Ghost Bites Vol 68 (22)

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Corporate finance corner (M&A / capital raises)

• Telkom responded to rain’s media statement about a proposed merger with Telkom, confirming that no offer or proposal has been received from rain. This is why the Takeover Regulation Panel (TRP) was so irritated with rain, as a press release has been thrown into the market that currently has no substance whatsoever. Although a proposal is surely en route to the Telkom board, there are important legal steps in a process like this and rain doesn’t seem to be bothered by minor irritations like the laws of South Africa or our market regulators.

• Mondi has agreed to sell its largest facility in Russia (Mondi Syktyvkar) and two affiliated entities to Augment Investments Limited (owned by Russian billionaire Viktor Kharitonin) for around €1.5 billion. The assets being sold exclude a cash balance of EUB 16 billion (around €255 million at current rates). The cash balance will be declared to Mondi as a dividend before the deal is completed. The Ministry of Finance of the Russian Federation will need to consent to the remittance of the dividend. In the year ended December 2021, Syktyvkar achieved profit before tax of €271 million. Performance had improved significantly this year, with interim EBITDA of €225 million vs. full year EBITDA of €334 million in the prior year. Based on last year’s profits, this is a Price/Earnings multiple of around 5.5x. Actually getting this deal across the line is going to be very tricky. Nonetheless, the share price rallied 10.3%. Those who punted at Mondi immediately after the Russian invasion could’ve picked up the shares at around R270 and would now be able to sell them at R335, a tidy return of 24% in five months.

• Novus Holdings has finally told us which company they want to acquire. Pearson South Africa is a brand that you might recognise, providing curriculum-based print materials and supplementary learning materials. Pearson also owns Maskew Miller Longman and Henemann, leading publishers of print materials and CAPS curriculum-approved textbooks. Novus is acquiring a 75% stake in Pearson, with the remaining 25% being retained by Pearson’s existing B-BBEE partners. The seller is Pearson Plc, which has made a decision to sell the international courseware and local publishing businesses. Pearson South Africa is one such business. This aligns with the core print activities of Novus, as paper-based textbooks aren’t disappearing from schools anytime soon. The deal value is just under R830 million and the profit for the year ended December 2021 was R260 million, so the price/earnings multiple is only 4.25x (remember that the R830 million is only for 75% of the company). This is a Category 1 Transaction, which means Novus shareholders will be asked to vote on it and a circular will be distributed accordingly. Even though it technically meets the test for a reverse takeover (as the deal is so large relative to the Novus market capitalisation), the JSE has given a dispensation for revised listings particulars to be included in the circular. This is a win for Novus as the regulatory burden can become significant. Irrevocable undertakings to vote in favour of the deal have been obtained from shareholders of more than 50% of the issued share capital of Novus. The company is able to fund this deal from existing cash resources and debt facilities.

• Alviva Holdings is currently trading under a cautionary announcement based on a non-binding expression of interest that was received at the end of June for a potential buyout of all the listed shares not already held by the parties. Alviva is still negotiating with the prospective buyers and has renewed its cautionary.

• Heriot REIT gave an update on its firm intention to make a general offer to shareholders of Safari Investments. Heriot is engaging with Safari and the TRP on the offer and needs to post its offer circular by 2nd September.

• African Rainbow Minerals has confirmed that the R3.5 billion acquisition of Bokoni Platinum Mines has become unconditional, with an effective date of 1st September 2022. The seller was Anglo American Platinum and its joint venture partner Atlatsa Resources Corporation.

Financial updates

• Resilient REIT released results for the six months to June 2022. The fund’s strategy is to invest in retail centres with at least three anchor tenants, with predominantly national retailers taking up the rest of the stores. There are also direct and indirect investments in offshore properties. In happy news for movie buffs, new rental agreements have been agreed with Ster-Kinekor, as the world emerged from the pandemic and Tom Cruise took us back to the movies. A similar arrangement has been proposed to NuMetro. Interestingly, Resilient highlights two important trends: downsizing of department stores and more grocery offerings. This is encouraging for a business like Food Lover’s Market. Headline earnings per share (HEPS) is up 3.76% vs. the preceding six months to December 2021 and the net asset value (NAV) per share is down 2.42% since December 2021, though this is largely due to the distribution of Lighthouse shares. The loan-to-value ratio has increased from 28.8% to 32.1%. Going forward, increasing the number of grocery tenants will make the properties more…well, resilient, though it will be yield-dilutionary. Solar projects are expected to be yield-accretive, offsetting some of this pain for earnings. An interim dividend of 234.05 cents per share has been declared, 7.4% higher than in the preceding six months and 3.5% higher year-on-year. The share price has increased marginally this year.

• Distell has released a trading statement for the year ended June 2022. HEPS jumped by between 30.3% and 40.3%, with the Covid impact on the base period clearly contributing to this. There were 47 more trading days in this period vs. the comparable period, which is largely why revenue increased by 20.8% and volumes were up 17.6%. Of course, it’s not just about Covid in the base, as Distell has been performing well. A good example is the international business growing revenues and volumes by high single-digits. The regulatory approval process for the Heineken transaction is ongoing and Distell hopes that the deal will be implemented before the end of 2022.

Operational updates

• SPAR Group enjoyed a positive response from the market to its voluntary announcement on the strategy in Poland. The recent journey into Eastern Europe has been a disaster and has had a major negative impact on the share price, with Covid making the execution of a turnaround plan very difficult. The disruption to the Polish economy from the conflict in Ukraine hasn’t helped either. After serving notice to 91 retailers in the south of Poland, a whopping 58 retailers elected to leave the group on 1 July. This represents 11.7% of turnover for SPAR Poland and 0.2% of group turnover. There are now 164 stores in Poland and SPAR needs to sort that business out. In a wonderful example of seeing the glass half-full, SPAR is excited to work with the remaining retailers to achieve the level of loyalty required. SPAR has three distribution centres in Poland and is going to close the centre in Warsaw, which will streamline logistics and reduce costs. There’s also a change in reporting lines, with a new CEO appointed for SPAR Southern Africa, which frees up the group CEO to oversee the turnaround strategy for SPAR Poland. The share price was trading at nearly R200 before the market became aware of the troubles in Poland at the end of 2021. It is now at R153, with a lot of work to do to claw back that value.

• Labat Africa has announced an agreement with the Council for Scientific and Industrial Research (CSIR) to accelerate the use of cannabis for medical purposes and to industrialise the local cannabis industry. The announcement notes that the CSIR has carried out extensive work in the areas of industrial hemp and medical cannabis.

• Salungano Group (previously called Wescoal) has put Arnot OpCo into business rescue. Salungano holds an effective 50% in the company, with the rest held by joint venture partner Arnot InvestCo. Utimately, a subsidiary of Salungano is a creditor of Arnot OpCo and the application for business rescue has been launched on that basis. For now at least, the business operations at Arnot OpCo continue as usual, including the supply of coal to the Arnot power station. Salungano’s investment in Arnot was fully impaired in the latest financial statements.

Share buybacks and dividends

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

• Unsurprisingly, Lewis shareholders voted almost unanimously for the company to move forward with further share buybacks. This has been a major driver of returns for Lewis shareholders and is one of the best examples on the JSE of how to use buybacks effectively.

Notable shuffling of (expensive) chairs

• Thungela has announced the appointment of Yoza Jekwa as an independent non-executive director. Yoza has extensive investment banking and investment experience and also serves on the boards of Brait and Northam Platinum.

Director dealings

• A director of a major subsidiary of RFG Foods has disposed shares in the company worth around R130k.

• A few Alexander Forbes directors and prescribed officers took advantage of the partial offer by New Veld to improve the status of their investment accounts. For example, the CEO banked nearly R11 million by selling shares into the partial offer.

Unusual things

• The fight between Caxton and Mpact has been taken to the next level. There are some serious allegations being made, with Caxton releasing a press release in response to comments made by Mpact CEO Bruce Strong at the interim results presentation. Caxton is trying to acquire control of Mpact and seems to be using various tactics to do it, including voting down certain resolutions at meetings. Caxton claims that its attempts to take control have been met with hostility from Mpact and Golden Era, a competitor of Mpact that holds 10% in the company. Caxton notes that Mpact and Golden Era are the co-accused in cartel case being investigated by the Competition Commission since 2016. Caxton believes that the Mpact board has failed in its disclosure duties and Caxton is now taking legal advice. The press release gets pretty ugly, with the most inflammatory sentence quoted below.

“In soliciting support from Golden Era to oppose a possible Caxton merger, the Mpact board has filed secret representations and affidavits before the Competition Commission and Tribunal, thereby exacerbating concerns held by Caxton that Mpact and Golden Era remain involved in the vestiges of their long-standing cartel.”

Caxton press release, 12 August 2022

• Dipula Income Fund’s credit rating has been upgraded by Global Credit Rating Company Limited (GCR) with a stable outlook. GCR notes Dipula’s resilient performance and financial flexibility achieved through restructuring the dual shareholders, along with the easing of financial covenants.

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