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HCI DISPELS LINGERING PRECEPTIONS

29 Jul General

Last week’s general meeting of empowerment conglomerate Hosken Consolidated Investments (HCI), convened to vote on a specific share repurchase proposal, could have been subtitled “Perceptions and Reality”.

Events certainly reinforce the notion that more shareholders should make an effort to attend AGMs and company meetings.

As it turned out, only a handful of shareholders attended the HCI meeting — a great pity since a number of lingering perceptions around the company were dispelled.

There have been whispers in the market that HCI’s proposed share buy-back signalled a pending change to its leadership . This was perhaps understandable after the emotional exit of cofounder Marcel Golding, in acrimonious circumstances, in late 2014.

The share buy-back proposals included the sale of 6.5m shares held by Golding’s Geomer as well as 5.24m shares held by a trust (Rivetprops) aligned to CEO and corporate chess grandmaster Johnny Copelyn.

FD Kevin Govender would also sell 400,000 shares as part of the repurchase agreement.

Sactwu, the investment arm of the SA Clothing & Textile Workers Union and majority shareholder in HCI, would sell back 4m shares .

Perhaps what made the market fret about Copelyn’s longer-term intentions was that the terms of the Rivetprops settlement were based on a share swap for shares in unlisted TIH (the holding company for HCI-controlled gaming and hotel giant Tsogo Sun) and for shares in HCI Australia.

The latter part of the transaction is what got the tongues wagging. Essentially the Copelyn-aligned trust was swapping 3m HCI shares for the company’s entire holding in Australia Stock Exchange-listed Oceania Capital Partners (OCP).

OCP is a relatively small investment company which holds stakes in security services, broadcasting and financial services.

Some quarters in the market interpreted the swap as a sign that Copelyn was intent on exiting HCI. There were even scurrilous rumours that Copelyn would be emigrating to Australia. He has created great value for shareholders through smart deals over the past 15 years.

To compound matters, there were questions around the effective pricing of the buy-back at R105/share, a sizeable discount to HCI’s sum-of-the-parts (SOTP) valuation.

Perhaps the valuation issue should be tackled first because at the time of the general meeting HCI’s SOTP was more than R170/share. But this needs context. At the announcement of the share buy-back the R105 price was in line with recent share trade patterns (as low as R98) and, as Copelyn pointed out at the meeting, an attractive price for HCI to buy back shares. The subsequent shift in the share price was informed by upward momentum in the price of HCI’s mainstay investment in Tsogo Sun, from around R22 to current levels over R28.

Shareholder Chris Logan pointed out at the meeting that there had been a “massive derating” in HCI’s value. Logan said that previously one HCI share was worth 6.5 Tsogo shares, but this had diminished to one HCI share equating to 4.2 Tsogo shares.

He contended HCI’s wider discount on its underlying assets indicated the market was “worried about something”.

Copelyn responded that he remained very loyal to HCI, and “was not selling any of [his] own shares”. (Copelyn still ranks as a major shareholder in HCI, with more than 5m shares held in his own name.)

Copelyn also argued that HCI did not set the price of the share buy-back; this was the function of the market.

But it was Copelyn’s explanation for the sale of shares via Rivetprops that should refute suggestions that HCI had “lost its mojo” (as one market commentator put it).

The reality is that the share buy-back was triggered by Golding’s desire to exit a chunk of his HCI holding. That’s understandable after Golding’s sudden and shocking departure from HCI. But this event, nevertheless, would have consequences. By exiting 6.5m shares, Golding would dilute HCI’s important empowerment credentials — key to the company’s investments in gaming and resources as well as to future deal-making efforts.

Put bluntly, to retain the BEE balance, Copelyn — a significant white shareholder — needed to sell a commensurate number of shares to offset the sale of shares by Golding — a significant black investor.

Copelyn remarked that it was unfortunate to have to facilitate the share buy-back through a related party transaction.

“Marcel has most of his wealth tied up in HCI, and wanted to spread his risk. We facilitated this, but by taking out a black shareholder you also have to take out a white shareholder. So I bailed.”

He suggested that approaching institutional shareholders to participate in a share buy-back was not feasible as these investors would demand a premium.

“Marcel and I built HCI together, and we are managing his exit together.”

One consequence of the share buy-back exercise is that Copelyn’s decision to walk away with the Australian assets has piqued market interest in Oceania. This interest may also be spurred by the fact that Montauk, which was recently spun out of HCI and backed by several executives (including Copelyn), has performed strongly in terms of share price in the past 12 months.

Copelyn, though, tempered market excitement around Oceania when he suggested that taking shares in the Australian offshoot was practically the only option available.

Speaking after the meeting, he indicated there was an initial suggestion to swap part of his HCI holding for shares in e-Media, the holding company for broadcast assets e.tv and eNCA. But the difficulty in pricing e-Media, where there is a startling price differential between the ordinary and low voting shares, put paid to that option.

There were even discussions about Copelyn’s trust swapping some HCI shares for a stake in its little-known technology subsidiary, Syntell.

In the end it was more suitable for Copelyn to take up HCI’s shares in HCI Australia, as he did not want to cash out his HCI shares. Interestingly, HCI Australia, aside from its core holding in OCP, also holds investments in various ASX-listed stocks like Commonwealth Bank of Australia (745 shares), Graincorp (10,000 shares), Telstra Corp (11,000 shares) and Woolworths (1,565 shares).

Addressing the meeting after the favourable vote on the proposed share buy-back, Copelyn reiterated that HCI was one of the few companies on the JSE that had actively bought back its shares when the price had been driven down.

He pointed out that HCI originally had more than 400m shares in issue, but that this number would now be reduced to fewer than 90m shares.

“We like to do sensible transactions — somewhere in the range of R100m-R500m.

As you get bigger you are expected to pursue bigger deals. But we have the skill in picking off opportunities of between R100m and R500m.

That has been the strength of HCI … and a thoughtful way of managing risk.”

HCI shareholder Abe Gordon interjected that the company had never resorted to a rights issue to fund acquisitions.

Copelyn conceded that without resorting to rights issues HCI was cash constrained and carried debt at the centre of some R2.5bn. But this was not necessarily a bad thing, he said. “We get lots of opportunities, but we are always anxious about what we can fund.”

All in all, buying back shares at a huge discount to the underlying value of the portfolio — which is underpinned by the cash-spewing Tsogo Sun — is probably the best way to unlock value for shareholders in a transaction worth more than R1.6bn. Because the bulk of the transaction is executed via share swaps, the R367m cash settlement to buy back part of Golding’s shares fits squarely in the R100m-R500m deal bracket cited by Copelyn.

So Johnny’s back then? Actually he’s never been gone.

Source: Financial Mail – Marc Hasenfuss