vukile Property Fund)

Absa is heading in the right direction this year at least – but watch that 2025 guidance (JSE: ABG)

The operations in the rest of Africa remain a headache relative to SA

Absa has released a voluntary update for the year ending December 2024. As we saw at sector peer Standard Bank recently, the currency effects in Africa are creating a situation where banks with African operations are having a disappointing year. Absa notes that the exchange rates have been a drag on revenue and earnings of around 3% for this year.

On the whole, 2024 guidance is unchanged, which means Absa expects mid-single digit revenue growth with fairly similar growth seen across the two main sources of revenue: net interest income (NII) and non-interest revenue (NIR).

They expect mid- to high-single digit customer loan and deposit growth for the year. NII has slowed in the second half of the year due to lower growth in retail lending in recent months. Thankfully, NIR is having a stronger finish to the year, leading to the full-year commentary about how they are fairly equal contributors to growth.

The good news is that cost growth has slowed to mid-single digits, so the cost-to-income ratio is expected to be steady at 53.2%. This means low- to mid-single digit growth in pre-provision profit for the group.

With the credit loss ratio expected to improve year-on-year, you can therefore safely assume that Absa will deliver mid-single digit growth in earnings. The dividend payout ratio is expected to stay at 55%, so dividend growth should be in line with earnings.

They expect return on equity (ROE) to be 14% to 15%, which is too wide a range to be very useful. For reference, ROE was 14.4% in 2023.

Looking ahead to 2025, they unfortunately expect only moderate growth in revenue, leading to a negative impact on operating earnings due to expense pressures. That’s pretty weak guidance, particularly as they then give a hopeful view that ROE will somehow jump to 16% in 2026.

A clever B-BBEE deal at Nampak (JSE: NPK)

This is an example of how creativity can be applied in deal

In a world of cut-and-paste B-BBEE deals, it’s great to occasionally see one that does something different. Nampak has certainly ticked that box, partnering with Cambrian Capital Partners to create a private equity fund that will invest in Nampak’s South African business as well as other opportunities.

The founders of Cambrian are Tembinkosi Bonakele (the ex-head of the Competition Commission) and Tembeka Ngcukaitobi, a well-known Senior Counsel who was thrust even further into the limelight when he presented South Africa’s case at the ICJ. Bonakele is the Managing Director of Cambrian and Ngcukaitobi is the Non-Executive Chairman.

Nampak has assisted in incubating the fund, enabling Cambrian to subscribe for shares in Nampak Products. Through an internal financing transaction using preference shares (far superior to the classic structures using bank financing), Cambrian will acquire its stake in Nampak Products at nominal value. This avoids Cambrian starting its life with high levels of debt. Cambrian will hold a 15% interest in Nampak Products, taking Black Ownership in that subsidiary to over 25% (remember there are flow-through rules that reference the listed shareholders in Nampak Limited).

Further to this, Nampak Intermediate Holdings will provide committed capital of R12.5 million over the life of the fund, allowing the management team of Cambrian to participate in other opportunities and diversify their exposure as well.

As limited partner of the fund, the cleverness lies in Nampak actually participating in equity upside through the fund, so the cost of this deal is vastly lower than would be the case in traditional structures.

Trustco has released the circular for the Legal Shield deal (JSE: TTO)

This deal essentially flicks Riskowitz Value Fund up to the top

Back in 2017, Riskowitz Value Fund acquired 20% in Legal Shield Holdings, a key Trustco subsidiary, for a meaty N$1.2 billion. Yes, that’s R1.2 billion! A lot of things then transpired, many of which were painful, leading to Riskowitz Value Fund transferring 8.65% in Legal Shield Holdings to University of Notre Dame as one of the investors in its fund.

This left Riskowitz with an 11.35% stake. Trustco is now acquiring that stake and issuing new Trustco shares to pay for it, which means Riskowitz is swapping exposure in the subsidiary for exposure to the group. This will be paid for by the issuance of 400 million shares at N117 cents per share. Trustco is only trading at 35 cents per share at the moment, so this means that Riskowitz is getting R140 million back at current prices for a stake originally acquired for around R680 million. Ouch.

The nuance is that this will give Riskowitz the largest shareholding in Trustco, so the fund will be perfectly placed for any major transactions that unlock value at some point.

The independent expert has determined the transaction to be unfair, but reasonable. This is based on the expert’s view on what the shares in Trustco are actually worth vs. the heavy discount that they are currently trading at. This deal references illiquid shares in two different companies, which always makes things tricky.

Shareholders will now need to vote on the transaction.

In a separate announcement, Trustco noted that they are still busy with approvals for a share repurchase transaction with a related party. The date for completion has been extended to February 2025.

Vukile’s latest deal in Spain is still on hold (JSE: VKE)

They are still assessing the property for flood damage

If you’ve been following Vukile, you’ll know that the property fund is heavily invested in Spain via its subsidiary Castellana Properties. The country is proving to be a popular investment choice for a few South African property funds, with competition for properties heating up.

The terrible recent floods in Spain threw a proper spanner in the works for one of Vukile’s planned deals though. The proposed acquisition of Bonaire Shopping Centre was delayed to allow the impact of the flood damage to be assessed. If you’ve ever wondered why material adverse change clauses are so important, this is a great example! If something goes terribly wrong during a deal, the buyer needs the right to walk away or delay things.

The latest announcement by Vukile notes that the exclusivity arrangement for the acquisition is in place until the end of January 2025. For now, property damage from the flood is still being assessed before a decision can be made.

Nibbles:

  • Director dealings:
    • A director of a subsidiary of RFG Foods (JSE: RFG) sold shares worth R4 million.
    • If I understand the Sea Harvest (JSE: SHG) announcement correctly, various directors received share awards and only one of them elected to keep the awards to the value of R1.36 million. Most of the directors didn’t retain any shares.
    • Acting through Titan Premier Investments, Dr. Christo Wiese has bought another R524k worth of shares in Brait (JSE: BAT).
    • The CEO of RH Bophelo (JSE: RHB) bought shares worth over R430k.
    • A director of Rainbow Chicken (JSE: RBO) bought shares worth R45k.
  • From my perspective and what I’ve seen on X, people aren’t any closer to understanding the numbers behind the acquisition of Sublime Technologies by Mantengu Mining (JSE: MTU). The deal looks too good to be true, yet here we are, with all conditions fulfilled and the deal now implemented! The company has also been making several drawdowns from the R500 million facility made available by GEM Global Yield, taking the form of share issuances to raise capital.
  • Here’s something you won’t see every day: Crookes Brothers (JSE: CKS) is terminating the appointment of BDO South Africa as it external auditor due to the proposed fees for the next financial year “exceeding the company’s affordability criteria” – they will now look for an auditor that is more affordable.
  • Conduit Capital (JSE: CND) has noted that the potential disposal of CRIH and CLL has been given further room to breathe, with the parties extending the long stop date to March 2025 in the hope that the Prudential Authority may give a positive response. This is after the Financial Services Tribunal agreed to set aside the Prudential Authority’s decision. Having said that, the potential purchaser (TMM Holdings) will only cover CLL’s operating costs until the end of January 2025, so there’s a financial hole coming down the road.
  • Obscure property group Deutsche Konsum (JSE: DKR) has seen its balance sheet improved through a bondholder partially converting EUR37 million worth of bonds into shares. This makes the holder (Versorgungsanstalt des Bundes und der Länder – good luck pronouncing that!) a major shareholder of Deutsche Konsum. More importantly, it takes some pressure off the loan-to-value ratio.

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

Majority shareholder Super Group will need shareholder approval for its proposed disposal of its 53.58% stake in Australian provider of integrated mobility solutions company SG Fleet. Australian private equity firm, Pacific Equity Partners, has announced terms of the acquisition of 100% of SG Fleet by way of a scheme of arrangement for a cash consideration of A$3.50 pr share. The offer price represents a 31% premium to the closing price on 22 November 2024, the date prior to the SENS and ASX announcements. Super Group will dispose of its stake for A$641,4 million (c.R7,53 billion). After settling up to R1,96 billion in SA debt, the remaining proceeds will be returned to shareholders by way of a special distribution of R16.30 per share. The effective date of the proposed transaction is expected to occur in March 2025.

Numeral (formerly Go Life International) is to acquire an effective 51% stake in Longevity Lab for an undisclosed cash sum. Longevity is a biotechnology business specialising in creating and managing wellness clinics and holistic wellness programmes which incorporate nurse and doctor administered stem cell and cellular optimisation medical treatments. The deal is in line with Numeral’s strategy of building a fully vertically integrated biotechnology group.

Aveng Africa (Aveng) has disposed of a 30% stake in Dimopoint to Collins Property Group for R96 million which will be settled in cash. Following the completion of the transaction, Collins will directly hold 100% of the property holding and investment company. The deal will result in the termination of the head lease agreement between Aveng Africa and Dimopoint. The deal is cash accretive and will improve earnings before tax by R82 million.

In a new empowerment transaction announced by Nampak, it will partner with Cambrian Capital Partners who will manage a private equity fund which will seek investments in B-BBEE private equity opportunities. The intra-group transaction will enable the Fund to acquire a 15% stake in Nampak Products at nominal value without the need to raise acquisition funding. Nampak Intermediate Holdings (NIH) will hold the remaining 85%. As the limited partner to the Fund, NIH will provide committed capital of up to R12,5 million over the life of the Fund. The transaction is a category 2 transaction and as such does not require shareholder approval.

The proposed reverse takeover of Kibo Energy by ESTGI AG announced in September 2024 has been terminated. According to the announcement sent out by Kibo, there is insufficient time available to secure all relevant information in a timely manner necessary to complete the takeover particularly given that the company has been suspended for almost six months. Rather, it said, focus would be on publishing outstanding audited accounts to enable the lifting of its suspension on AIM and the JSE.

The R160 million disposal by Transaction Capital of 100% of RC Value Added Services to SA Taxi Holdings (SATH), announced in late September is taking longer than initially anticipated. The Extended Commitment Negotiations Long Stop Date has again been extended, this time to 13 December 2024. Failing a conclusion, the parties may opt to restore their position to that prior to the implementation of the deal.

Mantengu Mining has received Competition Commission approval for its acquisition of Sublime Technologies from Sintex Minerals and Services. Sublime is the only Silicon Carbide producer in Africa and currently accounts for c.2% of the global market share.

Suspensive conditions of Trematon Capital Investments’ disposal of a 60% shareholding in Aria Property Group, a portfolio of 13 properties, have been fulfilled. The cash consideration of R293 million in respect of the disposal is expected to be paid on 2 January 2025.

Unlisted Companies

Etana Energy, a majority black-owned South African energy trading company supplying electricity generated by renewable energy projects to businesses, is to receive US$100 million in default guarantee finance. GuarantCo, part of the Private Infrastructure Development Group and British International Investment, the UK’s development finance institution and impact investor, will each provide $50 million in a deal designed to boost South Africa’s green energy transition. The guarantee facility will enable around 500MW to be added to the grid by several renewable energy (wind and solar) independent power producers over the next few years.

UK growth capital investor Salt Capital has acquired a strategic stake in Pirtek Africa for an undisclosed sum. Established in 1999, the company’s core business revolves around the supply and maintenance of hydraulic and industrial hoses, fittings and related products catering to a wide range of industries. Pirtek Africa owns the master franchise rights to supply and distribute the Pirtek branded fluid transfer solutions offering for the African continent with a presence in eight countries.

As part of the conditions set by National Treasury for Eskom to qualify for its R254 billion debt relief package, Eskom has announced the sale of its home loan company, which is housed in Eskom Finance Company SOC, and its interests in Nqaba Finance 1 (RF). The sale, to African Bank, is expected to conclude by 31 May 2025.

DealMakers is SA’s quarterly 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

Following the results of the scrip dividend election, Redefine Properties will issue 150,180,791 new ordinary shares in the company in lieu of a final cash dividend, resulting in a capitalisation of the distributable retained profits in the company of R668,31 million.

The board of Zeder Investments has approved a further special dividend of 11 cents per share to shareholders amounting to R169,4 million. This follows the dividend received by Zeder from the sale of Novo Fruit Packers by Capespan Agri.

Mantengu Mining has issued and will list, 15,933,813 shares on the JSE in terms of its R500 million drawdown facility announced in April this year.

Shareholders voted in favour of the buyout offer from Sasfin to acquire up to 10% of the company’s shares. With shareholders holding a collective 28,96 million shares representing 90.14% of the shares in issue having provided irrevocable undertakings not to accept the offer, and so remain invested in an unlisted company, Sasfin is expected to delist on 30 December 2024.

EOH will trade under its new name iOCO and JSE share code IOC, with effect from Wednesday 11 December 2024.

The JSE has approved the transfer of the listings of Rex Trueform and African and Overseas Enterprises to the General Segment of Main Board with effect from commencement of trade on 2 December 2024. Crookes Brothers and Sebata followed suit on 4 and 5 December 2024 respectively. The listing requirements in this segment are less onerous for the smaller cap firms.

In its Quarterly Report, suspended Salungano has advised shareholders that it intends to release the FY2024 financial results around 31 March 2025 and the FY2025 interim results shortly thereafter. Given this, the company estimates that its suspension on the JSE will be lifted around mid-April 2025.

This week the following companies repurchased shares:

In October, Anheuser-Busch InBev announced a US$2 billion share buy-back programme to be executed within the next 12 months which will result in the repurchase of c.31,7 million shares. The shares acquired will be kept as treasury shares to fulfil future share delivery commitments under the group’s stock ownership plans. During the period 25 – 29, November 2024, the group repurchased 405,708 shares for €21,04 million.

Hammerson plc continued with its programme to purchase its ordinary shares up to a maximum consideration of £140 million. The sole purpose of the buyback programme is to reduce the company’s share capital. This week the company repurchased 531,166 shares at an average price per share of 292 pence.

South32 announced in its annual financial statements released in August that it would increase its capital management programme by US$200 million, to be returned via an on-market share buy-back. This week 541,992 shares were repurchased at an aggregate cost of A$2,02 million.

In line with its share buyback programme announced in March, British American Tobacco this week repurchased a further 286 020 shares at an average price of £29.67 per share for an aggregate £8,49 million.

In the six months to end September 2024, Prosus and Naspers repurchased 92,689,659 (US$3,3 billion) and 7,037,420 ($1,4 billion) N shares respectively, representing 4% of the outstanding N ordinary shares in issue. During the period 25 – 29, November 2024, a further 2,482,721 Prosus shares were repurchased for an aggregate €94,6 million and a further 207,949 Naspers shares for a total consideration of R1,92 billion.

One company issued a profit warning this week: Labat Africa.

During the week, five companies issued cautionary notices: Conduit Capital, Choppies Enterprises, Super Group, Vukile Property Fund and Transaction Capital.

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

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

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

DealMakers AFRICA

Early-stage investor, Renew Capital has announced its first investment in Tunisia, backing payment gateway firm Konnect. The platform offers payment links, e-commerce plugins and an API designed to cater to all size businesses.

HUB2, a fintech from the Ivory Coast, has raised US$8,5 million in Series A funding. The round was led by TLcom Capital and included FMO, Enza Capital, Bpifrance, Eric Barbier and other investors. HUB2 aims to become the “Stripe for Francophone Africa”. The company currently operates as the backbone for 55 fintechs across Francophone Africa, including Jaulaya, Onafriq, NALA and CinetPay, by providing payment infrastructure to these firms to power their operations.

Moroccan mobility firm, Enakl, has secured US$1,4 million in pre-seed funding from Catalyst Fund, Renew Capital, Digital Africa, Station F and 15 angel investors. The startup provides sustainable, collective transport solutions tailored to emerging markets.

Nama Ventures, A15, Sanabil 500 Global and some angel investors, have back Egyptian logistics startup Nowlun, to the tune of US$1,7 million in seed funding. The online freight forwarding platform will use the funding for its expansion plans and to further develop its platform.

African Export-Import Bank (Afreximbank) is the mandated lead arranger and lead financier of a historic ammonia and urea fertilizer plant in Angola, promoted by the Grupo Opaia. Afreximbank and other financial institutions will provide US$1,4 billion in debt funding. The plant will have a production capacity of 4,000 metric tonnes per day and will create 4,700 jobs (3,500 during construction and 1,200 permanent positions).

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

Contingent Value Rights: Bridging the valuation gap in public M&A

Vuyo Xegwana-Bandezi, Colin du Toit and Mncedisi Mpungose
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Contingent Value Rights: Bridging the valuation gap in public M&A

South Africa is not immune to the global mergers and acquisitions (M&A) valuation gap between the price sellers are willing to accept and that which purchasers are willing to pay. In a stretched financing market and a strained broader global economy, one solution to the valuation gap may lie in implementing a contingent value right (CVR).

The boards of target companies and purchasers have long been divided on the appropriate valuation for a takeover of a target company. The target board seeks to maximise shareholder value and will be reluctant to sell in a downcycle when valuations are low, even if the price is reasonable, given the prevailing economic circumstances. The purchaser’s board, on the other hand, will generally be looking to invest against the cycle or to merge for long-term strategic reasons, and is likely to be looking to do so at a time when the lower valuations favour its proposal or strategy. While the purchaser will likely be viewing the acquisition with a longer-term lens, it will nonetheless be concerned with overpaying in the downcycle, especially if the purchaser’s valuation (and cash flow) is also adversely affected by the cycle. The converse is equally true at the upper end of an upcycle (e.g. tech stocks).

When it comes to M&A, this can lead to a marked difference between the purchaser’s and seller’s price expectations, particularly at the deep end of a downcycle or the peak of an upcycle. Looking at the downside case, certain target boards will reject offers that they believe are too low or opportunistic, while purchaser boards may be reluctant to stretch the offer price or even make an offer in these circumstances. Ultimately, the heart of the disconnect between them is that neither party can be exactly certain where in the cycle they are, or how soon and how sharply the cycle will reverse. Each party risks judging this incorrectly, with potentially significant adverse impacts on their respective financial outcomes. Aside from the numbers, there is also the human psychological factor – since criticism outweighs praise, where there is material uncertainty on the merits of a proposal, the natural bias of both boards (but especially the target board) is towards a ‘safe’, status quo decision, which usually favours saying ‘no’ to the deal, rather than ‘yes’.

While various factors contribute to a widening valuation gap, the volatile political and macroeconomic environment in which we find ourselves is a significant factor. With over ten significant elections worldwide in 2024, as well as international upheaval due to ongoing wars in the Middle East and Ukraine, many deals hinge on the outcome of these uncertain geopolitical events.

The same is true for South Africa, where, aside from an uptick in M&A activity in 2021/2022, there has been a significant slowdown in the post-pandemic years. New listings are one measure of market activity and price confidence, commonly reflecting sell-side activity from private equity or a company positioning itself for acquisitive growth (and the corollary for delistings). South Africa has seen both an increase in delistings and a slowdown in new listings, accelerating in 2023 and 2024. On the political front, since the announcement of a Government of National Unity in June, South Africa has seen an uptick in investor confidence, with the JSE All Share Index returning 5.6% in Rand terms and 8.3% in US dollars, comfortably outperforming the S&P 500, the MSCI World Index, and emerging market peers. Yet, this has since slowed as the initial optimism has been tempered by the inevitable, but no less disappointing, teething issues that have emerged.

Considering these prevailing challenges, purchasers and sellers around the world are seeking different M&A strategies or looking to supplement existing approaches. For purchasers, these may include a strategy centred on direct engagement with key target shareholders in formulating their ‘bear hug’ price – an offer to buy a publicly listed company at a premium to ‘fair value’, or avenues such as CVRs to land on a price that will have clear shareholder support. With wide valuation gaps, more innovative deal structures are also being proposed, including the use of CVRs. A CVR is an instrument that commits purchasers to pay a target company’s shareholders additional consideration for their shares based on a future contingency, in addition to the initial baseline purchase price paid to them (reflecting a conservative valuation). As the triggering contingency can be any event, and the resulting consideration is similarly flexible in both amount and nature, CVRs offer the parties a flexible, highly customisable solution to the unknowns and risks contributing to the relevant valuation gap.

CVRs can generally be categorised as either price protection or event-driven mechanisms. Price protection CVRs can be applied in an exchange offer to guarantee or underpin the value of the purchaser’s shares that are issued as acquisition consideration in the transaction. This underpinning can take a variety of forms, including a top-up issue of shares (much like a payment-in-kind loan note), or a special dividend or series of dividends. Event-driven CVRs entail a commitment to pay additional consideration to the target shareholders, depending on the occurrence of future events. Typical examples include a value linked to future profits, the resolution of a material litigation claim, and profits realised from the on-sale of a specific asset or business of the target. The latter can be particularly relevant where the sell-side considers the asset to be significantly more valuable than the valuation attributed by the purchaser (e.g. a project in development) or where the asset is non-core to the purchaser or not one for which it is willing to pay an acquisition premium. The commonality among these scenarios is that the purchaser pays less upfront (and thus lowers the risk of its buy decision), and the seller exits with a reasonable, though not optimal price, but with an upside case should the factors which it feels justify a higher valuation come to pass (and thus lowers the risks of its decision to sell). Similar mechanisms, including earn-outs and/or deferred payment structures, are a staple of private M&A deals.

In some ways, a price protection CVR is similar to a Material Adverse Change (MAC) clause in an M&A deal, but focused on the purchaser and not the target. An event-driven CVR is the inverse of a MAC, with the triggering event being more focused on the upside rather than the downside. A MAC is a contractual mechanism that allows the purchaser to terminate the acquisition agreement and withdraw from the transaction if, before the deal is closed, a material adverse change occurs – one that has a significant, negative effect on the target’s business, assets or profits. A CVR reflects a similar idea, but instead of being a contractual condition that allows the whole deal to collapse, it enables the deal to proceed, but to be adjusted later, based on the relevant event occurring or not occurring.

A CVR can be structured and offered as a listed instrument tradeable on a securities exchange, or on a privately held basis (transferable or non-transferable). A listed CVR allows shareholders who have differing risk or time-value profiles to hold or exit their CVR to match their respective preferences. The value and price of a CVR at any given time will depend on several factors, such as the probability of the event’s occurrence by the expiration date, the remaining time to maturity (and thus payment), the performance and volatility of an underlying asset, and the risks of default and dispute.

While CVRs have increasingly been applied in mid- and small-cap life sciences and healthcare transactions in the United States, they are presently less common in the public M&A market in Europe. Although there has been a recent uptick in CVR negotiations in these markets, few have yet been implemented. We have not yet observed one being used in public transactions in South Africa.

Price considerations aside, a CVR will often also have to address two key considerations. The first is the risk of a dispute arising over whether the trigger event has occurred, or the extent to which it has occurred, and how such a dispute will be resolved. The second consideration is the degree of alignment (or misalignment or indifference) between the occurrence of the future event and the impact such an event will have on the purchaser. An earn-out style provision, for example, likely has a fair degree of alignment between the parties as it represents a win-win scenario for both. On the other hand, the successful resolution of a tax dispute may have no alignment, or even misalignment, between the parties, especially if the base acquisition price is already factored into the worse-case outcome or if the purchaser’s ongoing relationship with tax authorities is placed at risk. In such instances, the CVR will need to include appropriate terms (such as an all-reasonable endeavours undertaking), or a specific mechanism (such as appointing a neutral party to have carriage of the dispute), to address this.

Not only can a CVR be used to bridge a typical buy/sell valuation gap linked to market cycles, but it can also be used to close a deal when the valuation itself has a significant inherent uncertainty or complexity. Some examples of this include where the valuation is significantly influenced by:

  • the occurrence and value of an anticipated future disposal;
  • the success of ongoing research and development activities (e.g. a breakthrough medicine at its trial stage);
  • industry-specific events (e.g. regulatory reviews or approvals);
  • impending potential legislative changes or the timing and form of their implementation (e.g. National Health Insurance, emission standards, required rehabilitation provisioning); and
  • unresolved disputes or specific, but difficult to assess or quantify, risks with a wide range of potential outcomes (e.g. class action claims or significant tax disputes).

While, for many market participants, CVRs have mainly been a point of discussion rather than a done deal, increasing examples have been seen through to completion. We believe that a CVR can be an effective alternative mechanism for closing public M&A deals where valuation gaps exist or are dependent on specific, uncertain outcomes. Considering their flexibility, CVRs can be customised to best serve specific requirements of the deal, thereby helping to get more mutually beneficial deals over the line.

Vuyo Xegwana-Bandezi is a Senior Associate and Colin du Toit and Mncedisi Mpungose are Partners | Webber Wentzel

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

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

Private equity and the shifting global order

Lisa Ivers and Tim Figures
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Private equity and the shifting global order

In the ever-evolving landscape of global trade and geopolitics, private equity (PE) firms are navigating a ‘new normal’ characterised by heightened uncertainties, shifting power dynamics, and an evolving geopolitical landscape, where the traditional norms of trade and investment are being reshaped.

As part of this new reality, emerging markets are becoming ever more important, particularly the countries in the BRICS group (Brazil, Russia, India, China and South Africa).

This ‘new normal’ has introduced opportunities, but also new risks when undertaking investments or managing a global investment portfolio. This means that private equity investors need to keep abreast of issues such as trade wars, sanctions, and regulatory changes that could impact the flow of capital and the stability of their investments.

Through recent analysis, we identified several ways in which recent geopolitical events are affecting the investment landscape; most notably:

  • Portfolio risk exposure: Among the 20 largest private equity (PE) fund portfolios, an average of 20% of assets are exposed to geopolitical and trade risk. Some funds have even higher exposure.
  • Due diligence: Individual investment decisions are increasingly subject to geopolitical, as well as economic, considerations.
  • Areas of risk: Companies face risk exposure in three main areas: cross-border value chains, strategic sectors, and climate regulation and policies.

Consequently, PE firms should adapt by integrating geopolitical risk analysis into their due diligence processes and portfolio investment strategies. This involves a thorough analysis of risk exposure, taking into account specific issues of the geographies, trade flows and sectors concerned.

The BRICS nations have been pivotal in giving the Global South a greater voice in world affairs and challenging the domination of existing institutions. With the potential expansion of the BRICS+ to include emerging economies like Egypt, Ethiopia, Iran, Saudi Arabia, and the UAE, the bloc’s influence on global trade and investment strategies is set to increase. While it is too early to tell how this group might develop, this expansion has the potential to establish global institutions parallel to Western-led ones, and to create new opportunities for economic cooperation.

Moreover, this expansion of the BRICS group is part of a wider shift towards a multipolar world, where emerging markets gain a stronger voice and the ability to shape international policies and institutions. This shift necessitates a strategic response from PE firms to capture the opportunities and mitigate the risks associated with a more fragmented and volatile global landscape.

With a changing world order, PE firms need to be agile and innovative. They need to build strong local networks, invest in on-the-ground expertise, and foster relationships with local partners. Additionally, they must embrace environmental, social and governance (ESG) criteria, which are becoming increasingly important to investors and can provide a competitive edge in these markets.

There are three key actions that PE firms can take to mitigate geopolitical risks:

  • Review overall fund strategy: PE firms should assess their portfolio for geopolitical and trade risk exposure. They need to identify companies that require attention, screen for at-risk industries, and evaluate potential changes in geopolitics, trade and regulations.
  • Create new portfolio value: While assessing high-risk companies, PE firms should estimate the impact by analysing revenue, cost drivers, value chains and sector exposure. This helps identify value creation levers.
  • Incorporate geopolitical perspective in due diligence: During due diligence for acquisitions, PE companies should actively apply geopolitical perspectives to assess target attractiveness and market outlook.

While the ‘new normal’ in geopolitics poses significant challenges for private equity firms, it also opens new avenues for growth. By understanding and adapting to the political risks and embracing the opportunities presented by emerging markets – including the expanded BRICS group – private equity firms can position themselves to thrive in this changing landscape.

It is a delicate balance of risk and reward, requiring a strategic approach that is both globally informed and locally attuned.

Lisa Ivers is Managing Director and Senior Partner; Head of Africa, and Tim Figures is a Partner and Associate Director, EU & Global Trade and Investment | Boston Consulting Group

This article first appeared in Catalyst, DealMakers’ quarterly private equity publication.

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

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