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For enthusiasts of exciting corporate transactions, this was a big week on the local market. It included everything from new listings to substantial buyouts and mergers, with some sweet capital raising sprinkled on top for good measure.
The best returns on the JSE this year may have been concentrated in only a few sectors – such as gold – but dealmaking is widespread at the moment, as corporates take advantage of the opportunities that this environment is dishing up.
Let’s dig into some of the latest examples.
A fresh listing: Canal+
MultiChoice will soon be 100% owned by Canal+, thanks to the willingness of the international media company to clear just about every hurdle you could think of in this deal. Its patience with the South African regulatory environment has been extraordinary. It is also keeping its promise to inward list on the JSE in the aftermath of this deal, which means that local investors will be able to participate in the merged media group, which offers an interesting alternative to the likes of Netflix.
Read more: Canal+ seals R55bn MultiChoice deal, thanks to some impressive compliance gymnastics
For context, there will be more than 40 million subscribers across nearly 70 countries once you combine Canal+ and MultiChoice, so that’s far more of a scale player than before. Although it will still be much smaller than Netflix (more than 300 million) and Disney+ (nearly 130 million) as the obvious US-based examples, it brings a regional focus and strength in languages other than English that investors may find interesting.
Even for those who are just casual observers of this story, the inward listing means that the financial progress of MultiChoice will remain visible in public. This will be fascinating to follow while we all wish for cheaper premium packages to watch our beloved sports.
Read more: After the Bell: Making the DStv dish more appetising
Capital raises: ASP Isotopes and Vukile Property Fund
Thanks to ASP Isotopes and Vukile Property Fund, we have two examples of capital raises that are completely different in nature.
Let’s start with the simpler one, which is the accelerated bookbuild by Vukile Property Fund to raise capital for acquisitions in Iberia and South Africa. As has been the recent trend in the property sector, this raise was met with strong demand by the market. The company initially aimed to raise R2-billion, but investors were so hungry for the shares that Vukile was able to upsize this in a way that would impress even McDonald’s. The final raise was a cool R2.65-billion, or around 10% of Vukile’s market cap. It managed this at a significant discount of 4.3% to the 10-day volume-weighted average price (VWAP).
This highlights one of the risks facing retail investors in a hot property market: exclusion from accelerated bookbuilds. This capital gets raised from institutional investors only, and usually at a small discount to the current market price. Although it’s great that the capital will be used for growth, the best returns are reserved for the investors who can buy shares at a discount when these raises happen on the market.
ASP Isotopes is a more complex example of how companies can tap into public markets for capital. Although the company is listed on the local market, the Nasdaq listing is where the action is happening. That’s just as well, as the US offers the deepest capital market in the world – particularly for companies that are still relatively early in their journey and hence further along the risk/reward curve.
ASP Isotopes is taking advantage of a meteoric rise in the share price that has seen the market cap double year-to-date. What goes up can come down though, with plenty of volatility in recent trading days. Looking through all the noise, we find a company that knows exactly how to use public markets to its advantage. It is raising $210-million while the going is good, giving it a healthy dose of fresh capital to support the growth plans in future. This includes a mix of organic and inorganic initiatives, ranging from delivering on critical supply contracts to US customers through to acquisitions in that market and potentially elsewhere in the world.
The way it works in this case is that instead of running a bookbuild and getting hold of institutional investors, ASP Isotopes simply sells the shares to underwriters at a discount to the current traded price. The underwriters then need to offload those shares to investors, making a profit along the way (in theory at least). This shifts the risk of a failed capital raise from the company to the underwriters, as ASP Isotopes isn’t directly affected by the price at which the underwriters offload the shares. Although retail investors in the stock still get diluted at a discount to the current price, the share price has moved up so sharply that I doubt anyone is complaining here.
An acquisition: Premier wants to buy RFG Holdings
Premier has 28% market share in the formal bread market in South Africa. RFG Holdings is best known for its canned fruit and jams. On your breakfast plate at least, it seems like a match made in heaven. But from a corporate perspective, does a combination of the two companies actually make sense?
There are, unfortunately, many examples worldwide of disastrous mergers in the FMCG space. Kraft Heinz is arguably Berkshire Hathaway’s worst-ever deal, showing us that even Warren Buffett and the late Charlie Munger struggled to get these transactions to work.
The problem is that synergies tend to be limited in these groups. For example, the supply chain and manufacturing process for bread versus fruit is completely different. The fact that both products are eventually sold by retailers is more of a red herring than anything else. To add to the lack of strategic fit, Premier’s business is more about operational excellence and squeezing out every possible cent (think of how price sensitive consumers are to bread, or sugar for that matter), while RFG’s performance is more beholden to global markets for fruit products and how they influence pricing both locally and abroad.
Premier has enjoyed a far better share price run this year than RFG, so this deal looks more like an opportunistic play than anything else. Premier is offering a 37.5% premium to the 30-day VWAP of RFG and will pay for the deal by issuing new shares. The current RFG shareholders will have a 22.5% stake in the merged group if it all goes ahead as planned.
It looks like this deal has been spearheaded by the current private equity shareholders in RFG (Capitalworks), with other institutions cautiously supporting the deal while they wait to see if a competing bid emerges.
The rationale for this deal is weak, and I’m concerned that it might prove to be dilutive to the excellent recent investment story at Premier. The performance in years to come will give us a definitive answer to whether this deal is a good idea or not. Generally speaking, when private equity players are selling a stake, you need to be cautious if you’re on the other side of the deal. They tend to be pretty smart at negotiating a good outcome for themselves. DM