In this interview, I refer to Re:CM’s founder and chairman Piet Viljoen as “Mr Rational”. It’s an appropriate description for this student of the Warren Buffett/Charlie Munger way and, not surprisingly, committed deep value investor. So using that as a base I asked him for his view on whether, if he lived in Gauteng, he would be buying an e-tag; and if he were an investor in Adcock whether he’d accept Bidvest’s R70 a share offer. Interesting responses. As was his take in the Remgro consortium’s R2.34bn purchase of Element One shares – the OTC-listed trust whose only asset is a 39% stake in local newspaper and printing group Caxton. – AH Â
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ALEC HOGG: Let’s get an in-depth view on the markets. Piet Viljoen, Founder and Executive Chairman of Regarding Capital Management, joins us from our Cape Town studio. Piet, there’s lots happening today. We can pick up on pretty much anything to do with e-tolls, or to do with that CFR bid, and I’d like to get your views on that in a while. Before we move off the e-toll subject, you’re Mr Rational. You look at things rationally. If you were living in Gauteng (which you will say you’re fortunate you don’t), would you be buying e-tags?
PIET VILJOEN:  Look, it’s the law and I think one has to abide by the law and if you don’t like the law, you have to change the people who have implemented that law, and you do that through the ballot box. I think that’s the process that needs to be followed.
ALEC HOGG:Â Â Alternatively, you leave the province and go somewhere where the laws are different.
PIET VILJOEN:  Alternatively, you move to a place that doesn’t have e-tolls.
ALEC HOGG:  Indeed. Down your way there’s an Annual General Meeting of Remgro and the report we have out of it – we don’t have everything yet – but Johann Rupert, the chairman, says that all of the speculation about Remgro going into the print media through the Element One transaction, is actually overplayed. He said he’s not going into print media, and that Remgro will only end up with about seven percent of the new controlling structure. What did you make out of all of this?
PIET VILJOEN:  Historically, Remgro has been a shareholder in Caxton. They have a small percentage – I forget what it is – but a small holding in Caxton, so they know the company, they know of it, and I think they are backing Terry Moolman in his control of the business.  Personally, I think they’re really paying a full price for that, but it’s not a huge amount of money they’re spending on it, they’re backing the person, and I think it’s almost as simple as that. I think one tends to sometimes make too much of things.
ALEC HOGG:  So in a way, it’s a private equity investment from their perspective. They’re not going to be selling the shares.
PIET VILJOEN:  Well, in a way it’s a private equity investment. No, they’re unlikely to be selling their shares. They’ve had a very small stake in Caxton for a very long time, which they’ve never sold and now they’re putting a little bit more money to work in the business. They obviously like Terry, and what he does there, and Terry’s a good steward of capital so I don’t think it’s a big bet for them. It’s not a big movement. It’s not a big position, and so I don’t think we need to spend too much time on that.
ALEC HOGG:  But the whole idea of Element One made things very complicated. Could it be that that’s being sorted out with Remgro coming in with – clearly – access to further capital, that this could spark some kind of consolidation in media?
PIET VILJOEN:  I think consolidation in media has been happening and will continue to happen. Whether Caxton, via Element One or otherwise, takes any part in that is up for debate. I’d be surprised. Many people are speculating about TV and print media and those are two different animals. I’m not sure they’ll be able to put them together, or even think of putting them together. Again, as I said it’s a small position in Remgro’s line. I’m not sure it’s exercising an inordinate amount of time in their lives, so I think if one looks at the valuation of business you see that they’re paying a fairly full price, and that’s about that. I think that’s about the extent to which we’ve looked at it.
ALEC HOGG:  Sun International you’ve looked at, much more closely.
PIET VILJOEN: Yes, we think that whole sector, the gaming/tourism/hotel sector is the sector that had become, and still remains, fairly undervalued mainly due to the large capacity increases that took place in the period leading up to the World Cup where many people were building hotels. I’m not sure what they were thinking at the time because the World Cup is a month long, a hotel is a long-life asset, and so there was massive overexpansion into that industry. We subsequently had the economic slowdown in the world, which put profitability under pressure, so those businesses have been under pressure in terms of profits for quite a while now. However, it does at least look as though the hotel side of things is starting to change. Occupancies are up, and the interesting thing about the hotel business is that it’s highly operationally leveraged, so once the occupancy starts rising above a certain level, a lot of the numbers above that start falling straight through to the bottom line. It’s a highly cyclical, highly operationally leveraged business, it makes a lot of money during good times, and it seems to us as if a lot of the capacity is being either taken out of the system, or being taken up by normal economic growth. I think we could look ahead to the next few years for some decent profits – not super profits, but decent profits – out of those sorts of businesses.
ALEC HOGG:  And the vote against the directors’ remuneration, from your side?
PIET VILJOEN: Are you talking specifically about that? I think what happened there was that there were some conditions around how directors would be remunerated. Historically, they were remunerated on the basis of economic value added EVA-type calculations, which we think is very sensible. It measures the amount of capital you put into the business and the returns you generate on that capital, which is what business is about. They were going to change that to more of an EPS margin type of calculation, which we didn’t think was sensible and it seems, quite a few other shareholders also didn’t think was sensible. To their credit, they didn’t pull the resolution. Many companies, when they see that the vote is going to go against the resolution, they pull it from the general meeting so that it isn’t voted on. They kept it there, which I think is good corporate governance, they publicised the fact that it had been voted down, and now one goes back to the drawing board, engages the Remuneration Committee there, to see if we can’t get to a more sensible solution as to executive remuneration in that company.
ALEC HOGG:  Clearly, there would be many looking at executive remuneration and cheering from the sidelines at least, that there’s more shareholder activism. Piet, to close off with…we’re going to be seeing that Brian Joffe interview in just a moment. How are you reading the way that Joffe has played this?
PIET VILJOEN: I think Mr Joffe is probably one of the most consummate dealmakers in South Africa. He built up Bidvest by doing transactions. Most of them have been executed very well, and he’s very smart. He and his team are very smart when it comes to these sorts of things. I think his offer of 34.9 percent of the business is ‘step one’ in his strategy. It’s very definitely a stumbling block for the CFR Grouping, so it’s quite an interesting game of chess they’re playing. It will be interesting to see how shareholders will be swayed: by the cash and paper offer of CFR (and certain value), versus the cash offer (but for a minority stake) from Bidvest. Both of those offers have certain advantages, but they also have certain pitfalls and it’s not an easy thing to make up your mind between those.
ALEC HOGG:Â Â Are you a shareholder?
PIET VILJOEN: We still have a small amount of shares, but we are basically, out. We think the prices being offered for the business by the potential acquirers are in excess of what we as value investors would want to pay for the business.
ALEC HOGG:Â Â So R70 to you would be a fair offer.
PIET VILJOEN: Yes, we think that effectively, for a passive minority outside shareholder like ourselves who have no influence and no control in the business that probably overvalues the business somewhat. If you’re a control investor where you can extract synergies and exert strategic influence in the business where you can extract a bit more value, you’re probably justified in paying a higher price than somebody like us – an outside passive shareholder – would want to.
