Ghost Bites Vol 65 (22)

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Corporate finance corner (M&A / capital raises)

• BHP Group has announced a non-binding indicative proposal to acquire OZ Minerals Limited, which trades under the ticker OZL on the Australian Stock Exchange. This is going to be a fun one to follow, as the proposal was sent to the board of OZ for them to consider a scheme of arrangement for 100% of the share capital. The board was quick to kick that offer to touch, saying that it “significantly undervalues” the company. OZL’s share price had been hammered in recent times based on recessionary fears, as the company is primarily engaged in copper mining. Copper gets hit the hardest in anticipation of a recession. Of course, a proposal of A$25 per share from BHP was quick to repair the share price, with a rally of 35% in one day that would’ve killed anyone sitting with a short position as a play on copper. The big question is: will BHP turn up the heat and possibly take the route of a hostile takeover? There are some clues in the announcement, like BHP pointing out how the A$25 per share proposal represents a “compelling value proposition” for OZ shareholders, representing a premium of 41.4% to the 30-day VWAP. BHP goes on to remind OZ shareholders that they face a “deteriorating external environment” and “increased operational and growth related funding challenges” – in other words, BHP wants them to believe that this is their only way out of this mess. I love these boardroom battles, as they inevitably drive huge share price action. Here’s the chart of OZL, showing how the drop in the copper price murdered the share price until BHP’s opportunistic offer:

• Datatec has announced that its subsidiary Logicalis has acquired Q Associates, which sounds like a consultancy to James Bond and the rest of MI5. Alas, the real story isn’t quite as exciting. Q Associates is described as one of the UK’s leading providers of IT consultancy and advisory services around data management, data protection, compliance and information security. If you keep reading the announcement though, you discover that Government Security Services is listed as one of the client categories. Perhaps Bond is involved after all? This is clearly a small transaction as no price has been given.

• Alexander Forbes has announced the results of the partial offer by New Veld, LLC. The new investor had previously acquired 14.83% in the group from Mercer Africa Limited and wished to increase this to a maximum of 33% in Alexander Forbes through a partial offer. This was a successful piece of corporate finance, with “excess tenders” making sure that the investor reached the target. This has nothing to do with the ANC and everything to do with offer strategies, allowing investors to accept the partial offer and put forward the rest of their shares for inclusion in the pot, making up for investors who don’t want to accept the offer. Due to more shares being in the pot than required, those who offered their shares in excess of the partial offer will sell 93.08724% of them at R5.05 per share. The share price closed 6.9% higher at R4.99.

• Sun International has announced the disposal of a portion of a property in Menlyn, Pretoria as well as the acquisition of an interest in Time Square. Effectively, Sun International is increasing its equity position in Time Square and is selling vacant land next to the property that will become a mixed-use development. Servitudes will be granted over certain parking bays at Sun Time Square. Sun International unlocks a net cash inflow here, as the land is being sold for R198 million and the stake in Time Square is being acquired for R125 million (subject to adjustments). This is a Category 2 Transaction that doesn’t require shareholder approval.

• Buffalo Coal has announced the completion of the transfer of shares from Resource Capital Fund to Belvedere Resources. This means that Belvedere is now the majority shareholder in this coal business that has two operations in South Africa. There is almost no liquidity whatsoever in this company, with a share that looks like it traded on just a couple of days in the past six months.

• British American Tobacco has released a supplementary prospectus for its £25 billion Euro Medium Term Note Programme. Effectively, the interim results have now been incorporated in the prospectus. If you’re curious about the underlying documents in a debt capital raise. I’m including this here because it is easy to forget that corporates also use public markets to raise debt, not just equity. This is generally reserved for institutional investors only, as the amounts involved are enormous.

Financial updates

• Mpact released its results for the six months ended June 2022 and the share price ended the day where it started. Liquidity has become an issue for this stock, despite having a market cap of around R4.3 billion. The results themselves were strong, with underlying operating profit up by 21.5% and headline earnings per share (HEPS) up by 31.1% to 142 cents. Return on Capital Employed (ROCE) increased from 15.4% to 18%. The interim dividend is back, with the board declaring a 40 cents per share dividend. Mpact has diverse operations, which usually results in a mixed bag of results when you drill down to segmental level. For example, the containerboard and cartonboard businesses saw strong local demand and higher selling prices that mitigated input cost inflation. In contrast, fruit packaging was hit by uncertainties around the Russia-Ukraine conflict, as fruit producers have delayed decisions on harvesting until they have clarity on export markets. Adverse weather and port constraints haven’t helped. It’s encouraging to see that the quick-service restaurant customer base showed strong volume growth, as South Africans returned to old habits of eating out or getting takeaways. Other challenges have included cost and availability of raw materials (putting pressure on working capital) and delays in the arrival of capital equipment (impacting important projects and production of bins and crates in the plastics business). It’s also worth noting the 20.5% increase in net finance costs as a result of higher average net debt over the period. The outlook seems positive overall, though each underlying business faces different market conditions. This is part of what makes it difficult to anticipate Mpact’s performance. The share price is down nearly 14% this year.

• OneLogix has released a trading statement for the year ended May 2022. It’s been a horrible period for the logistics company, facing everything from civil unrest and attacks on Transnet’s operations through to floods in KZN. To add insult (and even more injury) to those injuries, OneLogix suffered a R25 million knock from hailstorm damage to passenger vehicles that were being processed by the company. This was the amount net of insurance proceeds. HEPS has fallen by between 55% and 75%, though it is worth noting that the company has still made a profit and is projected to meet loan covenants. The share price closed 7.7% higher on the day. Back in December, the management was considering a buyout and delisting at R3.30 per share. Many months later, the company is still trading under cautionary and no formal offer has been made. The share price closed at R2.80 on Monday.

Operational updates

• None – come back tomorrow!

Share buybacks and dividends

• In the past week, Naspers repurchased shares worth nearly R1.6 billion and Prosus repurchased shares worth $250 million.

• British American Tobacco has continued with its daily share buybacks.

Notable shuffling of (expensive) chairs

• A non-executive director of Trustco has resigned after a relatively short stint on the board. He was appointed to the board in March 2021. For much juicier news on Trustco, make sure you read to the bottom of Ghost Bites today.

Director dealings

• A director of Stefanutti Stocks has acquired shares in the company worth R154k.

• A director of a subsidiary of Vodacom South Africa has sold shares worth R1.3 million. These were issued to the director as part of the company’s forfeitable share plan. I generally don’t read anything into dealings like these.

• Europa Metals has settled £33k worth of director fees through the issuance of shares. The outgoing CEO isn’t receiving any of these shares due to his resignation.

Unusual things

• There’s an interesting corporate governance tussle underway at Richemont. The A shares are the ones that us plebs can own, with the B shares held by the Rupert family. The Depository Receipts that trade on the JSE are linked to the A shares, with 10 Depository Receipts equivalent to one A share. Bluebell Capital Partners is an institutional investor that is pushing for board representation for the A shareholders. The board has recommended to shareholders that they do not vote in favour of this proposal, instead voting for the appointment of an independent director put forward by the board as a representative of the holders of A shares. The board will give its reasons for the recommendation in the letter to shareholders at the AGM. In reality, any changes to the articles of incorporation would need to be supported by the Rupert family, so the recommendation to shareholders is just for optics. Still, it’s interesting to see some activism around governance at Richemont.

• Trustco released an update on Monday in the midst of the closing auction, causing the share price to close 35.6% higher. Admittedly, this was based on such tiny value traded that it wouldn’t even cover monthly school fees for most kids. In a very interesting court victory for Trustco, the High Court granted an urgent interdict to stop the JSE suspending Trustco’s listing. It’s hilarious reading the JSE’s announcement vs Trustco’s announcement, with the former providing a formal overview of what happened and the latter adding some flowery language to drive the points home. For example, Trustco points out that the “Honourable Judge dismissed each and every argument the JSE made” – the company also couldn’t resist pointing out that this is the second urgent application won against the JSE in the High Court. What actually matters is the Review Application set down for 5 September 2022, as all that Trustco has achieved here is the avoidance of a suspension until that process is concluded. I must quote this section from the Trustco announcement, as the directors better hope that they win against the JSE when it really counts:

“Shareholders are referred to the announcement published on SENS on 8 December 2021, in terms whereof 98.08% of minority shareholders in a non-binding vote indicated that the parties responsible for shareholders’ value destruction be held accountable”

Trustco SENS, 8 August 2022

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