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HCI’S STRATEGIC PLANNING PAYS OFF

30 Sep General

Buying assets at the right time and targeting closely related industries are part of the blueprint for success: WHEN the Mineworkers’ Investment Company (MIC) and Sactwu Investment Group (SIG) acquired Hosken Consolidated Investments in January 1997, the deal was struck at around R2.50 a share. In two-and-a-half years, just prior to HCI’s partial unbundling in May, the underlying net asset value had increased to about R10 a share. HCI chairman Marcel Golding says the union investment companies, which joined forces in the mid-90s to form Amalgamated Union Investment Company, pioneered the trade union investment movement, becoming the first such company to seek a listing on the JSE. HCI was among the first-generation black empowerment companies in SA, alongside New Africa Investments and Real Africa Investments. It pioneered a broad-based empowerment concept, which was emulated by others. Golding says: “Our original structure gave us a competitive edge. Now that the concept is not novel any more, we are looking at new ways to make a strategic contribution to our investments.” HCI’s investments spread across a narrow spectrum focusing on media, information technology, telecommunications, interactive gaming and financial services. It unbundled R1.4-billion of assets in May, with its union trust receiving around R750-million. This after setting out in business in 1995 with only R5-million of borrowed money, which was repaid in a year. HCI’s investments include interests in financial services group Mettle, Highveld Radio, Cape Talk, e.tv, IQ Business Group, SA Video Gaming Corporation, Vodacom, Everest Business Solutions, Atlantic International Entertainment and Red Pepper Pictures. In May it unbundled its interests in IT group Softline, and Unibank, after having seen an enormous growth in the asset values of these investments while with HCI. HCI in its earlier incarnation, Amalgamated Union Investments, took the initial approach of running an opportunistic private equity fund, Golding says, securing nowvaluable stakes in assets such as Vodacom. In January 1997, Golding and HCI CEO Johnny Copelyn, who headed up SIG, completed a reverse takeover of HCI. Golding says that HCI took the opportunity to invest in companies which other buyers were more cautious about, such as Softline, whose debut on the JSE was not at first well received. Investment strategy means “we sit on the boards of our underlying investments and play an active role in their strategic management. The investment has to meet certain criteria, such as a 35% returnon-investment hurdle rate. “There also has to be a clear exit strategy and strong entrepreneurial management.” HCI has never tapped into the unions’ pension funds, opting rather to raise funding from institutional investors. Two trusts, one for MIC and the other for Sactwu, were established as intermediaries between the operational entity and the unions, into which the benefits of HCI’s activities are injected. “The trusts were established to benefit all mining and clothing industry workers, regardless of whether they are union members or not, and to provide them with better healthcare and education, for example. We can’t change the country, but we can make a modest contribution. But one cannot be philanthropic unless one has a wealth base.” HCI is considering its strategic direction post the May unbundling, but Golding says that the clear focus is knowledge-based industries, and preferably start-up ventures, even though the risk associated with them is greater. The emphasis will still be on private equity investments, but the value of each investment might be slightly smaller. “We used to target investments valued between R20million and R100-million. But we may now look at slightly smaller opportunities.” HCI’s investment into Midi, the holding company of e.tv, has caused some headaches for the group. Some of the original minority investors in Midi failed to deliver their contribution to the TV station’s capital costs, forcing HCI to fund the shortfall. HCI is currently in discussions with a number of parties to recapitalise e.tv, a move which requires the approval of the Independent Broadcasting Authority. Copelyn says that HCI’s success comes partly from buying assets at the right time, and the strategic contribution made by HCI management. “But our strategy has also been about targeting industries which are closely related, particularly with the convergence of media and the Internet. The business opportunities in the most exciting technological advance of our age are in this sphere.” Part of the reason that HCI is targeting start-up ventures, Copelyn says, is that the wealth creation opportunities for the union trust beneficiaries are that much greater. And this approach also allowed HCI to grow the asset base to deliver debt-free value to its beneficiaries. “We could have invested in mature industries which would have meant having to rely on a strong dividend flow to generate value for the unions. But, on the other hand, opting for start-up ventures doesn’t produce much in the way of cash-flow. So the only way to deliver value is to unbundle the shareholdings. The R750-million which accrued to the union trusts in May is probably the single largest delivery of benefit to black shareholders in SA history.”

Source: Business Times – Top Co’s 100 – Amanda Vermeulen