How waiting 5 years let Altron buy Altech for half price
As we all know, timing is everything. When it comes to finding a job, getting married, having kids, or buying a business, timing is always a crucial factor, and this remains true whether we're talking about people or whole businesses. Take, for example, Altron's acquisition of Altech. Back in 2007, Altron already owned 56% of Altech, but its attempt to buy out the minorities in an all-share offer failed when shareholders balked. Fast-forward seven years, and the picture is quite different – Alron was able to successfully buy out minorities in a R1.8bn bid that say the birth of Altron TMT, a new entity composed of various Altech and Bytes Technologies assets.
The whole deal is an interesting lesson for companies eyeing potential acquisitions, both because it highlights the importance of sweetening a bid with cash and a decent premium, and because it underscores how crucial it is to time things right. – FD
GUGULETHU MFUPHI: Welcome back to Power Lunch. Altron saw a 49 percent rise in full year normalised headline earnings per share and revenue increase by 12 percent in the results they published today. Joining us in the studio to tell us more about these numbers, is Robbie Venter, Chief Executive of Altron. Robbie, thank you so much for joining us. I think an interesting division that started now at your business, is Altron TNT, the merger between Altech and Bytes. Tell us more about that. Why did you decide to bring those two together?
ROBBIE VENTER: Gugu, we did a bit of evaluation and decided that a simplified Altron Group is what investors were really looking for. In addition, we looked at where the most successful acquisition we've made have been. Traditionally, if you look back at the buyout of the Power Tech minorities and the Bytes minorities, those were success stories. It's not rocket science. If you've managed and owned a business for a long period of time, that is always infinitely better than conducting a two-week or two-month due diligence. It can be very thorough, but you really don't get to understand the business and Altech was at a phase where, having sold its East Africa operations, we felt from an Altron perspective – for our Altron shareholders – that this would be a very good allocation of capital for us. That, combined with the fact that we knew the business well, understood the opportunities that the business provides, led us to make what was our biggest acquisition – R1.8bn buyout of the minority shareholders at Altech.
ALEC HOGG: Robbie, it was 'second time lucky', though. You did, once before, try to do the deal with Altech. What was different this time (that's one part of the question)? The second part of that question is if you had been successful with your previous attempt to get Altech, would you have been better or worse off?
ROBBIE VENTER: That's a good question, Alec. The main reason that the first time around was not successful – that was around five, five-and-a-half years ago – was because we basically offered shares as currency for the transaction and we didn't offer an underpin of cash. Certain shareholders wanted the cash and basically, didn't want to take shares in those transactions. In this particular transaction, the lesson learned was to have a cash underpin, which we did. In addition, we went through a very thorough process with all the key shareholders to get their commitment and their support for this transaction. In addition, they would also provide us with security in the form of irrevocables to give us some certainty that this was going to be a transaction they would support and those were really the two drivers for allowing us to be successful this time around. It's a big deal for us because we had this strategy in place for some time…to have one listed entry point into the group, which we've now been able to achieve.
ALEC HOGG: The second part of my question is, would you have been better off or are you better off now, rather than doing it five years ago? The markets yesterday for instance, with JD Group, is thanking his lucky starts that he was turned away institutions the first time around.
ROBBIE VENTER: Well, it's a similar situation for us although the offer price, if I recall correctly for Altech some five-and-a-half years ago, was around R80.00. I think the final acquisition this time around was about 50 percent of that price. As far as timing is concerned, it was good for the Altron shareholders. We were able to offer a good premium to the Altech shareholders and certainly, from our perspective we got there in the end. It took us a little bit longer, but from a financial perspective, it was a lot cheaper.
GUGULETHU MFUPHI: Robbie, we heard recently in the news of Reinet selling off Nashua Mobile. What does that mean for a company like Autopage, which falls under your radar?
ROBBIE VENTER: Firstly, the market is evolving rapidly. It's common knowledge. Some of the macroeconomic factors such as mobile termination rates and cost cutting/price cutting in the operator space does put pressure on the revenue of line of the business. From that perspective, one can't deny it's an evolving business. Two or three years ago, Autopage was a 100 percent GM business. Going forward, that's not going to be the case. Through the Bytes and Altech merger, we injected the Bytes corporate ISP into Autopage, to really create a second leg in the data field, if you will, for Autopage and we're going to see that evolution continue. It's going to continue to evolve where voice is just going to be one of many converged services that Autopage offers. We have no plans in the short-term to divest of the operation. We are renegotiating. We are in the final stages of renegotiating our network agreements with the three main networks. We realise that the business model has be very efficient in what it does. We had to take some costs out of the business as it goes through this evolution process, but we're committed to it and moving along within this evolution.
ALEC HOGG: Robbie, thank for clarity on that. It's a good set of numbers, no doubt, with your dividend up by one-third, which really shows the cash position there. However, going back in history although you have had a bump in between, you're back at where you were ten years ago on the share price. If I'd been an investor with you and hanging onto my friend, Mr Venter, I'd be feeling a little but uncomfortable at the moment. Is this the new dawn? Have you now finally turned things around so that the share price can start reflecting better conditions underlying in the business?
ROBBIE VENTER: I think so, Alec. Ten years ago, we were in a very different space. [Inaudible 0:06:39.7] is everything. If you go back 15 years, maybe that comparison would be a little bit different, but two major things happened in the interim period from ten years ago to now. One was obviously the global economic crisis that had a material impact on the Power Tech business. The second was our ill-advised foray into East Africa, which cost Altech a lot of money and business. We've corrected that, we've sold the business; we fully exited the business, and sold our eight-point-six percent stake in liquid back to liquid for $55m, which we've received. A number of things have come to the fore outside of the Altech deal, which does give us some confidence that this is a little bit of a new beginning. We are moving in the right direction. Since the Altech deal, our share price is up about 25-odd percent, so obviously, some support for that transaction and it's nice to see the numbers actually, now reflecting and giving support back to those who supported us.
GUGULETHU MFUPHI: You've also increased your dividend. It's up by about 20 cents. Is that sustainable for the long term?
ROBBIE VENTER: We think so. The board increased the dividend by 33 percent this year, which I think is a confident sign of our future cash flows, our ability to continue that, and our philosophy is to maintain our dividend cover at about the two-point-three times cover where it has been, historically. For the foreseeable future, we'll take that approach to dividends. They'll follow our earnings.
ALEC HOGG: You're on the money, Robbie. I had a look back 15 years and you've trebled in that period, so the share price… Let's use the year of '99 as a benchmark rather, and hope that's what we're going to see in the next 15 years – a trebling. I don't think your dad or anybody else involved with the company will be displeased with that kind of return. Is it possible?
ROBBIE VAN ZYL: I certainly hope so, Alec. I think we've really turned a corner. We had to deal with a few obstacles, which we've done. You followed our group for many years and if you go back 15 years, we had nine listed entry points into our group. We're a clean group right now. We have a one-entry point structure and the amount of inefficiencies it takes out of the system is very difficult to quantify, but they are so significant. We've seen, since we've been able to put Altech and Bytes together, the amount of cost savings just by combining those two head offices. In addition, and more importantly, the impact it has on the top line and a lot of the top line growth, which we've seen this year, has been through cross-sell and up-sell, offering our customers a much more solutions-based business, comprising products that are both Bytes and Altech. In the past, we operated in a very silo'd type of approach. Those companies almost competed with each other and now we're able to really consolidate that. From what we've seen, that's a very good stepping-stone to be able to really take our group to the next level.
GUGULETHU MFUPHI: It certainly sounds like the beginning of a new dawn. Robbie, thank you so much for joining us today. That was Robbie Venter, Chief Executive of Altron.
Alec, I understand you were slightly busy in the Cape Town studios today. You have an interesting guest with us, due to tell us about power as well as cleaner power and efficient power for the African continent.