Barloworld shifts its portfolio

• South Africa
• Agriculture, Barloworld, Car dealership, Disposal, Material Adverse Change, Portfolio
• December 9, 2020

Barloworld is an interesting company that keeps me busy. I’ve written a few times this year about the happenings at the company.

Barloworld is currently a turnaround story. With a market capitalisation above R18bn (the value of the company based on the share price and the number of shares in issue), it’s certainly not a small cap either.

The company has rewarded those who were willing to bet on its turnaround this year, although the stock is still down nearly 21% year to date. Over the past month, it is up nearly 40%.

So, it’s a stock that traders enjoy. Volatile and liquid, Barloworld is a useful place to play for those willing to watch the markets closely and take the small wins when they come.

Longer-term investors would need to believe in the turnaround story, which is centred on a refocusing of the group’s portfolio. This means that the company will try and sell businesses that it doesn’t want to own anymore and will instead focus its attention on areas where it believes it can win, like in the yellow goods business distributing Caterpillar products.

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More starch in Barloworld’s diet

Barloworld agreed before lockdown to acquire Tongaat Hulett’s starch business. Then lockdown hit and the company tried to wriggle out of the deal, invoking the Material Adverse Change (MAC) clause that is commonplace in such transactions.

It gives companies an escape hatch if things change significantly before the deal is done.

The original envisaged deal value was R5.35bn, a massive cash boost for Tongaat Hulett which is currently delivering a miracle turnaround of note. When the news broke that Barloworld wanted out of the deal, it caused a few grey hairs for those who had punted at the sugar company that had fallen from grace.

Luckily for Tongaat (and its shareholders), an independent expert determined that the MAC clause could not apply here as the company would not suffer a decline in earnings of more than 17.5% this year (the original threshold in the MAC clause).

The deal has closed and the final deal value (which becomes a complicated calculation in acquisitions based on “closing accounts” which would include cash in the business, debtors etc.) is R5.26bn.

A move into the agriculture and agri-processing space isn’t a bad play by Barloworld. It’s the only sector that has grown in South Africa in 2020 vs. 2019. Incidentally, Tongaat’s share price has nearly doubled in the past six months.

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Fewer vehicles in Barloworld’s garage

Barloworld noted to the market at the end of November that it was looking closely at the automotive and logistics division for a potential sale. Companies won’t say those things lightly, so I’m not overly surprised to see an announcement that the car dealerships are on the chopping block.

I am slightly surprised that they insist on hanging on to Avis. It’s the cash cow of the automotive division but it’s still a poor performer from a shareholder perspective, demanding huge capital investment to generate its returns. I wrote in more detail about the division here.

There are precious few details available at present, so we will have to wait and see what the terms of a disposal of the dealerships business might look like. I don’t think car dealerships are particularly great assets and I think Barloworld shareholders could benefit from a clear push into more attractive industries.

The share price will face a strong resistance line at around R110 per share. If it manages to break through there, shareholders could be in for a wild ride. The share price is currently trading just under R92 per share.

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