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INVESTMENT FIRMS CHANGE TACK

28 Jun General

NOT JUST FOR WIMPS

A shift in strategy means investment holding firms should no longer be viewed as boring or superfluous. Marc Hasenfuss examines SA’s top four firms, their portfolios and prospects.

Investment holding companies are often regarded as boring, verging on the superfluous or equity instruments for wimps.

The discounts offered on these passive portfolios are increasingly viewed as a pronouncement on investment inefficiencies rather than an opportunity to acquire assets cheaply.

A number of market commentators regard investment holding companies as a market relic with little relevance in modern equity markets. Investec Securities stockbroker David Sylvester went as far as saying investment holding companies were sometimes a “jamboree of clutter” and a throwback to the JSE in the 1970s and 1980s.

Indeed, it is relevant to ask whether investors determined to invest passively would not be more comfortable accumulating a basket of assets through the adaptations of the Satrix index trackers. But can the JSE’s big four investment conglomerates – Remgro (market capitalisation: R63bn), Brait SA (R13,4bn), PSG Group (R12,6bn) and Hosken Consolidated Investments (HCI: R11,6bn) – really be regarded as mundane?

It might not be such a stretch to argue that “boring” is really the new “daring”. This might be especially true in these tremulous market times when cash-flush vehicles headed by charismatic and influential investors can well afford to dash after numerous well-priced opportunities – especially where prospects might have stalled for lack of capital or a cyclical lull.

An investment holding company functions on the quality of a variety of underlying assets (where controlling or passive stakes are held), and its ability to grow value by nurturing these investments, accumulating promising new assets or realising value by selling off or unbundling interests.

But an investment holding company structure also allows the management team the flexibility to back a winner to the hilt without being restricted by portfolio balance (unit trusts) or time constraints (private equity).

A good example would be PSG’s early backing of mass-market lending venture Capitec Bank, or the old Rembrandt Group’s investment in Vodacom.

Despite trading these days on the JSE under the slightly sexier tag of equity investment instruments, the local market, unlike other large international bourses, is hardly bustling with investment holding counters. There remain a number of small to medium-sized empowerment entities – like Brimstone and Grand Parade Investments, as well as a few interesting peripheral counters, such as Trematon and Sabvest. Blackstar has been the sole new listing.

It’s not as if there’s no craving for investing in an entity housing a conglomeration of many stakes – just glance at the plethora of unit trust funds in SA, which outnumber the shares on the JSE.

The fascination for unit trusts, now widely regarded as the default investment option for retail investors, is puzzling. The JSE’s big four investment holdings offer a more cost-effective investment option in terms of ongoing fees. Punters can also latch on to strong cash flows and often buy into quality assets at a marked discount (between 15% and 25%) to intrinsic value.

But the big selling point for Remgro, Brait, PSG and HCI is that each company appears to be geared, in its own way, for an eventful few years ahead.

Each of the quartet has made a key shift in strategy recently, driven by external and internal developments, that could signal the onset of a far more adventurous dynamic in future investment activities.

Remgro – now headed by fortysomething Jannie Durand since the untimely death of long-serving CEO Thys Visser – is rapidly cleaning up its sprawling portfolio. More importantly, Remgro is chipping away valiantly at its “staid” label with promising flutters with technology, as well as confirming a willingness to engineer big deals (the recently acquired 22% stake in Grindrod).

Brait has cast off its private equity mantle with retail tycoon Christo Wiese emerging as an anchor shareholder after underwriting a R6bn recapitalisation that brought a new long-term investment portfolio built around the formidable presence of retail giant Pepkor. The commanding presence of Wiese, a serial risk-taker with a number of brilliant scores outside his core retail realm, has heightened expectations of rewarding deal flow.

PSG has in recent years seen the consolidation of the Mouton family influence with Piet Mouton, the savvy and unflappable son of founder Jannie Mouton, taking on the CEO role. Mouton snr might have taken the chairmanship but is certainly not taking a back seat. The father-son combination works well – a measured Piet a foil to the passionate Jannie.

HCI still has its founders Johnny Copelyn and Marcel Golding at the helm, but the duo has gathered a formidable staff of highly capable lieutenants to run key operations (Stuart Queen at Seardel and André van der Veen at KWV).

After completing its strenuous endeavours to build a gaming hub, HCI looks ready for more action. With its 38% stake in Tsogo Sun providing dependable cash flows, HCI looks poised for bulking up existing investments (mainly KWV and its coal interests) as well as pursuing new investment activity offshore via Australian-based Oceania Capital (where respected deal-makers Michael Jacobson and Brian Scheiner hold sway).

Though each investment holding company (see accompanying reviews) has its own distinct appeal, it is intriguing to see to what extent the counters and personalities have crossed paths.

Whether we will ever see closer co-operation between the big four is debatable, but the lists of assets rotated and events set off among the quartet, besides occasionally serving on each other’s boards, is food for thought. Remgro played a role in building up HCI, once by acquiring HCI’s 5% stake in Vodacom and also by providing funding (and taking equity in) free-to-air television station e.tv. HCI and Remgro are the largest equity partners in e.tv.

Wiese is the anchor shareholder at Brait, but it was not too long ago that he held around 9% of PSG. He garnered this stake by swapping his significant minority stake in liquor group KWV for PSG scrip. PSG, in turn, used KWV as a wedge into listed liquor group Distell, where Remgro is the main shareholder (along with HCI’s partner in gaming group Tsogo Sun, SABMiller).

PSG sold its stake in KWV to HCI in late 2010, and has since worked with Remgro to simplify the cumbersome Capevin holding structure above Distell. Some market watchers believe it is inevitable that PSG will sell its stake in Capevin/Distell to Remgro. If SABMiller sold its stake in Distell to HCI, which looks determined to increase its influence at KWV, it would create a rather potent mix for concocting a local liquor giant.

In the most recent development, Wiese swapped out of PSG in exchange for a significant minority stake in industrial conglomerate Steinhoff. Steinhoff, headed by consummate deal-maker Markus Jooste, now owns 20,2% of PSG. Jooste rode to PSG’s rescue in 2001 when it was facing a hostile takeover from banking group Absa.

Source: Financial Mail – Marc Hasenfuss