Esorfranki CEO Bernie Krone (60) has never played his cards close. A straight shooting civil engineer who has been with the business most his career, I’ve experienced this up close. First when he came to visit after now defunct Sanyati had alleged Krone’s business had bribed officials over KZN Western Aqueduct project. And again last week in the CNBC Power Lunch studio talking about the sale of the group’s crown jewels, Esorfranki Geotechnical. This, the largest of three division, was described in the 2013 annual report as “our Sub-Saharan ambassador” with offices in Angola, Ghana, Mauritius, Mozambique, Tanzania and Zimbabwe. Its footprint together with the strong SA presence attracted UK’s Keller Group plc, the world’s largest geotechnical specialist. Krone says it was either sell to Keller or risk being swamped by the multinational which was coming anyway. The board decided it was best to sell. The price, at R500m, is close to the R512m the division was valued at in the 2013 annual report. Significantly, the other two divisions are valued at R873m, so this is a disposal of 37% of the group’s assets which generated half of the last financial year’s operating profit. Keller’s entry is significant on a number of levels. It sees the largest geotechnical business in SA moving into foreign hands. It also heralds a potential wave of multinational construction groups wanting to get their slice of the Africa story via SA. And coming this route because of poor relative ratings of local construction stocks after reputational damage wrought by the Competition Commission investigation. If there are more Keller’s on the sidelines, those low ratings won’t last. – AH
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ALEC HOGG: Before we pick up with Bernie Krone (CEO of Esorfranki) let’s have a look at this share price graph because it has been quite a story today. Bernie, you need to unpack this for us. You’ve got a market cap of R650m. You’ve done a deal to sell part of your business for R500m and the share price at one stage was down 10% today. It’s down 7% at the moment as we saw from the graph. Are we misreading this?
BERNIE KRONE: I think there are people that regard our Geotechnical business as being the crown jewels, so announcing we’re disposing of it is a bit like selling the crown jewels. I must say from a personal point of view; I’m a Geotechnical man.
It is a bit like cutting out my heart and giving it to somebody else.
But I think we’ve got to look a little bit deeper than this. Keller is a company that is 30 times the size of our Geotechnical business and they’re coming to play in Africa. It’s a bit like somebody saying they’re going to steal your car out of the car-park, but then buy it from you and take you out to lunch; so that’s what’s happened now.
ALEC HOGG: What’s Geotechnical?
BERNIE KRONE: Anything to do with ground, foundation work, piling, lateral support. So foundations for buildings…anything to do with the ground. Ground engineering is another term for Geotechnical work.
ALEC HOGG: Is it your original business?
BERNIE KRONE: It is.
ALEC HOGG: You had Esor and Franki.
BERNIE KRONE: Esor and Franki were originally Geotechnical. Then we got into Civils and Pipelines.
ALEC HOGG: So what’s left after this deal?
BERNIE KRONE: What are left is the Civils and the Pipelines and the pipe-jacking, culvert-jacking and bridge-jacking are staying with us as well. They will do it in down in KZN. Well, they can do it wherever they like. I must be careful not to run foul of the Competition Commission rules here, but we will be competing in that market; in the pipe-jacking, culvert-jacking, and bridge-jacking market as well.
ALEC HOGG: Why the market has marked down your stock so aggressively?
BERNIE KRONE: Well, we’re still higher than we were a couple of months ago. I guess for some people, the sentiment is ‘why just be in another construction company?’ We believe that after this, we will be a lot more focused on those two divisions which will continue to go along. I’ve always said that when I’m in my 80’s in my rocking-chair, I would like to see the brand going forward. I think this deal ensures that both brands will still go forward for many years to come.
ALEC HOGG: It’s about as much as you have in debt – the R500m that you’re getting in. Is that where it’s going to be applied?
BERNIE KRONE: We’re hoping to settle our high-yield bond and some other debt as well. We have to. The deal is cash-free/debt-free basis for the Geotechnical business, so there will be a bit of debt that we have to settle on that side. We’ll probably be left with a debt equity ratio of somewhere between 20 and 25%. It depends on how things pan out.
ALEC HOGG: Were you pushed into this, if you’re talking about the high-yield debt?
BERNIE KRONE: Well, not really. But we would have liked to have done a 50/50 deal with the guys. They were adamant on wanting to go with 100% and I think I’d rather go in a non-hostile manner and get something out of it. I think the Geotechnical business is around 37% of our total group and like you say – R500m. There’s also the benefit of an “agterskot” or a deferred contingent payment based on some earnings going into the future. It could amount to R150m. Fairly realistically, it could be R75m but it’s not an outside shot that it could be R150m as well.
ALEC HOGG: And you, Bernie, are staying with Esorfranki?
BERNIE KRONE: I’m staying. I’m staying with what will be Esor afterwards and it’s Franki that’s moving on.
ALEC HOGG: So it’s Franki then, that’s being sold.
BERNIE KRONE: Ja.
ALEC HOGG: What did you buy Franki for? What was it valued at?
BERNIE KRONE: In those days I think the total deal was something like R194m including some agterskot payments as well.
ALEC HOGG: So, looking back – quite a good transaction for you, both ways.
BERNIE KRONE: Ja. I’ve no doubt that under Keller’s stewardship that division will do better. They’re big global players. They have a lot of techniques, a lot of expertise and everything like that. I also think, sometimes in our local market, there’s a bit of perception from our other construction companies that by giving our Geotechnical division some work, they’re feeding the opposition. So I don’t think it’s a huge amount, but that could give them a bit of a tick-up in revenue as well.
ALEC HOGG: Just very quickly: who will Keller be competing with in the South African market?
BERNIE KRONE: Well, Stefanutti Stocks have their own in-house, so do Aveng, in the form of ground engineering.
ALEC HOGG: So they won’t be delighted to see this transaction.
BERNIE KRONE: I don’t know. It’s up to them.
