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A master capital allocator strikes again

Business Maverick

Business Maverick

A master capital allocator strikes again

Electrical transmission pylons are silhouetted as the sun rises over Saulsville township in Pretoria on 31 May 2019. While President Cyril Ramaphosa says Eskom is considered too big to fail, it could be too big to support because of the costs associated with stabilising its finances, Engineering News reported, citing S&P global ratings director Ravi Bhatia. (Photo: Waldo Swiegers/Bloomberg via Getty Images)

Two family-owned business entities have joined forces to invest in a third family-controlled entity, which, assuming all boxes are ticked, will delist from the JSE before mid-year.

It is going to be a busy year for small-cap holdings on the JSE with the recent delisting of Adapt-IT, and the imminent delisting of radio frequency company Alaris, as well as Brian Joffe’s Long4Life and ARB Holdings, the 40-year old investment holding company that distributes electrical, lighting and related products across South and southern Africa. 

More are sure to follow.

In the case of ARB, a special-purpose vehicle by the name of Masimong Electrical Holdings (MEH) has made a firm offer to buy out minority shareholders who hold 37.07% of the shares in the company at 800c a share. This is a 21% premium to the 30-day average trading price and values the stake being acquired at R696,9-million.

MEH is jointly owned by Masimong, a private investment group founded by its chairperson, Mike Teke, in 2013 and controlled by the Teke Family Trust, and Sabvest Capital, the JSE-listed investment holding company that is managed by Chris Seabrooke and controlled by his family trust. Masimong will hold 51.1% of the shares in MEH, and Sabvest the remaining 49.9%. 

The remaining 62.93% of shares in ARB will continue to be held by the  family trusts established by the founder, Alan Burke. 

The rationale given for the transaction is simple. Despite ARB’s financially successful track record since listing in 1988, no new shares have ever been issued and ARB has no foreseeable need to raise capital through the public markets. With 62% of shares in the control of the founding family, the share is thinly traded. This offer, therefore, gives existing minorities an opportunity to exit at a premium to the market price. 

Minority shareholders including Aylett & Co and Visio Capital will vote on the offer once it has been recommended to the independent board by an outside party. 

“Institutions own a derisory stake in what is a jewel of a business,” says independent analyst Anthony Clark. “Any shares that have come onto the market have been bought back by Alan Burke and family, so it is perhaps not surprising that they got tired of maintaining the listing.”

In its last financial year the company generated gross revenue of R2.9-billion, from which it earned R192-million in income. It is highly cash generative, generating R262-million from operations last year, and has cash on the balance sheet. It pays handsome special dividends and has a consistent earnings profile, adds Clark.

“Who better to buy out a family business than another, not one but two family businesses?”

For investors who like ARB, the only entry point into the company will be via Sabvest, which will now have a new arrow in its quiver. Current listed investments include Brait, Metrofile and Rolfes Technology Holdings while unlisted investments include Apex Partners, crypto company Revix, tech investment company DNI-4PL and Classic Food Brands.

“Seabrooke runs a tight ship and is a great capital allocator,” says Clark, adding that this is the first sizeable transaction since Sabvest sold its stake in Transaction Capital for R191-million. “This is an elegant recycling of the extremely fat profits from Transaction Capital into ARB, a relatively cheap asset. Chris Seabrooke, the master capital allocator, has once again hit a home run.”  

If the offer is successfully implemented, Sabcap will have an indirect, look-through equity interest of 20,36% in ARB, comprising 18,5% through its 49,9% interest in MEH and 1,86% through its 10% shareholding in Masimong. DM/BM

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