Two big JSE companies had received buyout offers in under a month, one of them listed for 62 years, and value investor Piet Viljoen said both deals undervalued the businesses on a ten-year view. He also expected most shareholders to take the money anyway. A day after Sanlam's R505-a-share offer for the rest of Santam, and weeks after India's Solar Industries moved on Omnia, Viljoen told Alec Hogg why insiders and foreign buyers were seeing value that local investors kept missing, and what the delisting wave said about where the market sat in its cycle. He took on the Reg 28 offshore debate, BEE and the 4 November elections, and held his ground when Alec challenged him on MK, before turning to Wall Street, where he argued that a handful of AI stocks were masking real damage beneath record highs as US bond yields climbed to levels last seen in 2002..Listen here.Edited transcript of the interview.(00:01) Alec Hogg: Well, we've had two buyouts of two big JSE-listed companies in the last three weeks. Yesterday Sanlam, which owns Santam, which has been listed separately for 62 years, made a bid to take it off the market. You might recall that not long ago an Indian company wanted to buy out Omnia, and it looks like it's going to get there. A company called Solar Industries. Add to that: is the JSE perhaps being picked clean at the moment at bargain prices, or is it ever going to make a comeback? Is this delisting boom that we're seeing going to become a listing boom one day? Overlaying all of this, in the United States we are seeing interest rates rising to their highest point in more than 20 years. Piet Viljoen is with us to give us some understanding of all of this.Piet, let's start with Sanlam and Santam. Did you have, or do you have, either of them in your portfolios?(01:08) Piet Viljoen: No, no, we don't own either Sanlam or Santam.(01:12) Alec Hogg: Santam would be your kind of stock, I would have thought.(01:14) Piet Viljoen: So we've been looking at Santam for a while now, and I think Sanlam has pre-empted us from buying it. But that's just how it goes.(01:24) Alec Hogg: Okay, but what's going on here? Paul Hanratty is the chief executive of Sanlam. He came from Old Mutual. For generations, 60 years, Sanlam has owned a controlling stake in Santam, in the insurance company, but it never made a move until now to buy it all in. What is Hanratty seeing that those previous CEOs didn't?(01:51) Piet Viljoen: Well, I think what he's seeing is what a lot of the smart money is seeing: that there are attractive valuations on offer in South African companies. It's something Solar Industries, the Indian company, saw in Omnia, and it's something a lot of private equity players are seeing in smaller mid-caps, because we're getting the delistings of smaller mid-caps almost on a weekly basis, or a monthly basis at least, out of the South African market. So it's a trend that continues, and it's happening because assets are underpriced. Smart money is taking advantage of that.(02:26) Alec Hogg: Is it a good price that Sanlam's offering for Santam?(02:31) Piet Viljoen: Look, they already own 62% of it, so they're only buying, say, a third of the business. And it's not on a massive PE. It's on a PE of 12 or 13, if I'm not mistaken, Santam that is. And Sanlam's paying cash, which I think is quite smart. They're not issuing shares to do it. So in Sanlam's life it's not huge. I think it's a category two transaction, so shareholders don't even have to vote on it. It's so small in Sanlam's life.So I think it's a pretty decent price. And the thing is, if you want to own 100%, it's probably better to own 100% of a good business like Santam than it is to own 62%. And I don't think you get many opportunities to pay such a low price for such a high-quality business, which Santam is. So I think Sanlam is just opportunistically making use of Mr Market's depressed mood at the moment.(03:30) Alec Hogg: Surely, Piet, there would have been reasons in the last 62 years for other CEOs to have perhaps seen it as an opportunity. Why didn't they do it, and why is he doing it now? I get that it's cheap, but is it 62-years cheap?(03:49) Piet Viljoen: Yeah, look, I mean, strategies change with CEOs. I think Sanlam has been on an acquisitive spree over the past decade at least. They've acquired insurance companies in Africa and India. They have acquired interests in other businesses inside financial services in South Africa. So they have been on an acquisition spree, and this is just part of that strategy. Previous CEOs might not have been as acquisitive. They might have believed they needed to unbundle things and sell things.It depends also on market prices. There will have been times in the past when Santam was very expensive. That's not the case at the moment. But it depends on the prices of assets, it depends on the mood, and it depends on the strategy of the board and the CEO at that particular time. And these things change.(04:37) Alec Hogg: So should shareholders of Santam accept this offer?(04:43) Piet Viljoen: Well, I think it's a pretty decent price, and given the current market environment you're unlikely to get that price soon. On a ten-year view, I think it's undervaluing the business. But I think very few shareholders, especially institutional shareholders, can ever take a ten-year view. Their view is maximum one or two years. So on that sort of view, I think you've got to take the money.(05:09) Alec Hogg: And what about Omnia? Is that a fair price that the Indians are offering?(05:14) Piet Viljoen: Yeah, I think it's an okay-ish price. Again, the price they're offering is below where Omnia was trading ten years ago, I think, if I'm not mistaken. So again, it's not an expensive price. If you take a ten-year view, I would not accept that price. But again, I don't think South African institutions can ever take a ten-year view. Very, very few of them can do that. They are in a monthly and quarterly performance race with their peers, and they can't afford to take ten years. So with a lack of a long-term view, again, you've got to take the money.(05:49) Alec Hogg: Do you know much about the company, Solar Industries?(05:52) Piet Viljoen: No, I don't know anything about them.(05:55) Alec Hogg: It's an Indian business that had a look at a cheap South African asset and decided it was perhaps an easy way, a quick way, into Africa, and a very, very juicy asset down in the south of the continent.(06:07) Piet Viljoen: Yeah. I mean, Solar is not in the business of solar. They're in the business of chemicals and fertilisers and that sort of thing. I know that much. So it's aligned with their business, and it is a foothold in Africa. And I do think that what is happening right now is investment bankers get paid to do deals, and they are pitching South African assets to offshore companies quite intensively.(06:31) Alec Hogg: And the reason for that?(06:33) Piet Viljoen: Well, South African companies are attractive acquisition targets for offshore companies because of the attractive pricing.(06:39) Alec Hogg: They're cheap.Piet Viljoen: Exactly, yes.Alec Hogg: Do we deserve, then, what we're seeing here? That our investable universe on the JSE seems to be getting smaller and smaller. I remember a year ago when we spoke, it was September last year, we spoke about Metrofile, and you said at the time that South African assets are really cheap. Well, that delisting of Metrofile...(07:00) Piet Viljoen: Yeah.(07:09) Alec Hogg: ...the whole trend seems to just be gathering momentum. Where does it end?(07:14) Piet Viljoen: It does. I mean, it reminds me of that saying, "the beatings will continue until morale improves". This will continue until asset prices improve. And do we deserve it or not? I'm not sure it's about deserving it, but to the extent that we are not prepared to buy our own assets, to the extent that we funnel each rand we have offshore and buy speculative assets in expensive markets like the US, I think we deserve to have fewer listed stocks, because they're just too cheap. They're just far too cheap. So yeah, this will continue until we get some sort of bull market going in South African assets again, which I'm sure will happen in the fullness of time.(07:54) Alec Hogg: Sure, but that fullness of time could be quite a while, as you suggested earlier.(07:57) Piet Viljoen: Well, you know, who knows when it's going to happen. In the meantime, if you own a South African company on a PE of four, five, six or seven, you are on an earnings yield of 25%, 20%, 15%. Nothing needs to happen for you to make money. It can just go sideways and it'll make money. So that's the thing.And then if you take a step back and look at the global picture, what's happened in Brazil overnight is fascinating. The first round of elections has indicated a tilt away from socialism, towards more conservative policies, and their market is up something like 20 to 30% overnight. So that sort of thing can happen. It's not outside the realm of possibilities.(08:46) Alec Hogg: For South Africa? How would you see that occurring?(08:53) Piet Viljoen: Well, I think at the moment we have an incapable government, a socialist, incapable government in charge of the country, and if that changes over time, then there will be tremendous upside for assets.(09:07) Alec Hogg: My point is, how do you see that happening? Could it come in the 4 November election? Could we see some signal there?(09:14) Piet Viljoen: I think we could see a signal there. If you look at the polling, there's a strong swing away from the ANC. But we'll have to see what the election holds. It's hard to... I can't forecast these things. I don't know what's going to happen. All I'm saying is that if you own South African assets on low PEs, even if nothing happens, you make good money. But if something positive happens, an election result, I don't know, an economic boom, whatever, anything, then you have significant upside optionality.(09:54) Alec Hogg: But do you buy companies when you see them as potential targets for foreigners, and indeed for insiders? Because that's what's happening here. We've seen with Santam, the people who know the company best, the controlling shareholder, are buying out the smaller shareholders. And with Omnia, foreigners are looking at it and saying, "Wow, what a juicy opportunity for us." And yet the rest of us seem to be sitting on our hands.(10:22) Piet Viljoen: Yeah. I mean, I think it's that whole thing of, we tend to colour our investment decisions with our lived experience. And the lived experience of South Africa is not a great one. The economy is tough. Our politicians are a bunch of clowns. It's just not a great environment. But within that tough environment, we have fantastic management teams. We have massive entrepreneurial spirit, people building businesses, really good businesses, from the ground up, and building great businesses into things like Capitec and Shoprite and others. And those opportunities are right there before our eyes.We just need to get through the emotional veil which we tend to pull over things, and look at the numbers and look at reality. And the reality is that this economy is still growing. It's not growing rapidly, and there are still opportunities in the economy to make money, despite the best efforts of our useless politicians and despite the best efforts of all the hangers-on. So the opportunities are there. One just has to get rid of one's emotional baggage. That's the important thing.(11:34) Alec Hogg: What about this delisting trend? If you were to take a ten-year, 20-year view, surely at some point you're going to have to get companies coming back onto the stock market. You'd have a listing boom again. Things work in cycles. But right now, when you look at it, you've got to say, goodness, there is so much pressure for delisting of companies. Does this mean that we are close to the bottom, or could it intensify further?(12:09) Piet Viljoen: Yeah, I think, if I were to summarise it, we're bumping along the bottom. We're not close to the bottom; we're bumping along the bottom.If you take a step back and look at listing booms and delisting booms, generally the people who sell stock to the public, the insiders, know the value of their business very well. So when they are listing companies on the stock market, they are selling stock to the public. That means they think they're getting a good price, a high price, for their business. So generally that denotes a top in the market, or a high level in the market. And returns from those sorts of listing-boom periods, if you go back and look, are actually quite poor.And the converse is true when you have delisting booms. In other words, when companies are going private, they're being bought off the market by the insiders, who know the business well, as you point out, and they know they're buying the business at a decent or cheap price. And that signifies that long-term returns are attractive from these sorts of levels. How it plays out exactly in the future is hard to say.(13:14) Alec Hogg: But from a national perspective, and I'd love to get your thoughts on this, there are Reg 28 funds, in other words where all of our pension funds, our retirement funds, go. It's not that long ago that they were restricted to a relatively modest amount of money that could be taken offshore, and that was bumped up significantly. And my feedback from Pretoria is there are quite a few people who think that was a mistake...(13:23) Piet Viljoen: Yes.(13:43) Alec Hogg: ...to have allowed that. Can you just tell us exactly what happened there, and whether your thought is that it is a mistake? Because there certainly have been knock-on impacts, surely, on our own stock market.(13:54) Piet Viljoen: Yeah, there have been knock-on impacts. I don't think it's a mistake, to pre-empt my view. I think you should make markets as free as possible and let the market find the price. What's happened over the past 20 years is that exchange controls have been gradually loosened, and one of those controls is on Reg 28 funds, where initially we allowed 15% offshore, then 20%, then 25%. I think it's now 45% or something like that. So that's going in the right direction. Personally, I would say you should tell pension funds they can invest wherever they want in the world and let the market find its price.I don't think the fact that Regulation 28 funds have gone from, say, 30% offshore to 45% offshore is the reason our share prices are where they are. The reason is there is a lack of confidence in investors. That's why the share prices are where they are. And the lack of confidence stems directly from a lack of governance from our political leaders. That's where it comes from. So if the politicians think it's because of Reg 28 rules that share prices are where they are, well, they need to turn around and have a look at themselves.(15:05) Alec Hogg: Yeah, well, there are some politicians who certainly believe that.(15:09) Piet Viljoen: Yeah. Well, when I say politicians, I mean the incumbent government. That's what I mean.(15:13) Alec Hogg: Well, things are changing, and we will almost certainly see some quite big shifts after 4 November. How might that be interpreted?(15:25) Piet Viljoen: Look, it depends on how the shift happens. If the shift is simply a shift away from the ANC to MK/EFF, then I don't think much changes at all. But if there is a swing away from the socialist parties, and I group those three parties into the socialist camp, if there is a perceptible swing away from the socialist camp, I think that could be very good.If you look across the water to South America, ten years ago almost every country in South America was being ruled by a socialist government. Today I think there are two countries left. If Bolsonaro gets in in Brazil, there are, I think, two countries left with socialist-type governments. The rest have all tended towards more conservative, more right-wing, which is fantastic for fiscal policies, fantastic for monetary policies, fantastic for business, fantastic for growth, and fantastic for the broad population to increase their purchasing power on a per capita basis. So it's happening there, and I think it's happening in a lot of other countries, and hopefully it can happen here as well.(16:43) Alec Hogg: What makes you think that MK is a socialist party?(16:47) Piet Viljoen: Well, it's basically a splinter from the ANC, effectively.(16:54) Alec Hogg: Okay, but do you know any of their policies? I'm just asking because my feedback is a bit different.(16:57) Piet Viljoen: I have no... do they have policies? I don't think they have policies. Do they have policies?(17:02) Alec Hogg: They do. And there's a lot of people who...(17:04) Piet Viljoen: I think it's a continuation. It's just ANC squared, isn't it?(17:10) Alec Hogg: Not from what I've been told. You met Duduzane Zuma at the business conference. He's hardly a socialist.(17:15) Piet Viljoen: Yeah. Yeah, I think we have to differ on that point. (17:21) Alec Hogg: You think he is a socialist? Okay. All right. So that's not going to help with MK getting stronger.(17:22) Piet Viljoen: Yeah, dyed in the wool. No, that is not going to help. No, that would be terrible news, terrible news.(17:31) Alec Hogg: Piet, what is going to be the next shoe to drop of JSE companies? Surely there must be some favourites there, because we are seeing this delisting trend gather more momentum. Have you got any names you can give us, or thoughts?(17:51) Piet Viljoen: Look, I don't have any names. That would be pure speculation, to say who is going to be the next company, because I don't know. I was surprised when Omnia got taken out of left field by Solar Industries. That surprised me. It surprised me that Sanlam decided to take out Santam now. So that would be pure speculation.I think if you look at companies that are well managed, that generate good returns and have some sort of strong distribution into the South African market, those are the sort of candidates you want to be looking for, because that's what an offshore acquirer will want. They will want distribution into the South African market. So, one of three things: good management, generating good returns, with strong distribution into the market. If you can find companies like that, and there are quite a few companies like that, they might get taken out. But to name names right now, that would be just speculation.(18:49) Alec Hogg: But the point about all of this is that we have this noise around BEE, but you can be sure that the protagonists of BEE will be saying, "But hang on, companies are being bought by foreign businesses. What's the problem?"(19:05) Piet Viljoen: Yeah, well, I do think that BEE is going to be on its way out over the next decade. I think there are very strong forces, amongst others Sakeliga, to which I'm affiliated, that are fighting very hard against BEE. And I also think that a lot of corporates are starting to stand up and say enough is enough. We need to get investment going into the economy to generate growth, to generate wealth for the population. A BEE tax of 30% on transactions, effectively that's what it is, disincentivises investment. It's as simple as that. So I think we need to move beyond that, and I think there are very strong forces in place at the moment that over the long term will help us move away from BEE.(19:55) Alec Hogg: Just to close off with the United States, with yields on the ten-year bonds at 5.35% yesterday. That's the highest since 2002. Nearly a quarter of a century. Now, I remember from all the textbooks that when interest rates rise, stocks fall. Kind of one or the other. And yet that doesn't seem to be happening right now. So how are we reading this?(20:24) Piet Viljoen: Well, it is actually happening. If you look under the hood, if you look at, say, the S&P 500 index, it's seven stocks that are driving it to new highs, which it reached overnight again. But if you look underneath, there is decimation happening in many, many stocks. To name a couple, something like Nike is down 75% over the past few years. Big brand names: something like Lululemon is down 75% over the past three years. LVMH, it's not part of the S&P 500, but it's a big branded consumer goods business, is down 50% over the past few years. Even something like Netflix is down 50% over the past two, three years.So there's a lot of strong negative price action happening in the broad market, while the indices are being kept afloat by six or seven or eight stocks. So I think it's not correct to say that bond yields are going up and stock prices are also going up. A few companies' stock prices are going up, where there's a bit of a speculative fervour happening, but the broad market is not going up, and the broad market is actually reacting to higher bond yields as one would have expected.(21:38) Alec Hogg: It's a very interesting point, because here in South Africa we often talk about the JSE going higher, but you could have mining stocks going up and industrial stocks going down. So you can't just blithely make a statement that everything's going up.(21:53) Piet Viljoen: The market, especially in South Africa... it's even worse in South Africa. If you look at the JSE, the top stocks are Naspers, BHP, British American Tobacco, Richemont. Those are sort of the biggest stocks, and they're all basically offshore businesses. So if you look at the JSE, you're actually looking at an offshore index. You have to look at the smaller and mid-cap indices to see what's happening onshore. And again, to cut a long story short, it's not pretty here either. It looks pretty bad, just like it looks bad in America if you look below the hood of the index.(22:31) Alec Hogg: So the investment bankers at Investec and RMB and others of their ilk, they've got to eat, and they are now looking at those, beneath the hood as you're saying, and going off and marketing South African companies, presumably all over the world, and saying, "Hey, it's cheap, come and buy."(22:50) Piet Viljoen: I think that's what's happening. I'm speculating when I say that, but I think that's what's happening, because for them, they need to do deals, and they can't bring things to the market here.We at RECM operate in the private market as well. We own interests in private businesses, and there are many, many wonderful private businesses in South Africa. If our market was more confident, a lot of these companies would have been listed by now. But they're not listing because they can't sell their stock at a decent price on the stock market, so they're staying private. And again, that is not only a South African phenomenon; that's a global phenomenon.(23:31) Alec Hogg: So Piet, just to go back to the United States and close off with: be very careful what you're buying over there. Is this the AI play that's influencing the indices? I see Nvidia again at a new high last night. Five trillion dollars it's worth today.(23:48) Piet Viljoen: Yeah. New all-time high. Yes. Look, it is. It is basically the AI play that's driving the market higher. If you look at the stocks that are driving the market, it's Nvidia, it's Microsoft, it's Meta, it's all those guys, and Apple, of course. So those are the companies driving the market higher, and it's basically got nothing to do with how well or poorly the underlying economy is doing. It's just how well people perceive that AI infrastructure build-out to be going. That's what's driving prices.(24:23) Alec Hogg: And your advice to us, then?(24:26) Piet Viljoen: Look, I'm always nervous when there's a lot of speculative activity going on, and there is no doubt in the whole AI space there's a lot of speculative activity going on. There's circular financing happening, there are deals happening at insane prices. Those are all signs. And lots of IPOs coming to the market: we've got SpaceX, Anthropic is talking about coming to the market, OpenAI is raising capital in the private market. There's a lot of capital raising happening in that part of the market, which is again another sign of excess. So I think one should always be careful of the stock market, but of that part of the market right now, I think one should be extra careful.(25:07) Alec Hogg: And it's always easy to understand in hindsight. But...(25:11) Piet Viljoen: Yeah, yeah. In hindsight the picture is clear, isn't it?(25:14) Alec Hogg: Maybe we're going to look back in a year and say, "Why didn't we notice all of this?" Piet Viljoen, helping to give us the BizNews Edge today. I'm Alec Hogg from BizNews.com..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox every morning on weekdays. Register here.Support South Africa's bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here.