That Hosken Consolidated Investments (HCI) is led (very successfully) by two former trade union stalwarts, Johnny Copelyn and Marcel Golding, is not the only curious aspect of this formidable investment holding company.

Perhaps more of a departure from investment norms is that HCI has quite brazenly built its R12bn empire on debt – a big pile of long-term borrowings. Thanks to convincing cash flows from its gaming interests, the long-term debt has been whittled down to a more manageable R1,3bn, from R4,74bn reported at the end of the 2010 financial year.

Excessive gearing is anathema to an investment trust, which should be able to mobilise its cash flows from underlying investments to fund future deal flow and pay all important dividends rather than cull debt. History will show debt-laden investment conglomerates tend to come to harm, like Tollgate did in spectacular fashion in the early 1990s.

There have been times when things got a little tight. A fledgling HCI was forced to sell its valuable 5% stake in cellular services provider Vodacom to Remgro/ Venfin back in 2001 to sustain a young and cash-hungry e.tv.

But since then HCI has shown little fear or remorse around its level of borrowings. That’s not surprising, since the company’s investment portfolio is anchored by the consistent profit spin of casinos and an array of cash-generative investments that span the innovative e.tv and the old-economy grind of the Golden Arrow Bus Co (which has more than paid its purchase price in profits).

Even HCI’s more controversial dalliances into daunting turnaround opportunities, most notably clothing and textile group Seardel and liquor specialist KWV Holdings, are solidly underpinned by tangible assets.

Copelyn is philosophical about HCI’s debt position. “Having to be selective in the investments we can afford to buy has seen us ending up with top-quality assets. Sometimes the more money you have, the more you might be tempted to splurge on investments that are not that great.”

Copelyn describes HCI’s modus operandi as taking cash flow from stable businesses (Tsogo and e.tv) to build up quality assets in other industries. This echoes the old Rembrandt Group model, which mobilised cash flow from its core tobacco business to widely diversify its asset base.

Concerning future deal flow, HCI investors should expect the unexpected. When HCI cheekily counterbid (albeit unsuccessfully) for bus company Putco a few years ago, it became clear there was not much that was off limits for the company. Management have always given the impression that focus is the least of their concerns, and that building a classic diversified investment conglomerate remains a long-term goal.

Copelyn has consistently dismissed talk of unlocking value and buying back shares. HCI is pestered regularly about unbundling and separately listing e.tv (a highly profitable television broadcaster which also has Remgro as a significant shareholder). There have also been calls for HCI to unlock the value of the so-called legacy assets (property and art) held in KWV.

“These exercises can provide some short-term benefit to the share price. But on the question of investment philosophy we think we should do what’s best for the business, which in essence will be in the best interest of the shareholders in the long term,” says Copelyn.

His determination to exercise patience with HCI’s investments may well pay off, but it is going to be a long-term accumulation game that will require shareholders to accept only modest dividend flows for the foreseeable future.

For instance, the company’s media interests under Sabido (which appears to be now ogling a porn flick dynasty in the US) has the potential to consolidate other specialised entities – perhaps even sidle closer to radio ventures like Kagiso Media (where Remgro also has some influence) or African Media Entertainment.

KWV is another HCI-controlled venture that could do with a dash of product diversity outside its core brandy and wine offering. Harnessing the struggling KWV to an existing liquor producer to ensure diversified volume flows could make all the difference to what now is a high quality, low volume, grape-based operation.

The same might apply to HCI’s coal mining operations, which quietly turned profitable in the last financial year after a rougher-than-expected start.

There has even been talk that HCI might consider forming a “Landco”, a special vehicle which could house the extensive property interests that are held in various investment entities (most notably Seardel and KWV).

Of course, the bigger pay-off could come if the financially sturdy HCI looked at merging in smaller empowerment ventures that might be struggling for traction in deal flows – bolstering the asset base and broadening the company’s empowerment credentials (the SA Clothing & Textile Workers is the empowerment shareholder of reference at HCI).

Broad-based, asset-rich and sustainable empowerment ventures are all too rare on the JSE, with pioneering ventures like Nail, Real Africa Holdings and (more recently) Mvelaphanda lacking endurance. By consolidating smaller BEE ventures that hold quality investments, HCI could consolidate its status as a flagship empowerment vehicle.

Copelyn, though, is loath to fund deals by issuing scrip as the HCI share price currently discounts an estimated underlying value of between R110/share and R120/share by a fair margin. Such efforts may have to wait until HCI feels comfortable enough to ratchet up gearing.

What might seem far-fetched now would be HCI’s further endeavours in the casino sector. The fact that the R9bn holding in Tsogo started off with a small indirect slice of Tsogo Sun and a well-timed foray into the old Johnnic should serve as a reminder not to discount Copelyn’s determination and acumen in deal-making.

While HCI’s underrated limited payout machine operations (held under Vukani) are still being rolled out with as much vigour as regulations allow, would it be safe to discount the chances of HCI ever snatching SABMiller’s major stake in Tsogo?

In case anyone doubted Copelyn’s ability to pull off difficult moves or stay two moves ahead of the competition, there’s a story that as a student he could play chess against several opponents simultaneously and win.

Copelyn corrects this legend, pointing out that he actually played “blindfold chess” while driving a car, against an opponent sitting in the back seat. “I never crashed the car,” he notes.

Source: Financial Mail – Marc Hasenfuss