The Clover buyout: Why RMB had key role to play

Rand Merchant Bank (RMB) has helped facilitate several interesting deals in South Africa’s corporate landscape over the years. One of the most recent roles it has played has been that of sole financial advisor, lender and structuring bank to a consortium of investors led by Israel’s Central Bottling Company Group (CBC) when it came to their deal to acquire 100% of Clover. In this interview, Watson Hamunakwadi, Corporate Finance Transactor at RMB, explains RMB’s role in this deal. – Gareth van Zyl

This special podcast is brought to you by Rand Merchant Bank.

It’s a pleasure to welcome onto the podcast Watson Hamunakwadi who is a Corporate Finance Transactor at RMB. So, Watson, Rand Merchant Bank has acted as the sole financial advisor, lender and structuring bank to a consortium of investors led by Israel’s Central Bottling Company Group (CBC) especially when it came to their deal to acquire 100% of Clover. Just in terms of news flow, this has been one of the big business stories of the year in South Africa. But can you give us more background to this deal?

This transaction began over three years ago when a consortium of parties led by CBC began to look at Clover as they saw it as an opportunity for their stable as an acquisition that would move the needle as it were – especially in the context of finding a valuable asset within which to invest. Over that course of three years, we established a credible group of parties in terms of the consortium itself. The consortium was put together with the assistance of RMB and we came to a point where we could actually make the offer to the company and its shareholders and where we had resounding support from the shareholder base in the contents of accepting the offer, which essentially involves two aspects. This includes the fact that it represents significant value for Clover shareholders but also for the company to introduce a credible group of parties who are committed and very willing to grow the business into new trading markets that it previously was not in. This was also coupled with an international viewpoint which encourages the company to be more innovative and benefit from having a partner that has various global touch points in the context of the dairy industry.

Let’s dive deeper into RMB’s role on this deal. Can you explain to me how RMB approached this and how they worked to get it done over this period?

So what RMB did is that we initially began with this transaction when it was consummated over three years ago. There were no parties at the table that had formed any consortium so it was a group of parties that had an interest in executing the transaction but they certainly had to have the conviction to undertake the transaction. We had to play the role of an advisor who was able to ensure that the consortium of parties, first of all, got together but also that they got together around a business that they could understand and – with our relationship and our knowledge of Clover – then be able to have the kind of interactions that would form the basis and the premise upon which they could consummate a transaction at all. So we then played that role of deal maker in the context of making sure that the parties that were around the table were forming a credible consortium. We were involved in assisting with the structure of how that consortium would look. We also ensured that the parties that were around the table were all very much understanding of the local regulatory contexts and issues we might face. And we therefore effectively designed a process of engagement with all the parties, as well as with the company, in order for us to get to the stage of the transaction is complete. We often assisted in making sure that the funding behind this buy-out was adequately structured to ensure that the funding for the transaction was actually put in place and that it was representative of the spirit of what the partnership is given that it is a complete 100% buy-out.

This particular deal also represents a significant delisting for Clover, so has  it presented good valuation for shareholders in the end?

It certainly has. So at the point when the first cautionary announcement came out related to the transaction where the company indicated with clarity that there certainly was a transaction on the cards for a 100% buy-out of the share price – the premium that it was at was 70%. From a strategic view of Clover, it represented a trading price which the company had not reached on its own but also a price which we felt certainly represents significant value for shareholders. But in the same context, it allows an international investor to get their hands on what is a premium asset in the quantum of South Africa. Even with all of that considered, it still represents good value for the consortium especially amid the rhetoric that’s around South Africa assets, which sometimes bedevils the asset valuation which should be appropriate. So a company such as this certainly should have been viewed at a higher valuation but it was not in the market, and only an international investor who is able to see through the cycle and begin to look at the company in a more strategic level is able to ask questions like, what are the brands in the business? What is the distribution capability? How well positioned is this company? What more can we do? What is the cash flow going into the future? And they could certainly very quickly say that this is a premium asset that is being neglected in its own market. So, that was the benefit that they had of being an outsider, of having that outside-inside view of South Africa as opposed to an inside-inside view of South Africa. Certainly, it says a lot to our local investment community that asset prices can be very divergent if the pricing mechanism is correlated to views around where we are as an economy. South Africa has very strong public institutions, we have a great focus on good governance that is underway in this country. This is not a peculiar situation that South Africa is in, in the context of these matters, and investors that are able to take the long view can certainly look at quality assets that are mispriced and they can take advantage. I think this represents a case where a strategic international consortium was able to see through the pains of the country and be able to say over the long-term this is a premium asset and that this is the right time to acquire it.

It’s interesting that you mention that outside-in view because, obviously, this deal did happen against the backdrop of quite a depressed South African economic environment. What motivated the CBC in particular to persevere with the deal and what specific opportunities did they see that maybe other local investors didn’t see?

Well, firstly they looked at the fundamentals of the business, which are: what is the size of the distribution chain that Clover has, how is it positioned in the market, how is its growth and how much does it retain in market share year-on-year. And they then said that it looks very good and from an international perspective. Clover is also a company with a heritage of nearly a century of being a beloved brand, so in the end, the company is well positioned and you can introduce a variety of new brands. You also know you can certainly introduce a variety of new market tactics that would be on the back of a very strong existing fundamental business. So they ticked that box and said that’s important. They looked at the market and said, is the market or is the consumer in the greatest space? Maybe not but certainly Clover is growing, therefore, there is scope to be able to tap into other markets, particularly the informal market where the company’s distribution does not effectively reach as much as the potential might hold. This is particularly true given that the majority of the distribution of Clover is certainly more in the formal market. So that’s an opportunity for a market that is untapped. That said in the context of the capabilities of the company as well, can it do more on its own? Certainly. But with a strong international partner, there can be a lot of synergies that can be brought to bear in the context of how the operations will go forward. Those are the three key considerations that an international investor would have been looking at and then, of course, the political economic social context of the country is an overlay. But based on the fundamentals of a strong company. Those things being considered, one would then have to debate about whether we believe that the current economic social-political context is a permanent state of affairs for South Africa? Because certainly, it is eroding investor confidence in the country. But I think the answer to that was also that anywhere in the world there are periods of depressed economic political and a social context which certainly erode confidence, but as a long term investor and with CBC having been around for over 60 years, they could see through that and say that if things become settled in 5 years or 10 years, then this business is good. This is the primary viewpoint that the consortium took and it’s certainly a viewpoint that the social-political issues of the country are unlikely to persist in the long-term. And that’s what drove them to keep going forward. So it didn’t matter what news came out in the last few years, they were anchored in their view of the company, its potential, what it can do. And that was the premise upon which we could continue to have engagements, even through the difficult times that we face.

Because part of their plan is also to push into the more informal markets so many townships and more rural areas in South African, as well is that correct?

That is correct.

And is that a particularly untapped market at the moment? I mean why hasn’t Clover pushed into that space before? Has it been a lack of capital perhaps?

It hasn’t been a lack of capital per se. I think it is a strategy that is already in place so Clover has done a lot of work in terms of accessing informal markets. Certainly, a very recognizable portion of their revenue is derived from their capability to distribute their product into these places. But what you find with some of the partners in the consortium is certainly a greater strength and understanding of how far that can stretch. So the company already has these plans but it’s found a partner who is able to accelerate and also provide input, as well as being able to execute more effectively in the context of what is achievable.

Final question Watson: what lessons can be drawn from this transaction for local and international companies looking to South Africa to find valuable assets?

Key lessons are, firstly, our long-term fundamentals are correct, they are right, we are a country with a very good basis for being an amazing investment destination. We, certainly we ought not to keep within the rhetoric of thinking that our issues are more pronounced then they are. So one has to look at our issues as they are and say are these issues that will persist in a decade, in two decades? We’ve come a long way. In the context of 25 years of democracy, there has been a lot of change — so no situation persists forever. What we know of our country is that we collectively committed to creating a good place for all of us to live, work and do business and that is the basis and the mindset that people can take and ensure that they are aligned in their own minds around how they think about the country and how they think certainly about their investment. By so doing this we can have more clarity. Furthermore, it helps us to look at assets from a fundamental perspective and be able to be comfortable with the strength of the companies that we have in South Africa. There is a lot of good going for us and I believe that in this context having an outside-in view. We have to take time to look at ourselves and say we have a very good climate for investment. We have good companies, and we certainly see value. And when we are faced with challenges, we should look forward and be pro-SA.

Watson thank you very much for taking the time to tell us more about this interesting deal.

Thank you, Gareth.

This special podcast is brought to you by Rand Merchant Bank.