While there have been concerns raised about South African listed companies being gobbled up by international private equity firms, the good news is that should these take-outs go ahead, there will be a R50-billion cash injection into the JSE.
On the back of an announcement of Consol’s delisting, it is estimated that there are a further four companies that are in negotiations with private equity firms including Edcon, Alexander Forbes, Shoprite and Super Group. All together it is estimated that these deals would put R50-billion of cash into the hands of investors.
According to portfolio manager Chris Freund of Investec Asset Management, this will create a pool of liquidity that will be re-invested in the market and extend the bullrun a bit longer.
“A fund which has a mandate to hold 100% equities will have to invest that money back into the market,” says Peter Brooke, strategist for Old Mutual Asset Management. He also says that the pension fund managers who run balanced funds already hold cash weightings of 10%, which is high by historical standards. This means that they will want to invest the new cash injection. Brooke points out that should we have a market correction during the year, this extra cash will help cushion the blow and limit the extent of the correction, which is good news for investors who may be concerned about the current valuations on the JSE.
The delistings could be especially good news for the sectors they are in. For example, if a fund manager specifically wants exposure to a food retailer, with the possible delisting of Shoprite, they would only be left with Pick ‘n Pay and Woolworths’ food division. “If asset managers want a defensive share like a food retailer then it could give Pick ‘n Pay an artificial boost,” says Freund. With Edcon in the sites of private equity players, only Foshini, Truworths and Mr Price would be left for investors wanting clothing retail shares. “It will limit the universe available to us,” says Freund.
Ian Liddle, portfolio manager at Allan Gray, says that even more than the cash injection, the sentiment around these deals will be positive for the JSE. “Apart from more cash, it also means there is a whole new set of buyers for South African shares [who weren’t there before]. That is positive for people who own the shares; the more people who want to buy them the better it is for you and better price you will get.”
He says that Allan Gray has no quibble with private equity investors who are willing to pay a fair price for their shares. However, Allan Gray has been very public about the way in which the Shoprite deal has been orchestrated, forcing minority shareholders to sell at a price less than the asset manager believes it is worth. “It is fine to take a public company private if you have a willing seller, it is just in Shoprite’s case they have not given the shareholders a choice.”
Freund, however, has some concerns about solid South African companies delisting. “We need to consider seriously whether we want to sell or not. It is important that we don’t sell out too cheaply. You don’t want to lose excellent companies without being paid well for it.” Freund points out that the interest rate hikes are nearly over and that there are better times ahead for retailers.
Selling now would be a short-term view. He argues that investors should not let the family silver go without at least a 20% premium. “I think fund managers are going to be more prepared to walk away from deals and that some of these won’t happen.”
Freund says the JSE needs some very big listings to come through to replace the companies that have delisted already, such as De Beers, as well as potential delistings such as Edcon. These would ideally be large utility companies such as the Telkom listing three years ago. He is hoping to see Eskom and Transet coming to the JSE at some point.