Spare a thought for Russell Loubser this Christmas. If the buyouts of listed companies continue, the JSE’s CE may find himself presiding over a stock market that’s merely a shadow of its former self. Already, the private equity sharks are circling and have a number of kills under their belts. More are expected in the new year.
Private equity deals involving listed companies amount to R33billion so far this year, with another large deal still being negotiated. A significant portion of this is foreign investment, signalling a massive vote of confidence in our economy and boosting our balance of payments. To put this into perspective, Barclays’s purchase of Absa, announced in 2004, came to R33billion.
But the cost to the stock market is high. The departure of Shoprite and the planned delisting of Edcon, with a combined total market cap of R35billion, wipes out a third of the value of the once-vibrant food and drug and general retail sectors.
The trend kicked off in January when Waco International, which had been about to list on the JSE, was bought out by Hong Kong-based CCMP Asia. That deal was worth R5,4billion. Alexander Forbes was bought for R8,3billion. Next up was Shoprite, which controversially accepted an offer for R13,5billion last month, when the market had hoped for more. This week, Supergroup said its private equity deal had fallen through, but Consol said it would be bought out for R6billion. Edcon is also in buyout talks, with an offer of R21billion on the table. Altogether, private equity buyouts of listed companies, including Edcon, total nearly R55billion.
The Shoprite deal has garnered controversy as the price equates to R26 a share, lower than the closing price of R28 a share when the amount of the offer was made public. On the other hand, investors have been happy with the price paid for Consol, which is a 46% premium on the share price before the cautionary was issued.
“For investors, it’s not great news to have all these companies delisting,” said one analyst, who asked not to be named. “It’s not good for liquidity, it’s not good for the image of the stock market and investor choice is limited. It’s also frustrating because new companies aren’t listing.”
Market watchers have been complaining that the JSE is fully priced, but it is clear that the private equity firms believe there is still plenty of value to be unlocked. “The challenge for private equity is to make returns for their funders, so they must be seeing something,” said Ernst & Young director of corporate finance Dave Thayser.
“In a sense, they’ve popped up out of the blue. The cynical view is that there’s a lot of private equity money chasing around looking for a home. They’ve been to India, they’ve been to South America, and now it’s our turn. And that’s fine, as long as it heads our way. We’ve found ourselves on the global map. In global terms, it’s not a lot — $170billion was invested in private equity in six months — but it’s still significant,” said Thayser.
Private equity firms funded buyouts valued at $300billion last year. Thayser said this figure would double for 2006.
Analysts say a significant part of the local deals is of foreign origin, but it is difficult to calculate just how much. Brait, one of the local private equity funds involved, says about 60% of its cash is sourced from overseas, while Ethos, another local fund, says there is a “good mix” of local and foreign cash. A significant amount of its funds are from North America.
“A lot of it would be foreign, but it depends on who is doing the deal,” said Peter de Villiers, a manager in Deloitte & Touche’s corporate finance division. Most deals also have debt components, which De Villiers said would be sourced from both local and foreign lenders.
While local funds have been doing private equity deals for decades, what has changed is that now foreign funds also appear to be interested. De Villiers said international names such as KKR (New York-based Kohlberg Kravis Roberts & Co), Bain and Blackstone could make a showing. “They do huge deals and have huge access to funds. [As they haven’t invested in South Africa previously] this would be like a greenfields area to them,” he said. “Next year will be quite exciting from a South African private equity point of view.”
As Shoprite and Edcon will both delist from the JSE if the deals go through, there is not much left in the retail sector. De Villiers said information technology and manufacturing firms could be approached, as many international funds had a strong IT focus.
T-Sec economist Mike Schussler said the influx of private equity money has “definitely helped” the economy. “It’s one of the reasons why the rand has been relatively stable recently,” he said, pointing out that the currency has stayed within the R9.30 to R9.50 trading range against the euro for some time now. Local fuel prices have dropped despite the international oil price remaining flat, because of the rand.
The private equity inflows signal increased confidence in the economy, from inside and out. “We’re getting a thumbs-up from many people and many investors,” said Schussler.
Because this kind of funding is a longer-term commitment, it would also help the country’s balance of payments. Imported goods such as cellphones will remain relatively inexpensive. “We will be able to afford a bigger red mark in our cheque book with the rest of the world, which is our current account,” he said. “For South African consumers, we are getting a very good deal.”
What is private equity?
Local private equity funds have been operating in South Africa for decades. What is different this time is that big foreign investors are making their presence felt. Private equity funds use money raised from mostly institutional investors — including life companies and pension funds — to buy majority or large minority stakes in companies.
Targets for private equity buyouts include undervalued companies, which have good growth prospects for the future, strong management and good cash flow. Typically, they hold the stock for between three and seven years and then on-sell to other private equity firms or large companies, or publicly list the company. — Jocelyn Newmarch