One of the many things I love about David Shapiro is that he has opinions that he’s never afraid to share. There’s rarely a boring conversation when he’s involved, and today’s Power Lunch interview was no exception. Yesterday David attended the BHP Billiton presentation on “SpinCo” – where 10% of its so-called non-core assets, including all the South African operations, are being hived off into an independent business. We tossed the ball around a bit before coming back with the possibility the new business could attract the attention of Glencore, the global mining giant created by Johannesburg’s Ivan Glasenberg. An interesting prospect. And another reason why the new SpinCo, when it is listed, could be an exciting investment opportunity for South Africans. – AH
ALEC HOGG: Let’s get a more in-depth view of the market with South Africa’s favourite market commentator. David Shapiro from Sasfin is with us in the studio.
DAVID SHAPIRO: Alec, I think yesterday’s Shoprite results as well as today’s Massmart’s warning, just gives us a clear indication of where this economy is going. I’m very nervous of it and I think we discussed it before. Therefore, when we start to talk about bank downgrades, I can perhaps understand what the rating agencies are looking at: not at what’s happening now, but what’s down the line. I’d be very nervous if I were a lender and I would certainly tighten my credit criteria because one’s not quite sure whether the people who you lend money to, are going to pay you back – no matter at what level. I think this economy is under a lot of pressure.
ALEC HOGG: So you’re a Moody’s fan. We’ve been giving Moody’s a bit of a rev here….
DAVID SHAPIRO: I’m very cautious. I’m not saying that they needed to downgrade, but I’m very cautious of getting too carried away with retailers and also looking at banks.
ALEC HOGG: But we’ve been talking about retailers, Dave. You remember in Omaha this year, Dave and I were at a Value Investors conference. A guy stood up there – Pat Dorsey. He used to be the Head of Research at Morningstar. He now has his own business. He was talking about ‘pockets of opportunity in the world’. He said South African retailers have the highest return on equity anywhere in the world, and that’s a warning bell for me if ever there was one. Now it’s all coming home. They’re just coming back to normality. They had a wonderful run.
DAVID SHAPIRO: Looking at history, I think this is an economy, which is under a lot of pressure. We can’t ignore the platinum strike. We can’t ignore the effect that the manufacturing strike had. The other thing is I listen carefully – and I was at the BHP Billiton presentation yesterday. If ever you want to know how to present, they did it really well – 45 minutes. They spin it well.
ALEC HOGG: They’re spinning South Africa… The fact that they’re ditching us: they don’t want South Africa anymore.
DAVID SHAPIRO: No, they don’t want South Africa anymore.
ALEC HOGG: And yet, they spin it as ‘well, we’re giving a new independent company (in fact, we call it SpinCo, which kind of gives it away)…
DAVID SHAPIRO: Yes, they call it Newco. We call it SpinCo, but it’s spinning it off. These are the older, more mature operations.
ALEC HOGG: They’re South African operations, David.
DAVID SHAPIRO: Yes, but there are some in Chile.
GUGULETHU MFUPHI: Show some optimism here, Alec.
ALEC HOGG: They don’t like South Africans anymore.
DAVID SHAPIRO: There was a wonderful slide he showed of all the operations in 2005 and how they’ve grown now, into 2014 because of the demands that are coming out of China and that’s what’s differentiated. I don’t look at it negatively. I look at it in the same way as Goldfields spun off Sibanye, and look how well Neal Froneman’s done, which is a job that Goldfields couldn’t do.
GUGULETHU MFUPHI: Alec raised concerns yesterday about the new CEO that’s been appointed there, because he’s a bookkeeper.
ALEC HOGG: He’s no Neal Froneman.
GUGULETHU MFUPHI: Exactly. He’s Australian. He’s a CFO, so maybe on the management front there we might have to be cautious
DAVID SHAPIRO: I can’t comment on that one.
ALEC HOGG: He’s like a bean counter.
DAVID SHAPIRO: I’m an accountant.
ALEC HOGG: Froneman is the furthest thing from a bean counter you could hope for. If you’re going to turn around an asset that isn’t performing, don’t get an accountant to do it. All he’s going to do is just chop it up, whereas you’d get a Froneman who can make magic.
DAVID SHAPIRO: That will be the acid test: whether he can take those assets and generate the kind of cash returns.
ALEC HOGG: The headquarters is in Perth.
DAVID SHAPIRO: Yes.
ALEC HOGG: So here, you have a South African business…
DAVID SHAPIRO: Because it’s close to South Africa…
ALEC HOGG: Again – SpinCo…
DAVID SHAPIRO: Look, they’re keeping Mozal. They’re keeping Hillside. Bayside has been scrapped.
ALEC HOGG: Would love to hear what Brian Gilbertson has to say about this. What do you think he’d say? In 2001, Gilbertson was the next CEO after Anderson (I think his name was). Gilbertson came and he was going to run this. This was going to be his company – South African boytjie – the big Australian and the big South African company put together. Gilbertson was fired by Don Argus, the Aussie chairman (he cited irreconcilable differences).
DAVID SHAPIRO: Then they had another South African coming in.
ALEC HOGG: No, but he says he’s not a South African. I remember reading his profile in the FT. Marius Kloppers said ‘I’m an Australian. I have nothing to do with South Africa. I dissociate myself with that terrible country’, and now we have the last little bit of vestiges of the South African business being spun off into a SpinCo, ‘because it’s better for that business’. Come on.
GUGULETHU MFUPHI: I think ‘spin’ needs to be a banned word here, David. We’ve used it too many times in this discussion.
ALEC HOGG: I agree.
DAVID SHAPIRO: The point I got out of it – and you’ll see it with Glencore as well – is that you have to increase production (in other words, efficiencies). You have to increase volumes, efficiencies, and safety because commodity prices are not going to go up and that’s the challenge we have here.
ALEC HOGG: Would you buy the shares in it?
DAVID SHAPIRO: I like BHP Billiton. I would stay with BHP Billiton and I’ll see what happens once the…
ALEC HOGG: Stay with the rump.
DAVID SHAPIRO: I’d stay with the rump.
ALEC HOGG: The new Sibanye, potentially.
DAVID SHAPIRO: It’s too small. It’s only going to be about ten percent of the overall assets, I think, or thereabouts. I haven’t looked properly at Glencore, but I think he’s the smartest of all the managers.
ALEC HOGG: But wouldn’t he whip them out? Isn’t that a nice takeover opportunity for Ivan Glasenberg (Glencore CEO)? He doesn’t mind South Africa. He doesn’t hide his South African roots, either.
DAVID SHAPIRO: At the right time of the cycle, there might be something for him there. Look at them. They’re not bad assets. There may be one or two bad assets.
ALEC HOGG: They’re very good assets. They just happen to maybe, have been…
DAVID SHAPIRO: They’re in emerging countries, maybe countries that BHP doesn’t want to be in. I don’t think they’re poor.
ALEC HOGG: David, we’re going to come back. South Africa’s going through the darkest of times. We know that. We’re going to come back and when we come back, I want to go to Melbourne, stand in the BHP headquarters and say ‘guys, you all deserve to get your bonuses halved, because look at the stupid move that you made – getting rid of us’.
DAVID SHAPIRO: I’m going to depress your day more. You’re a Daily Telegraph reader. Well, you taught me to read the Daily Telegraph. I still have it on my Kindle. They have chosen the best cities in the world to live in. The worst thing is that in the top ten, there were four Australian cities: Melbourne, Sydney, Adelaide, and Perth.
ALEC HOGG: Why? Because nothing ever happens there.
DAVID SHAPIRO: Well, its comfortable living.
GUGULETHU MFUPHI: Do you think Woolies is aware of that fact, now that they’re entering into that territory?
ALEC HOGG: Well, Woolies says nothing ever happens there, so they go shopping.
DAVID SHAPIRO: Then there was Vancouver, Calgary, and a whole lot of other places.
ALEC HOGG: Calgary. Vancouver. The best description I heard of Vancouver was a South African who actually lived there, grew up there, said it’s sterile. Not too sterile though, because when you walk down the streets there – you know they have free drugs, so they have all the drug addicts gather in Vancouver – literally – in a place where they’re given drugs. This is the reality. Unfortunately, during the day these guys walk the streets and try accost you for a little bit of extra money because the government doesn’t give them enough drugs perhaps. The whole world has issues, but it irritates me when you have a merger of a good South African company – now they’re now spitting back the offshoots.
DAVID SHAPIRO: I see it more as Froneman would. I think two different policies are needed to run that process.
ALEC HOGG: Put Froneman in it to run it then. Don’t put a CFO there.
DAVID SHAPIRO: You could do it. You could split it within. You could keep it within. You didn’t have to spin it off. There I might agree with you. In other words, run two different, parallel companies within one.