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OUT INTO THE LIGHT

By freeing its investment in e.tv, Hosken Consolidated Investments (HCI) has showed reassuring determination not to bury its top-quality assets.

The problem with an investment company holding one huge and successful investment is that it can – as HCI appears to have acknowledged – completely overshadow other interests.

And this is a real concern when some of the smaller investments are gems, or have enormous long-term potential. As is the case with HCI, the market can accord a value to an investment company’s share that reflects only the largest asset, with little or no value attributed to smaller investments.

The problem for HCI is the dominance of its 41% stake in JSE-listed gaming giant Tsogo Sun. The Tsogo stake, worth around R12bn, is a substantial underpin for HCI’s market capitalisation of about R16bn.

In terms of operating performance and generation of cash flows, Tsogo Sun accounted for around 63% of HCI’s headline earnings of R1,1bn in the year to March. This is why HCI opted last year to escort a number of high-growth investments – namely its limited-payout machine gaming operations, electronic bingo interests and liquor group KWV – into a partially unbundled separate listing under Niveus. This offered pure exposure to the strong growth evident in the Vukani limited-payout machine operations, as well as the recovery potential in KWV – an alternative the market greatly appreciated, judging by the robust Niveus share price.

Last week, HCI took another step in ensuring quality assets are appropriately spotlighted. The proposal revolves around a complex transaction to bundle HCI-controlled media company Sabido – the holding company for free-to-air television broadcaster e.tv as well as radio and film production interests – into HCI’s listed subsidiary, Seardel.

HCI’s tactic mirrors a similar strategy adopted by another Cape-based investment conglomerate, PSG, which has most of its major investments held in three separate listings, Capitec Bank, Curro Holdings and Zeder Investments . Though offering investors separate entry points to specific investments can distract market interest from the parent company, PSG chairman and founder Jannie Mouton has long argued that having separately listed investments brings out the best in managerial skills by keeping executives in the spotlight.

In summary, HCI’s 64% stake in e.tv goes into a special-purpose vehicle (SPV) that is 70% held by HCI and 30% by its trade union partner, the Southern African Clothing & Textile Workers’ Union. Sactwu settles its acquisition of a 30% stake in the SPV by offering back a number of HCI shares commensurate with the value of that stake. Seardel then buys HCI’s 70% of the SPV in exchange for 350m of its (Seardel) N-shares, gaining a 70% stake of HCI’s 64% stake in e.tv.

The transaction will raise eyebrows for several reasons. The first is whether it would have been more effective to satisfy Sactwu’s desire for a direct stake in e.tv by initiating a separate listing of Sabido. One can only assume there might have been complications around pressing for a listing – remembering the balance of the shareholding in Sabido resides with investment conglomerate Remgro.

The choice of Seardel as the vehicle into which to reverse e.tv is also curious.Perhaps its selection over Niveus was motivated by the fact that Sactwu already holds 28,69% of Seardel’s low-voting N-shares. Seardel’s mainstay business is a patchy collection of clothing and textiles businesses, along with smaller operations in office equipment, stationery and toys.

In recent years, Seardel has mainly been viewed as a property play with a much discounted net asset value (NAV) underpinned by a sprawling industrial and commercial real estate portfolio. News of the Sabido/e.tv transaction resulted in Seardel’s ordinary and N-shares rocketing out of their 120c ranges to settle at more than 220c. This jump is understandable since e.tv completely changes the picture at Seardel.

Seardel CE Stuart Queen says there has been a propensity recently to expose a clearer value of some of HCI’s assets to the market. “E.tv might easily have been overwhelmed by other assets in HCI.” HCI’s media and broadcasting division is spectacularly profitable, with revenue of around R2,2bn translating into a chunky operating profit of around R834m. By contrast, Seardel’s operations churn some R2,5bn at top line, but operating profit is comparatively scant at around R80m.

Of course, reversing e.tv into Seardel may throw up the original dilemma of having one hugely successful investment dwarfing other operational assets. The difference at Seardel, with the greatest respect to the commendable turnaround effort in the past three years, is that there are no real gems or operations – perhaps aside from the newly formed property division – with outstanding long-term prospects.

The textile division, which managed an operating profit of R31m on turnover of R689m, is on a trading margin of less than 5%. The industrial division is in a similar position, albeit with around half the turnover. The branded products division eked out operating profit of R15m from turnover of R793m. Seardel’s clothing division might, at best, hope to hold at a break-even position after its sales of R694m were whittled away into a loss of R34m.

Shareholders might fret that the new-look Seardel will be slowed by pedestrian performance from the older operating assets, and that these low-margin operations will prove a distraction to management. To be honest, Seardel’s existing operations should be, at worst, neutral. The clothing and textile operations have already been scaled back to their leanest and meanest form and the recent weakening of the rand should at least boost the chances of a turnaround in the clothing segment.

What might occupy the minds of HCI and Seardel shareholders is whether further structural changes could be afoot. Though last year’s Niveus listing suggests HCI is comfortable with a mix of diverse assets, the obvious consideration would be separating the media assets from the clothing and textile clutter at Seardel.

Queen says Seardel has not projected further than the transaction bringing in e.tv, but concedes: “A lot can happen in the ensuing years, but there’s nothing definitive at this point.” Another scenario is that media gradually becomes Seardel’s focus as the other operating entities are sold off, transferred or wound down to unlock the underlying value of the legacy assets.

For instance, there has long been speculation that Seardel’s property arm – which generated almost R50m in rent from external tenants – could be the platform to accommodate other real estate assets from various corners of HCI.

HCI is already involved in several retail property developments and further winding down of operations at Seardel’s clothing and textile hub could free up further land for redevelopment. Presumably once the collective property assets reached critical mass and generated sustainable rental income, it would make sense to spin these out into another separate listing.

Source: FM – Marc Hasenfuss