Why the asset split?

The decision by Hosken Consolidated Investments (HCI) to separately list a handful of assets under Niveus Investments was an unexpected attempt at unlocking value at one of SA’s biggest investment conglomerates.

Then again the FM did warn readers in its June 29 cover story to “expect the unexpected” at HCI. Still, the company lately appeared to go out of its way to feign indifference to the market’s wide discount placed on its underlying value – purportedly R125/share.

Late last year at the KWV AGM, HCI CEO Johnny Copelyn said: “HCI trades where it trades. If it is [at] a discount to NAV or if it is [at] a premium, it does not make any difference to running the business …”

Copelyn has also repeatedly discounted suggestions that HCI pursues value-unlocking opportunities – which, to be frank, most observers might have believed would involve listing its media business, e.tv, separately.

Copelyn told the FM in June: “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.”

As such, the benefits to shareholders of separately listing operations and investments worth about R1bn under the Niveus banner are not immediately apparent. Certainly HCI’s shares have not surged on this development.

The assets are hardly what might be described as enticing, comprising mainly the limited payout machine (LPM) gaming company Vukani (worth R813m) and the 39,9% stake in liquor group KWV (see Fox page 22). The other minor Niveus interests include the fledgling HCI electronic bingo interests, the 90% stake in specialist industrial engineering business Formex, and R74m in cash.

If anything, the Niveus structure emancipates assets whose value might have been trapped in HCI’s large holdings in gaming and media.

Of course, it could be suggested that Niveus is really a home for relegated or second-class HCI investments. This contention may find support in the decision to offer Niveus shares to existing HCI shareholders at an effective swap rate of 712c/share compared with a last stated NAV of 977c/share.

Then again it is important to note that HCI – which will earn a value-based management fee from the newly listed company – insists on retaining 55% of Niveus. What’s more, Copelyn and chairman Marcel Golding, the founders and prime movers at HCI, will each take an 11,2% stake in Niveus.

It will be interesting to see how many HCI shareholders are willing to relinquish part of their HCI shareholding to take up a position in Niveus .

HCI’s retention of a 55% stake in Niveus may curb their enthusiasm . At this point there seems little incentive to switch out – Wilhelm Hertzog, a portfolio manager at RE:CM, says the proposal will probably be viewed as “neutral” by HCI shareholders.

The structure of Niveus mimics that of HCI, which also has gaming interests (the major stake in casino giant Tsogo Sun) providing the main value and earnings underpin.

The Niveus circular shows the Vukani LPM business generating a rather smart R133m in earnings before interest, tax, depreciation & amortisation (Ebitda) from revenue of R425m in the financial year to March. KWV is running at a loss, while the bingo operations and Formex contributed just R26m collectively at Ebitda level.

One suspects the cash flow from Vukani will be compelling. This is important for shareholders considering Niveus, because there is already a commitment to declare a generous interim and final dividend that will be equal to 50% of headline earnings.

One aspect that is unclear is whether Niveus will be HCI’s preferred investment vehicle (like Paladin Capital was, albeit briefly, nominated as PSG’s preferred investment vehicle).

Officially, HCI punts the creation of a “focused growth entity” offering shareholders exposure to investments and “an alternative risk and return profile to their current shareholding in HCI”.

The Niveus circular envisages investing in businesses with “asymmetrical risk/reward profiles” with a “long-term view and no predetermined exit strategy”. With only R74m in cash, and remembering HCI’s reluctance to issue scrip to fund transactions, one suspects the decision to list Niveus was informed by how to raise new capital.

But if Niveus is to take the form of a sprawling and unfocused conglomeration of investments, then shareholders might wonder why other, smaller HCI investments – for example, clothing and textile conglomerate Seardel, HCI’s fledgling coal business and Golden Arrow Bus Services – were not included in the mix.

Golden Arrow has been a solid performer for HCI but it faces various operational challenges, including the battle to secure subsidies, and competition from taxis as well as the new MyCiti bus service in Cape Town .

Seardel has also been a rewarding investment for HCI in terms of restored value, but operational challenges faced by the core manufacturing entities are well documented. Perhaps Niveus could accommodate Seardel’s nonclothing and textile operations like Prima Toys and the old Seartec stationery and consumer electronics business, which are profitable.

It will probably take time and some deal flow for the market to warm to Niveus. But what does the creation of Niveus really means for HCI?

At this stage it might be far-fetched to think of HCI becoming a central holding company for a variety of specialist-listed investment vehicles. But the Niveus proposal introduces a new dynamism to HCI, and should spark some conjecture over the longer-term strategy in structuring investments.

Besides Niveus, HCI already holds a controlling stake in Australian-listed investment vehicle Oceania Capital. There has also been talk that HCI might look at creating a “Landco” vehicle to house the sprawling property interests that are held throughout its various subsidiaries.

A media listing built around e.tv and perhaps the media interests held by Remgro (a co-shareholder in e.tv) can also not be ruled out. And does HCI have mining/energy ambitions that could be built around its coal operations and offshore energy interests?

Source: Financial Mail – Marc Hasenfuss