I’ve been a close watcher of Peregrine since its 1998 JSE listing. Perfectly timed, the then 30-person firm’s public offer of shares was massively oversubscribed with the price surging to over R20 a share – five years later the stock was available under R1.50. The share price got back over R20 during the 2007 bubble, before coming back to earth again. The share price showed signs of its old volatility recently, rising by a third since touching R11 in July. The future will tell. Peregrine was closely involved as an advisor in the listing of my then three year old company Moneyweb in 1999 at a forward PE ratio of 0ver 100 – and we could have placed a multiple of the R10m worth of shares available. Five years ago founder Sean Melnick left to run the group’s UK acquisition Stenham, and as you’ll read in this interview, remains closely involved in a business now run by Jonathan Hertz. Today Peregrine announced the acquisition of a controlling 65% stake deep value investment house Cannon Asset Management, its most significant acquisition since the takeovers of Citadel (2002) and Stenham (2008). No price was disclosed, so naturally we’re entitled to speculate. Stuart Theobald of Intellidex reasoned that as there was no Competition Commission approval required, the price must have been below R80m. Taking a line through Coronation Fund Managers, which trades at 5% of assets under management, as Cannon is still sub-scale Theobald puts an “optimistic EV value” for Cannon at R50m (AUM R3bn), which puts this deal at R32.5m. Kaveer Beharee of Ubiquity says a crude calculation would be 1.2% of AUM – or around R36m. No doubt all will be disclosed when Peregrine issues its next set of financial statements. A lively discussion ensued on Twitter until we asked Saville to settle matters. His responding tweet below is a classic. In the interview below, Hertz took us through the rationale for the transaction.  – AH  Â
@alechogg @Intellidex @Ubiquity_ZA – Our unemployment rate is 24.7%. Surely you don’t want my name added to that stat on day one? 🙂
— Adrian Saville (@AdrianSaville) November 25, 2013
To watch this CNBC Power Lunch video click here
ALEC HOGG: Peregrine Holdings has acquired the stake that Hollard Life owned in Cannon Asset Management. Jonathan Hertz, the Chief Executive of Peregrine joins us now. Hi Jonathan, congratulations on this deal. What stake, exactly will you hold in Cannon?
JONATHAN HERTZ: We’ll hold 65 percent of Cannon, Alec.
ALEC HOGG: So this is actually taking control. My goodness, it didn’t come across that way when we looked at it the first time around. It’s a big bet.
JONATHAN HERTZ:  It is and it’s an important bet for us. We’ve followed the business for quite some time. We’re very impressed with Adrian (Saville), Geoff (Blount), the investment team and the  process. We feel the time is right.
ALEC HOGG:  You do have Citadel in your group already. Is the idea at some point to merge the two?
JONATHAN HERTZ:  I wouldn’t expect so. Citadel is a private Client Wealth Management business. They build portfolios for clients. That includes some in house asset management and lots of multi management, looking for the best expertise wherever it is on the globe. We imagine Cannon would run a very separate and bespoke business. Hopefully, their returns and their process will fit very well in other parts of the group. But they’ll be independent and they’ll only be able to get money from internal to the group if indeed, they are the best. That’s the way the Peregrine Group has always operated and that’s the way it would continue to operate.
ALEC HOGG:  The asset management sector is having a good run at the moment. I guess because its deep value approach, Cannon hasn’t really participated in that to the degree that it might have. Are you going to change anything?
JONATHAN HERTZ:  We certainly aren’t going to change the investment process, Alec. It’s true to say that some asset managers, particularly those in the growth space, and those that have followed momentum have done incredibly well. Those in the deep value space have done less well as the cycle hasn’t suited them. We would imagine that Cannon would certainly continue along this road. We want them to be the best in the sector in which they operate and any support that we can give them – both from a distribution perspective and to some extent, from a back office perspective. Capitalising on the scale that we have in the group with over R80 billion in asset management, will be the value adds that we give for the business. Certainly, from an investment perspective we’d imagine Dr Saville and the team –  also ahead of us in the sector in which they operate, we’d want them to continue in that space.
ALEC HOGG:  If you have a look, maybe five years hence, it’s taken nearly 20 years for Cannon to get to three billion asset under management. Where would you see that going in the near term?
JONATHAN HERTZ:  We’ve love it to go to R33 billion and we’d certainly want it to expand. We think that the timing is quite right for a change from a sector perspective, and we’d hope that they’d capitalise. Traditionally, the deeper value sector specialists are people that do incredibly well when markets come off aggressively. We’re currently in a very ‘bull-market’ phase. I believe that there will be some volatility in the months and years ahead and we believe that the recipients of such volatility may well be businesses such as Cannon.
ALEC HOGG:  It isn’t listed so working out the price is interesting. What processes did you go through?
JONATHAN HERTZ:  We use a variety of metrics. We were fortunate in that we had a seller who wasn’t overly involved in the business – it was really just a portfolio investment for them – so we were able to negotiate a price that we felt comfortable with. Ordinarily, in these types of deals you have management selling some of their shares. In this case, there was an opportunity for management to actually marginally take up their shareholding in the business, so we’re all on the same page. It’s not a particularly expensive transaction, but it does come with Peregrine committing themselves to the business, providing good working capital to the business, and providing an ability for the business to grow its distribution footprint, which we think is important if they’re going to expand and grow their assets under management.
ALEC HOGG:  Please clarify that. You say management had the opportunity to expand their shareholding.
JONATHAN HERTZ:  Yes, so we’ve allowed management shareholding to increase slightly. As a result of the transaction, they were slightly below the 35 percent number. With certain ratchets that they had in place, it was quite a complicated shareholder structure. We think that we’ve made it much simpler. We’ve given them certainty and are material shareholders directly in the business along with us, and really, it’s just the stake from the pre-existing shareholder that we’ve managed to buy out and incentivise everyone accordingly.
ALEC HOGG:  So you have Citadel on the one side – we mentioned that a moment ago. You also have a very successful hedge fund operation. You now have deep value investing. Are you looking to cover the spectrum?
JONATHAN HERTZ:  Well, I certainly think there are other opportunities. You haven’t mentioned our securities business. It’s certainly the second largest stockbroker in the country by volume. We run the number one derivative business as ranked by FM over the last three years. We’ve generally been successful in building businesses that are market leaders in their specific sectors. I’d like to think there are a few more opportunities that we’re looking at and we’ve certainly communicated that to the market, particularly on the private clients’ side of the stockbroking arena etcetera, where we haven’t been major players to date. We’ve been more institutional and hedge fund prime brokers. We also think there might be some more opportunities in our offshore fiduciary businesses where we run a very successful business under the Stenham brand – within the trust and fiduciary space, as well as the asset management space. We were fortunate. I was on the show a few weeks ago, mentioning our half-year results where we were up some 50 percent at an earnings line. We’re hopeful that with the wind in our sails we will be able to do small incremental transactions, which fit in very well with the group within Cannon – certainly one of those.
ALEC HOGG:  Jonathan, just to close off with: Sean Melnick, the founder of the business – you did mention Stenham… Does he still play a role?
JONATHAN HERTZ:  He does. Sean is becoming the non-executive chairman of the group on 1st April 2014. He’s very important in my life. We spend a lot of time together from a strategy perspective and he’s still a major shareholder in the business. He has lots of wisdom and history to add, and a keen eye for a deal, which is irreplaceable.
