LONDON — In this special podcast, RMB Investment Banking Director Ferdi Vorster tells us about the project which simplified a complex structure for the Distell Group to position it for a new growth path. The Distell Group, created in 2000 by a merger of Stellenbosch Farmers Wineries and the Rupert Group’s Distiller Corporation, has been hamstrung by a highly complex ownership structure. Here’s the story of how that Gordian knot was addressed.- Alec Hogg
Ferdi, you’ve been at this for four years.
Yes, Alec. This structure has been in place for a very long time. There was a period in South Africa when these types of control structures were quite popular. Various layers of companies would be inserted above listed companies, and through the holding of 50% or more through these layers, you could effectively control those structures. Distell was one of these companies.
There were a few others, but over a period of time, these structures became very unpopular with shareholders because it had a detrimental effect on those companies – principally because it limited their free-floats and ability to raise capital. As you know, typically, the JSE requires a minimum free-float for a company of 20%-plus. Distell was below that level and although the JSE condoned those types of arrangements, it had an impact on the tradeability of the shares, purely because of the fact that a large chunk of the shares was locked up in these controlling structures.
On top of that, it created a discount if you flowed through these structures at various levels. Typically, investors would want to try and arbitrage the underlying value of these structures by investing in the upper layer of the structures where it was typically discounted in. Over a period of time, investors decided they don’t like these types of structures because of their largely detrimental effect on these companies.
Just as a thought there, maybe unpack a little more. It wasn’t quite an “N”share structure but something of a pyramid where in the past, you had well, you’ve still got it with Naspers for instance as a Naspers N-share. You used to have Primedia N-shares and at some point in time, the JSE tried to address all of this. Did Distell fall into this camp?
No, Distell didn’t fall into that exact category as Naspers did. The Naspers structure still has N-shares, but the Distell one was slightly different in that you had 52.8% of those shares sitting in a company called RCI. RCI was an unlisted vehicle and effectively was joint-controlled by Remgro on the one side and Capevin on the other side. Both of those companies had 50% in RCI. Capevin was also a listed vehicle with RCI being its only asset.
Effectively, that controll structure was a double-layered structure as opposed to the N-share structure where the voting in the shares are slightly manipulated, so it’s a slightly different one from the Naspers situation. These structures were typically set up through families. Pick n Pay had a similar type of structure and that one has also been collapsed.
Right, that was Pickwick and Pick n Pay of course, on that side. Just to go back here: it must be really difficult to get decisions made if you’ve got Capevin on the one side and Remgro on the other? Were they able to work together?
They were friendly. I think the benefit of this collapse was that shareholders in Distell specifically asked for the structure to be collapsed. I think that even with Capevin there were a number of shareholders that started to realise that adding an additional layer is detrimental to the tradability of the shares.
The larger shareholders like Remgro and Capevin – although they were the effective controllers – had to listen to what other shareholders were asking. It’s something that’s been discussed for many years at shareholder meetings at Distell.
Distell was open to collapsing the structure but could just never find a way to do it in a manner that would make all the shareholders and stakeholders happy. We started on the design of this transaction about four years ago, so it was quite a long time. It was a difficult process with a long path to come up with a solution that all parties were happy with.
I think the intent was always there. It was just to find the correct way and means to do it to make all shareholders happy. We were quite fortunate in coming up with the mechanism to do it.
Before we look at the structure itself, with 52.8% in a controlling shareholding structure, I guess that did restrict the ability of the Distell Group to grow through issuing additional shares.
Without a doubt. I think that was a large part of why the shareholders were asking for a long time for the structure to be collapsed. You can well imagine that for Distell to raise cash from its shareholders (typically this happens though rights issues), it often has a dilutionary or accretion impact on shareholders. The controlling shareholder being the RCI company, would have been fairly reluctant to allow any rights issues to happen if it could impact its 52.8% share. You can also realise that the buffer isn’t that great above 50%.
For a very long time Distell had to rely on its own internal cash to achieve its growth. Although it had a very healthy balance sheet, the major portion of the growth was funded by loans from banks. In an environment where interest rates are starting to creep up, that could have a negative impact on companies.
I think Distell did quite a lot for its ability to grow, purely because it never had the ability to use its shares in some shape or form as currency for acquisitions or to raise cash from shareholders. That was one of the big drivers for Distell to collapse structure because they were just never able to raise cash from shareholders.
It’s a sizeable business – 5 000 employees, ZAR17-bn in turnover, ZAR1.5-bn in profit – so you can see it’s almost at that level where it now needs to flex its muscles and to move on to the next level, I guess. You said that you’ve been working on this for four years now.
Yes. When RMB gets involved in these types of transactions, people often think that we just lend money to clients, but a big part of what we do in our Corporate Finance division is to come up with solutions for corporates besides just giving them money. When you start to look at this, you know that there’s a shareholder’s stake and there’s a demand for the client to come up with a solution.
We went through various iterations and scenarios to try and develop something that we thought was workable. We also had to test that with the company. We had to canvas this with the shareholders and clearly, in the South African environment, there’s a lot of regulatory requirements that one needs to adhere to which means we had to go to the JSE and the FSB.
The TRP became involved, so it took us quite a bit of time to eventually persuade the company that we had a solution that could work for them and ultimately all the shareholders, while getting all the necessary approvals. Typically, the approvals involved the JSE, FSB, TRP and although not directly involved in this one, one has to get the Reserve Bank to also sign off on these transactions.
It’s an iterative process. Just when you think you have a solution, someone has a problem with it. You need to make a change and you then have to start the process from scratch and go through all those levels again. That’s partly why it took so long to come up with something that we really believed would be approved by all parties.
From a commercial perspective, do you start a process like this on risk or does the board of Distell say, “There we go, guys. This is our problem. How do you find a solution for us?” Clearly, that’s RMB’s game, isn’t it? Solutionist Thinking.
Yes. I think we pride ourselves on being Solutionist Thinkers. We are an investment bank and we charge an investment banking fee, but it’s a service that we deliver to companies to find innovative solutions, so that they can concentrate on running their business. They don’t always have the internal resources nor the time to think about these types of solutions. That’s our role – to assist companies to do those types of things and ensure that in the process, we come up with answers and solutions that could create shareholder value.
Once you’ve looked at the complex structure (and we now know that on the 6th of June, it was relisted), how different is it today to the situation that existed in the old listing of Distell?
We re-listed the new company,, but effectively. the new Distell company is a mirror of the old company. We effectively acquired the full structure that existed in Distell previously and that now sits below the new holding company.
From an operational perspective, very little will change. It will be business as usual. The one benefit that we now have is that we have one layer of shareholders in the new company, so there’s no double entry points for shareholders, which typically result in limited free float. In the previous structure Distell’s own free float was roughly 20% because that was from outside shareholders and many shareholders sat in the Capevin structure.
By consolidating the Capevin shareholders and the minorities in Distell into one block, you now have a free float of roughly 40% in the company. In our world that has a nice impact on the tradebility of the shares. Another benefit is that through the double-layered structure, you’d typically have shareholders who would try and arbitrage the share price and it doesn’t really give you a fair reflection of the underlying assets value in the company. By having this one single entry point into the company, you suddenly start to see that people aren’t trading the shares to seek the premiums or the value differential in the structure. They now need to invest in the company and take a view on the underlying value, so that the new value of the assets will start to be reflected in the share over a period of time. Distell now has the type of structure that they can go to shareholders with and raise cash with through rights issues to help them with their growth.
It’s a R29bn market capitalisation now – the new company. What was it before? What I’m trying to get at here is whether the value has yet been unlocked.
I think the market cap is very similar. It will take a little bit of time for investors to understand the new structure. There are two things influencing a share price: the view people take on the asset and the view that the market takes overall. I think at the moment everyone understands that there is a bit of negativity on the JSE and share prices are a little bit depressed. We hope and believe that as soon as there is a more positive sentiment in the market as whole, the share price will start to pick up and the market cap will go up over a period of time.
Another benefit of this structure is that with the increased free float, the Index Tracker Funds would now also start to show more interest in the stock due to the increased free float. So it will attract some new investors to that.
I think it’s going to take a bit of time for the market to understand the new structure and with some positive sentiment coming back into our market over a period of time, I think it will have a positive impact on the share price and the market cap.
Would a structure like this make it possible now for the group to expand globally?
Yes, I think it would. I obviously can’t speak about the group’s plans but the CEO did say in the press that the company is planning to exand.. Africa is a specific focus area. The new structure is likely to give them that ability.
As I said previously, where they could not use their shares as currency to make acquisitions, they are now able to do just that. I think it was also reported in the press – not too long ago – that they’ve made a large acquisition in Africa and they’ve also disclosed to the market that Africa is a big target for them.
And, the fact that they have identified Africa as the opportunity into which they would like to expand – an area where you’ve been spending a lot of time and you’ve got lots of representation there – no doubt, you already have some ideas in the back of your mind.
Yes. Africa is a place where everyone is looking to make acquisitions. A few years back it was very popular. Foreigners were seeking to get their pot of gold in Africa. The macroeconomic issues have had a bit of an impact on growth factors in Africa for the last three to four years, but those things should start to stabilise soon as those issues become more stable.
I think the growth in Africa is still somewhat higher than what people can get in Europe and in the more developed countries, so it will always be a popular place for investments. As the usage of alcohol is still much lower in Africa than it is in Europe, there’s a large opportunity for them to grow their business there. It’s always a question of, “Where do you find the right target for the right price?” and yes, maybe we’ll have another two to three years to go through, but hopefully we can help them find those targets.
That was Ferdi Vorster, the Investment Banking Director at RMB and this special podcast was brought to you by RMB.