Activism and acquisitions on the JSE

• South Africa
• Adapt IT, Alexander Forbes, Imperial, Independent Expert, Naspers, Prosus, Sanlam, Shareholder activism, Stadio
• June 19, 2021

It’s been a busy few weeks in my new role as Managing Editor of InceConnect, a daily mailer that gives me the opportunity to unpack the biggest stories on the JSE. Occasionally, I get to add in some international news as well, depending how busy the JSE news flow was.

Although I always tried to keep an eye on local markets to the greatest extent possible, my day job often made it difficult. Now, I get to read every SENS announcement and think carefully about the trends that I’m seeing.

With that in mind, I thought I would discuss a couple of these trends here.

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Shareholder activism is evolving

The Naspers-Prosus situation is so crazy that it has driven asset managers (who compete fiercely against one another) to join forces in a wonderful display of shareholder activism.

You won’t see the biggest names on the list, mind you. It’s mainly the boutique houses that have taken action by writing to the independent board of Prosus. This may have something to do with the fact that not only is Hendrik du Toit the lead independent director, but he is also the founder of Ninety One, the asset management business that was spun out of Investec.

Du Toit is in a difficult position now. He has a conflict of interest because of his duties as a director vs. his duties as a manager of other people’s money. Frankly, this is why I don’t believe he should’ve have taken on the role in the first place.

The anger is because the latest proposed deal to “unlock value” is preposterous. It creates a crossholding, which means Naspers and Prosus would hold significant stakes in each other, a situation usually reserved for the nastiest of Wits University FinAcc IV papers.

The sad thing is that Prosus is out there doing deals and building a formidable EdTech presence in addition to other interesting investments in the group. In June alone, Prosus announced R28.5bn in deals in the EdTech business unit, including the R25bn deal to acquire Stack Overflow. The latest annual earnings show that the Food Delivery unit is starting to benefit from increased scale as well, although it remains heavily loss-making.

Unfortunately, when shareholders are angry about a structure that is leaving well over a trillion rand in value on the table (yes trillion), then R28.5bn in deals won’t excite them. To put that in perspective, the value of those deals is similar to the current market cap of Santam, but nobody cares.

If you want to read my detailed article on the Naspers-Prosus situation, you can find it here on InceConnect.

The even juicier activism story at the moment is Bell Equipment. The controlling family is aiming to take the company private at R10 per share, which has severely angered certain shareholders who believe the company is worth a great deal more than that. In this case, the independent expert on the proposed deal (whoever that may turn out to be) will play a critical role in ensuring that minority shareholders are protected.

We’ve seen in the Adapt IT saga how important the independent expert is. In that case, both Huge Group and Canadian company Volaris increased their buyout offers for Adapt IT, based on the work done by the independent expert. Takeover law and the JSE regulations are well-developed in South Africa and do a decent job of protecting minority shareholders in cases like these.

If you are interested in learning more about Bell, read this article on InceConnect. If you want to improve your understanding of takeover law and how it works practically, my article on Adapt IT will be of interest to you.

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Corporate activity is picking up

Companies are focusing on core competencies and getting rid of everything else. With tough global operating conditions, there simply isn’t any room for marginal businesses that take up management’s time and the company’s capital without generating attractive returns.

Once the unwanted businesses are sold, the cash generated in the process is typically used to pay down debt. If the balance sheet is in decent shape, then companies face another decision: invest it in bolt-on acquisitions (companies that are complementary to existing operations), announce a share buyback programme or pay a special dividend.

The market has really tightened the screws in the past couple of years. Five or six years ago, companies were doing deals like crazy and buying whatever they could find. Then, the house of cards collapsed for several of these acquisition machines (like Ascendis, EOH and Steinhoff) and the mood changed.

Management teams are given the credit they deserve these days for responsible capital allocation decisions.

There have been some noteworthy decisions lately in the market. Each of these links is an InceConnect article that I’ve written that unpacks the news in more detail:

• Sanlam has allocated a further R100m to its South African operations, by acquiring the Life business from Alexander Forbes
• Mpact has announced that R500m will be invested in new facilities in South Africa, as well as additional solar power projects that will take the group’s energy generating capacity to 10 MW
• Imperial Logistics is acquiring Deep Catch, a Namibian integrated cold-chain business, for R630m

The Deep Catch deal is notable for its detailed earn-out structure. This deal technique is used by companies to limit risk in an acquisition, by adjusting the purchase price if certain targets are not met.

Often, the earn-out offers the seller the opportunity to outperform and be paid a greater sum for the business that has been sold. The Stadio – CA Connect deal is an extreme example of this, which I wrote about here.

There’s so much to learn on the JSE. It’s all about knowing where to look.

If you are serious about improving your understanding of the markets, sign up to Ghost Mail – my free weekly mailer that includes explanations of market concepts that you won’t find anywhere else. There are a number of JSE CEOs who read it every week. It’s a no-brainer to read what they read, for free.

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