Since the JSE crash, South Africa’s biggest companies are dangerously undervalued, writes Donna Block
While the Johannesburg Stock Exchange (JSE) is going down in flames, its biggest and brightest companies are selling at fire-sale prices, attracting the attention of merchant bankers, multinational companies and international corporate pirates.
With the collapse of the world’s financial markets, the value of South Africa’s premier companies has dropped so dramatically that raiders are licking their corporate lips and eyeing golden opportunities to buy blue-chip firms on the cheap.
Over the past two weeks companies specifically mentioned as being ripe for the picking include beer king South African Breweries (SAB), petrochemical giant Sasol, iron and steel company Iscor and insurers Liberty Life.
The country’s other major oil concern, Engen, is already in the cross-hairs of an unsolicited bid by Petronas, Malaysia’s state-owned energy conglomerate.
While other suitors have yet to show their hands, there is talk of major companies like Mobil, Chevron, Elf and Agip waiting in the wings to pounce on Engen should the Petronas gambit fail.
For the moment, though, the name of the game is watch and wait. Says Michael Schussler of Future Bank Corporation: ”Timing is everything. Only the bravest of the brave would attempt anything in this market.”
Nevertheless, everyone agrees that for rich American and European multinationals looking to expand south of the Sahara, South Africa’s corporate crown jewels are particularly tempting.
A combination of a weak rand, undervalued share prices and a relatively stable domestic political scene makes South Africa’s top companies even more attractive than their counterparts in Russia or other emerging-market countries. Once the dust starts to settle, companies in the developed world with cash to spare will be on the prowl.
According to one New York analyst, a company like Sasol, valued at $2,5- billion, is pocket change in comparison to United States oil giant Exxon, which even at its lowest price in the past year was worth $166- billion.
SAB, the fourth-largest brewery in the world, is currently valued at approximately $5-billion, whereas US brewer Anheiser Busch tips the scales at $23-billion.
”Somebody is definitely going to notice this,” the analyst says. ”It’s only a matter of time.”
Even more worrying for shareholders is the fact that some South African companies are now worth less than the sum of their assets. ”If you take a company like Iscor and break it all up, the scrap value of the ore is right now worth more than the entire company,” says John Clemmow, head of African research at Investec Securities in London.
The Petronas bid for Engen is proof that offshore companies are already in the market and are exploiting South African opportunities. The Malaysian group already owns 30% of Engen, bought in 1996 for $436-million. But Engen’s share price has dropped considerably since then.
Petronas is now looking to acquire the remaining shares at R23, far less than the original R34,50 per share. This means that, after the sharp falls in the value of the rand and the share price, the Malaysians now stand to acquire the remaining 70% of Engen for less than they originally paid for the 30% stake.
The offer is tempting to those who want to cut and run, although the consensus among analysts is that the bid is undervalued. But the steady decline in oil prices and the meltdown in financial markets have shaken shareholder resolve.
Merchant bankers are always on the lookout for undervalued, asset-rich companies like Engen. The oil company was born out of the remnants of Mobil when trade sanctions forced the US firm to leave South Africa.
It has since become the top retailer of petrol and service station products in the country. Its assets include 1 375 service stations, a refinery in Durban that pumps 105 000 barrels of oil a day and a 58% stake in Energy Africa Limited – making it a real steal for anyone who picks it up at the current price.
Petronas won its first battle for Engen shares when one of the large shareholders, Gensec Asset Management, ”irrevocably” agreed to sell its 8,1% stake in Engen at the proposed R23- per-share offer.
The Gensec stake still does not give the Malaysian company the leverage it needs to force remaining shareholders to surrender their positions. Other key shareholders haven’t disclosed their intentions.
Little can be done to stop foreign companies from pushing their way in. There are no restrictions prohibiting foreign ownership. All the rules and regulations that apply to local companies regarding ownership changes also apply to offshore companies.
Some companies have traditionally written in their articles of association limitations on the amount of shares able to be held by foreigners, but in the end the shareholders’ desperation and market forces, fear and greed will determine the future of any company.
Malcolm Wyman, group corporate finance and development director of SAB, says there is no protection from a possible takeover bid: ”It’s up to the shareholders. It’s a shareholder issue.”
Clemmow says local shareholders are running scared. ”The people who will lose out are the South African investors. They’ll sell out because they want to get out of their holdings, and foreigners will pick up these companies very cheaply.”
Once a sense of calm returns to markets, there will be a number of strategic company moves, both foreign and domestic. The good news is that takeovers mean that more direct foreign investment will flow into South Africa.
On the domestic front, smaller companies hurt by high interest rates and falling share prices will be merged with or scooped up by larger companies.
The bad news is that those South African companies will forever after be as South African, as, well, apple pie.