International firms circling South African companies

• South Africa
• Acquisition, Barloworld, Massmart, Mergers and acquisitions, Multichoice, SENS, Takeover offer
• October 5, 2020

The Companies Act requires public companies to make an announcement whenever a shareholder crosses through a 5% milestone.

In other words, if a shareholder held 4,8% and bought more shares today, thereby increasing to a shareholding in the company of 5,4%, the company would need to announce on SENS that this has happened.

This is important because it alerts the market to potential takeover activity in future.

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Exhibit A: Barloworld

Saudi Arabian group Zahid Tractor & Heavy Machinery Company has been steadily building a stake in Barloworld over the past few months. Both companies are major global distributors of Caterpillar equipment.

We know this because Barloworld made announcements in April, July and at the end of September, confirming that Zahid now holds over 15% in the company.

Barloworld’s share price hasn’t done much since the global drop in March, other than a few spikes here and there. The company is finalising the Tongaat Hulett starch acquisition that I’ve written about previously and has a strong balance sheet (R8bn cash as confirmed in a trading update at the end of September).

It looks ripe for a takeover offer from Zahid but the share price doesn’t seem to have noticed. Zahid recently acquired Wagner Asia Equipment, a Caterpillar distributor in Mongolia, so the company certainly isn’t scared of emerging and even frontier market deals.

There are parts of the Barloworld business that Zahid might not be interested in, but those could be sold off as surplus to requirements.

Takeover offers typically carry a premium of over 20% to the listed share price, so speculators who believe an offer might be on the way could take a position and sit it out for a while, waiting for a SENS announcement confirming a firm intention from Zahid to buy out the rest of the shareholders.

The risk is that the offer never comes, with Zahid happy to be a significant minority shareholder after buying shares at depressed prices. When you see a trade player coming onto the shareholder register though, this isn’t usually the case. They aren’t in the business of making portfolio investments; they are in the business of acquiring other companies and operating them.

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Exhibit B: Multichoice

Hot off the press is the news that French broadcasting company Canal+ has taken a 6,5% stake in MultiChoice. Your friends might have cancelled DSTV in favour of Netflix, but MultiChoice is still Africa’s largest pay-TV operator and is immensely powerful on a continent that doesn’t have widespread access to broadband for content streaming as an alternative to satellite television.

MultiChoice investors got terribly excited about this and sent the share price up over 9% for the day.

The slightly odd thing here is that Vivendi, which owns Canal+, commented that the acquisition was a long-term financial investment. It could well be that they hope to work together with MultiChoice on content creation and distribution, perhaps focusing on Francophone countries in Africa.

Canal+ has a similar number of total subscribers to MultiChoice, so this isn’t a case of corporate Pacman where a big yellow company gobbles up a smaller one. This situation changes of course if Vivendi decided to throw the kitchen sink at this market vertical and invest heavily in it, because Vivendi is a €29bn company (R565bn) and MultiChoice is a paltry R45bn company in comparison.

Still, the likelihood of a Zahid – Barloworld deal seems higher than an offer from Canal+ for the rest of the shares in MultiChoice. Saudi money must be looking for alternatives to oil exposure and Barloworld offers this.

The dark horse: Massmart?

I’m still not sure why Walmart hasn’t bought out the minorities in Massmart and delisted the company. It could be restructured away from the public eye and Walmart could press on with a Game turnaround and expansion into Africa.

Massmart’s share price has jumped from trading around R20 per share to trading around R30 per share, but it’s still infinitely cheaper than the original Walmart acquisition price, especially when one takes the Rand into account over the past decade.

I bought into Massmart on the premise that either Walmart would buy it out or the new management team would get it right. Walmart’s exit from UK supermarket group Asda does make one question where Walmart’s pain threshold might be with Massmart, but the UK is overtraded with retailers whereas Africa represents a juicy source of growth.

It’s a race

There are many stocks on the JSE trading at substantial discounts to net asset value. International investors are smart and willing to take a risk over the next decade if potential returns are attractive enough.

The question is: which companies will be snapped up first?

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