We’re at a point in the economic cycle where we’re seeing a lot more M&A activity. Stock prices have run hard, and in places like the US, valuations are so high that it’s hard for companies to resist the urge to use their pricey stock to buy up attractive businesses. This can be a mixed blessing from a shareholder perspective.
On the one hand, mergers and acquisitions are notorious for creating very little in the way of shareholder value for those who own the merged or acquiring entity (AOL Time Warner, anyone?). On the other hand, those who sell their companies to others can make out like thieves (AOL Time Warner, anyone?). This potential payday for shareholders in target companies makes the idea presented in this interview, that Sasol (and potentially AVI) could be in line for some M&A attention pretty exciting for their shareholders. – FD
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ALEC HOGG: In company results out today, Petro-chemical giant Sasol produced a 26 percent improvement in first half headline earnings per share, while AVI reported only a ten percent improvement in its first half of headline earnings per share. To get a more in-depth view of how the market’s trading – and some of those insights into those results – Sasha Naryskine our man here on a Monday, is in the studio. Sasha, let’s kick off with Sasol. I think there are many people interested in these results and I suppose it was, to a degree, expected.
SASHA NARYSKINE: Yes, it was telegraphed in the trading updates in the middle of February, around three or so weeks ago, so it was pretty much anticipated. The share price has actually run up to record levels in Rand terms. I say that because if you look at the ADR price, it hasn’t kept pace as much. The problem I think, with all these businesses and where Sasol finds itself is that it’s valued relative to all of the oil majors globally. Now, it’s not as small as it used to be. I was having a look at the market cap. It was roughly a quarter of BP. BP is a massive company, so the question remains ‘when will it become an acquisition target for one of the majors’. The way I see it, it’s once they have a mainland presence in the U.S. at scale. The decisions affect whether to proceed with what will be the single biggest investment in the U.S. by an outside company, and those will be made fairly shortly. I think they will go ahead. However, we’ve been told by Sasol before…remember five years ago, we were talking India, China, coal to liquids, and plants. I think in light of a cleaner energy tag, they have to go the natural gas route. In a sense, I guess that’s quite exciting, because natural gas prices across the world aren’t all the same. Natural gas price in Japan is more than four times as expensive as it is in Lake Charles simply because of the transportation costs associated, and where it is.
ALEC HOGG: You have fracking in North America, which has transformed all of that.
SASHA NARYSKINE: Correct.
ALEC HOGG: Maybe the CEO, David Constable… He’s a Canadian and he knows North America well. It would be a brave born and bred South African who would take Sasol into the American market, but someone who knows it well enough…
SASHA NARYSKINE: Well, I guess they’ve – kind of – shown in Qatar that they can and can’t do it. There were some teething problems in Qatar. It’s still a great business for them and it will continue, but this is transformative not only in the sense that the company will have a proper North American presence, which will then encourage North American shareholders to rerate it, because that’s the important part. On the same earnings, you can get a 30 or 40 percent increase just on a multiple rerating because (a) it becomes a takeout target, plus people understand the business a whole lot better. They say okay. They’ve divested from Iran and they attract a whole new shareholder base, because that part’s also quite important.
ALEC HOGG: They also divested from China. You’re so right. If you go back ten years, the story was China and India and the story today is ‘goodbye China, goodbye India, and even in fact, goodbye Iran’ – no more emerging markets – more emerged or first world markets. It’s a 377 billion market cap business. In a South African context, it’s huge, but as you say globally…
SASHA NARYSKINE: I wouldn’t say it’s small. It’s medium. It’s a medium oil…
ALEC HOGG: It’s a takeout possibility. What is the South African government? Have you looked at that? Can they say no to a takeover?
SASHA NARYSKINE: I think the IDC and the PIC own somewhere between 22 and 23 percent collectively, so it certainly is very much still a South African-held company – but widely held. I think if we get out of this mindset of ‘what is South African and what is not’, it’s just a fabulous business, and at that size and scale, the very best at doing what they do. We should be proud of Sasol. I think directly and indirectly – what do they contribute – over 30 billion Rands worth of taxes, and that was as of last year. Obviously, it’s more this year, being more profitable.
ALEC HOGG: Well, we’ll hear more as you say on that subject, from Gugu in a little while. AVI to me…now, there’s a takeover prospect: fantastic brands, perennial underperformer, with only a ten percent improvement in their numbers for the first half of the year. It appears as though at some point in time, someone will say ‘I & J…Five Roses Tea… Let’s take them out’.
SASHA NARYSKINE: And of course, the shoes business: that was a great acquisition all of seven or eight years ago – inspired – because the margins there are obviously much better. However, as you say…serial underperformer and at R50.00, it’s nearly on a six percent yield – forward. People are obviously rerating the stock downwards in a consumer environment, which looks very patchy. Middle income South Africa – many businesses have said – is going to bear most of the brunt – middle and lower income South Africa. That’s therefore their target market although having said that, it’s nice to see a bounce back from I & J. There certainly aren’t many fish in the sea.
ALEC HOGG: It’s not much of a bounce back. They’re still a small…
SASHA NARYSKINE: It’s a tiny contribution, but Snackworks showed a positive improvement and maybe inside of the numbers, the footwear business showed signs of strain in possibly the first sign that discretionary spend is under pressure. Altogether, it’s a brands business and the brands augment each other nicely, and in a time of consumer stress the more high-margin stuff are under a little bit of pressure, but the foodstuff’s still going. You’re right. There are some great brands in there.
ALEC HOGG: It’s in that level where Adcock Ingram was, between the ten and twenty billion market cap, and a share price that’s down 12 percent on the year. It’s therefore an area, where perhaps an international player might look – perhaps even a local player.
SASHA NARYSKINE: Well, remember…was it Tiger who tried? I think it was about three or so years ago, but I think there would be huge competition issues. Maybe if there was another JV with another African food business, and maybe them expanding their borders in a type of sharing… The way I see AVI going ahead, is that their food businesses will continue to do well as we open borders in Southern Africa – to their foods. You’ll therefore find Baker’s Biscuits more readily available and it will be seen as a type of soft luxury item on Shoprite’s shelves. Shoprite and Massmart’s expansion across the continent is probably key to AVI making progress into these markets where they’re probably better from a luxury point of view than the local brand.
ALEC HOGG: The bottom line for both of them is if you own the shares, don’t get rid of them because not only are they doing okay, but also there’s a prospect – perhaps – of somebody wanting to snap them up. Grand Parade Investments: a good run on the market today, on the news that came out on Friday.
SASHA NARYSKINE: Gambling…I don’t know how the regulatory authorities globally will see gaming and gambling, because in essence, it eats into what government’s trying to achieve here, which is social upliftment. I know they pay enormous amount of taxes and I know they employ many people, but it’s always a type of trade-off. How much tax do we want to collect in excess of what they pay on their profits from these businesses, whether or not it’s investable over a ten or a fifteen-year period? I haven’t quite worked that out, so steer clear away. I know Grand Parade isn’t just that, but I want to steer of gambling companies in their entirety simply because the outlook from a regulatory point of view is too tricky to call.
