Inside the Alexander Forbes listing – a market experts perspective

Six years ago, financial services and administration company Alexander Forbes delisted amid a scandal over so-called “bulking” – essentially, Alexander Forbes cheated customers out of the profits it made by pooling their accounts and earning higher returns from banks on the pooled accounts. The company’s reputation took a big blow when the scandal broke in 2006, and in 2007, Alexander Forbes delisted from the JSE and was bought out by a private equity consortium for the handsome price of R8.2bn. This week, however, Alexander Forbes announced that it was headed back to the big board. The deal is a little complicated, especially since about 30% of Alexander Forbes remained listed for those investors who didn’t want to sell back in 2007. Essentially, Mercer Africa, a subsidiary of US-based insurance broker Marsh & McLennan, will buy 14.9% of Alexander Forbes at the time of its IPO back onto the JSE, and another 19.1% pending certain regulatory approvals. Alexander Forbes will apparently not be offering new shares to the public, and some details are still needed to evaluate the deal, but it is exciting to see Alexander Forbes return to the JSE. – FD  GUGULETHU MFUPHI:  Thank you so much, Tshepiso. Let’s take a quick look now at how markets are currently performing. Well, it’s interesting to note how the markets are currently performing, but to help us get a more in-depth view of them we’re joined at the desk by Sasha (the Russian) Naryshkine, from Vestact. Alec looks at me with a smile on his face. You look at me in agreement… SASHA NARYSHKINE: Look, half of my family on my mom’s side all live in France because the Russians kicked them out about 100 years ago, so there we go. ALEC HOGG: [Inaudible 01:15] your name. Great score over Switzerland – [Le Nasharine? 01:19]. SASHA NARYSHKINE: Le Naryshkine. ALEC HOGG: No, you can’t. Naryshkine is a little bit too Russian. We have lots to talk about. Have you had a chance to look at Naspers? SASHA NARYSHKINE: In detail…it’s every interesting because what they spent on development of their ecommerce business in their 2013 financial year (not 2014), is about as much as that business had in revenue in 2010. It just shows you how that business is changing. You were talking about Bob. Remember, Bob van Dijk came from eBay Germany. Before you say ‘oh, eBay Germany’, Germany was eBay’s second-biggest contributor by revenue. ALEC HOGG: He was the top guy there as well. SASHA NARYSHKINE: Exactly. They even refer to their satellite TV business as legacy business. Here’s a business that’s maybe worth ninety billion and is growing revenues at 20 percent per annum, and they’re talking about that as a legacy business just because they’ve seen very fast changes in the developed world where you’re seeing people cutting the cord on their satellite TV. ALEC HOGG: You’re going to stay with us (I hope) while we watch the interview with Bob and then, we’d love to get your comments on that one afterwards, so let’s not go too deeply into Naspers now. The other big story of the moment is Alexander Forbes. I’m sure you’ll recall how much trouble they were in before they de-listed in 2007. SASHA NARYSHKINE: Essentially, it’s booking the last price on the day. I think that’s what they refer to as ‘bulking’. Unfortunately, you put yourself ahead of your clients, which is illegal, and which is why I guess, they paid the fine. ALEC HOGG: Five-hundred-million. SASHA NARYSHKINE: Five-hundred million. That obviously left a lot of people with a bad taste in their mouth. I still think the industry needs to do a lot more in improving standards, in bringing down costs to their clients because those of ‘white ant’ – the way it returns over a significant period of time. I like the conversations you have with the low cost index tracker people. I don’t think index tracking is perfect, but from a retail point of view, it probably is a much better option because it’s low-cost and it’s what everyone’s trying to do, which is to beat the index. For normal retail clients that are contributing on a monthly basis, I always think that that’s a much better option. GUGULETHU MFUPHI:  Is it one that you’ll be looking out for, once it does list? SASHA NARYSHKINE: No, our only interest in this was that we own Discovery shares, so we were hoping Discovery didn’t overpay because in the Investment Solutions part of the business…they didn’t have a significant presence there. You must remember that everyone was called in and told, ‘okay let’s see what you can come forward with here’, so our only interest in it was that we hoped Discovery wouldn’t overpay. That’s why I think Discovery’s price has been moving north in the last ten days or so. ALEC HOGG: Just unpack that. SASHA NARYSHKINE: Well, we were hoping that they wouldn’t overpay because they wanted to aggressively get into the same space that Investment Solutions was in, because they’re not there whereas all the other majors in South Africa are there. The fact that Alex Forbes is listing is a positive for us, as Discovery shareholders. ALEC HOGG: As far as the legacy is concerned with that company, do you think it’s going to have much of an impact? SASHA NARYSHKINE: No, I don’t think so because people have very short memories in the investment space. ALEC HOGG: This time? SASHA NARYSHKINE: Not just this time, but also everywhere. Last week is a long time ago. As you said, I’m sure an enormous amount has been done in cleaning up the business as well as scrubbing out past businesses that weren’t necessarily the ones they wanted to be in, for example, insurance. ALEC HOGG: As a 34 percent shareholder…? SASHA NARYSHKINE: That can only be a positive. That can only be a positive. Maybe that signals intent on their behalf and maybe gives the rest of those similar-type businesses a bit of a premium. If a global player of that scale is interested in a business like that, then there must be other businesses that are looking for growth opportunities, particularly in what is still the most underdeveloped continent from an insurance point of view. I guess that’s a net positive for the whole sector. GUGULETHU MFUPHI:  Well, we will be getting insights from Edward Kieswetter a little bit later on. He’ll be joining us today. We’re also speaking to a gentleman from the Competition Commission on the enquiry regarding LPG Gas in South Africa. It’s interesting to note that both Sasol and Afrox are down on the back of the news. Are investors reacting a bit too early? SASHA NARYSHKINE: I don’t know. At the end of the day, we’re sitting with an amazing resource on our doorstep. You must remember that Sasol provides the electricity – government electricity provider in Mozambique, with gas through a turbine of their own. Ironically, if we wanted to lower energy costs to South African households, we’d open up the grid for Sasol to expand more. They’re becoming energy self-sufficient because they have this massive supply from Mozambique, which is on our doorstep. We have gas supplies here too, so ironically, you can’t have the same argument on the one side if you’re blocking them from becoming an energy generator on the other side. ALEC HOGG: I wonder how they pick which sectors to go after, because one I’d immediately go for would be retail. SASHA NARYSHKINE: Or SAA. GUGULETHU MFUPHI:  Retail, Alec? On that note, what about retail? SASHA NARYSHKINE: You can’t, because retail essentially does regulate itself in the South African context. ALEC HOGG: Think about this. I know, because we had a little stall. We were paying R1000.00/m2 for our little 50m2, whereas our competitors were paying a fraction of that and our competitors were much bigger, and they had bigger buying power anyway. That’s part of the whole game. In Australia, you can’t get away with it. [Inaudible 07:17], Woolworths, by the way. SASHA NARYSHKINE: Well, I don’t know. Woolworths have been in Australia for the better part of 20 years. That’s why that whole fight with Solly Lew and Country Road has been ongoing. To shift the argument about whether or not they manage to get that specific deal through or not, for David Jones, will be positive either way. I have no doubt that they will prove that they can take a beaten up asset and turn it around in the same way they’ve done before. This is a management team that have done the hard yards. This isn’t somebody who’s going into Australia naively. ALEC HOGG: This is not Country Road. This is different business. SASHA NARYSHKINE: Yes, I know. When they bought Country Road, you will recall

that it is today. They’ve done a lot of hard work in turning that business around. Premium Brands have done a lot of work. ALEC HOGG: You’re drinking the Kool Aid, hey. SASHA NARYSHKINE: Drinking the Kool Aid… Well, we are Woolworths shareholders. ALEC HOGG: Well, there we go. GUGULETHU MFUPHI:  Sasha, calm down. SASHA NARYSHKINE: I’m always calm. GUGULETHU MFUPHI:  You’re always calm. Just to wrap things up, the market performance has always been on quite a steady run at fifty-one-thousand points and above, as we’ve seen consistently over the last couple of days. Is it still overvalued or should we just enjoy the run – the bull market? SASHA NARYSHKINE: What was interesting was that I saw tweet from [Edy Olsebauer? 08:40], a prodigious blogger in the U.S. He said ‘eek, valuations in the S&P have gone from fifteen-and-a-half to sixteen-point-six. Everyone run’. ALEC HOGG: We’re at eighteen-and-a-half, I think. SASHA NARYSHKINE: We’re at eighteen-and-a-half, so as long as you have the growth rates, which I think, you are seeing… There are segments and spots in the market where you’re not seeing the growth come from, but remember that our market is now largely driven by a lot of companies that have a big international presence. I’m not too concerned about overall market. I think you have to look at your business, specifically. ALEC HOGG: You don’t need to start selling your Satrixes or your index trackers because most of that is actually offshore exposure anyway. SASHA NARYSHKINE: Exactly. ALEC HOGG: It’s a nice hedge against the Rand, which is probably the one thing you’d be a little concerned about, rather than with all the knock-on effects of what we’re seeing in our country. SASHA NARYSHKINE: Dead right. ALEC HOGG: Sasha, we didn’t get to talk about Curro, but maybe you can just throw your five cents in there – big rights issue. SASHA NARYSHKINE: Again, as with DSTV, when you’re operating against the government and that’s your alternative in low-cost private school education, there’s an enormous amount of room for growth. Whilst that company looks completely overvalued from an earnings point of view, in due course and time, whilst they’re on this acquisition spree, many positive things can come out of Curro in the next five to ten years. If I were a shareholder there, I would stay the course. GUGULETHU MFUPHI:  Well, we’re also aware of the bookbuild by PSG. They’re no doubt going to invest some of that capital into Curro. We will continue with this discussion with Sasha after the break when we focus on Naspers’ full-year results. Don’t go anywhere.

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