Johann Rupert’s “aha” moment sparks Reinet’s R10bn share buyback

LONDON — Reinet's share buyback scheme is intended to protect small shareholders from the 40% discount. Chairman Johann Rupert's inspiration came from an unlikely source. – Alec Hogg.This is the Rational Perspective. I'm Alec Hogg. In today's episode, Johann Rupert is to spend almost R10bn unlocking value at Reinet. South Africa's leading businessman Johann Rupert has taken the empire that he inherited from his father to another level. In 1988, just three after joining Anton's industrial group Rembrandt. Rupert Jr. created Richemont, which is today one of the world's top luxury goods businesses. When Richemont restructured a decade ago, its 80-million plus shares in British American tobacco, some other investments and €350m in cash was injected into the newly-established Reinet Investments – named after the Ruperts' old Karoo hometown – Graaff-Reinet. As we hear from Rupert in the podcast that follows, the company that was created in this way as a hedge against the market crash hasn't done that great because of the lengthy bull market..___STEADY_PAYWALL___.The share price now trades at 40% discount to the value of its assets. Rupert reckons that makes the thousands of small shareholders vulnerable to giving up their investment in Reinet at a discount. So, at today's annual general meeting in Luxembourg it was announced that Reinet will buy back up to 20% of its own shares in the open market, narrowing that discount as the share price rises. At the current share price, this project could run to almost R10bn. Here's how Rupert dealt with the formalities..The general partner proposes that the company be authorised to acquire ordinary shares, up to 20% of a company's issued ordinary share capital which at that date of authorisation – 28th August 2018 – 195 941 286 ordinary shares. I don't think it's fair to start immediately because I think there are people who probably haven't heard of the announcement and that it was approved today so we normally take a few days. We will have to look at where we want to do it and how we want to do it, and the best price but this really started… Reinet started a decade ago in the middle of the trouble and I was concerned that we would have more 2008. I'm sure we're going to have them but I totally underestimated the folly and stupidity of fighting Central Banks. I really could not believe that they would carry on for so long with their 2% inflation target rate or easy money..It doesn't really matter what you want to call it. What really persuaded me was when at Richemont, we managed to get €4bn in three tranches: eight years, 12 years, and 20 years – what I consider to be a very attractive rate for the company. I then looked at the opportunities that the shareholders that may wish to exit Reinet had and at that discount, it was unfair for them so if we could use assets inside Reinet to close the gap between the NAV and the market price then it's only (I believe) the correct thing to do. It's the moral thing to do so we at that stage (it was a few months ago) decided to come to the shareholders to ask them for permission. 20% is higher than the norm. Normally, people go for 10% maximum but obviously this is with the goal in mind to treat all shareholders equally and to try to give people a choice as to the redeployment of their assets whereas currently, they may be locked in because of the discount rate..In other words, the directors asked for and received permission to buy 39 million Reinet shares on the three exchanges where it's listed: Johannesburg, Amsterdam, and Luxembourg. At today's price of €14.70, that translates into a potential €575m buying order, or R9.5bn. So, why now? Rupert says things fell into place for him when the European Central bank became an eager participant in his other company Richemont's recent €4bn bond issue..The reason for the timing is that we did that bond issue this year and this is the first AGM we've had after that where I could get permission to buy back shares. That was my 'aha' moment. We raise €4bn this year in Richemont and we got it at such remarkably low rates and when I heard that the ECB had in fact bid on all three tranches – the eight year, the 12 year, and the 20 year – without even pricing it, I said to myself that they're not going to stop and that it's just simply not a fruitful exercise to consistently fight and defend. So, it's going to end in tears but genuinely don't know how long it's going to take. They keep on buying bonds. As a result, you see Ferrari selling for $50m. You see wine collectors, you see works of art, real estate, and remarkably strong prices across the road because capital is not being priced properly. If you really think about it, they've been carrying on doing this for longer than certainly I thought and I agree with Stan Druckenmiller..Then I definitely thought they should. We cannot carry on with these artificially low interest rates Alec. For a Central Bank to apply for three tranches of €350m each without putting in pricing; they didn't put pricing into their bid so in other words, they just said, "We'll take it." I said, "If people can do this, they'll do anything.".So, with Central Banks pumping in the liquidity, the vehicle that Rupert created and which thousands of small shareholders followed him into has performed poorly. The purpose of Reinet was to serve as protection against another market crash. Hence, 60% of its assets are tied up in the defensive stock British American Tobacco or the name we know it better by – BAT..Ten years since we started Reinet and it was done as a hedge against another crash. Now, I'm sure the crash is going to come some time or another but I'm not going to hold on to a structure for third parties when there's an obviously better way to redeploy capital. That is the traditional hedge against market crashes – safe investments with proper yields. It's an investment that I did not want to get rid of because it's a 'stay rich' versus a 'get rich' but you've got to remember it's gone up five times since we've bought it so we've done very well over the last decade. I'm just of the opinion that if the market thinks there's a 40% discount, I'm just not interested in worrying about when the market's going to crash anymore. I never wanted this thing to be a public vehicle. I got talked into it being a public vehicle and Richemont is now perfectly hedged. It's got €4bn in a very long-term average life of over 13 years. Very, very cheap debt. It doesn't make sense to try and have separate hedges everywhere..Fair enough, but why now? What's the intention of buying back Reinet shares today?.Because of shareholders that invested 10 years ago. It's easier for me to return their money. If they sell today, they sell at a discount. Obviously, if we keep on buying shares that discount's going to go down so it's a way of returning money to the old long-term shareholders. You must read what I said carefully. We said it's one way of returning capital to shareholders. We've seen some of the bigger funds that have not done too well in Steinhoff, sniffing around with places where there are big discounts knowing that surely, sooner or later people are going to do something about them. I don't want professionals to intercept opportunities from the original shareholders. I will hang on to my shares because I still am of the belief that one needs defensive shares but for people who do not wish to hold onto defensive shares, at least they can exit at a price that is not at a deep discount. That is the message..In essence, Johann Rupert is sharing his view that Central Bank stimulation is likely to keep asset prices higher for longer than he thought but Rupert the bear hasn't gone into permanent hibernation. Indeed, he warns that the consequences of these actions will be dire..Tears will be bigger the longer it carries on. Alec, we're living off our children's future. I saw yesterday that student debt in America is now above $1.5trn. People are borrowing and borrowing against the future and interest rates are not going to stay abnormally low ad infinitum and you can't get economic growth with higher interest rates. Capital is being mispriced by the ECB and by the FED. It's as simple as that. One should always remember that we've had the biggest bull market in the States. The best…this huge and enormous run and more and more intelligent friends of mine are getting more and more concerned about the eventual bear..Quite a sobering conclusion. This has been the Rational Perspective. Until the next time, cheerio..Well, where would you like me to start?

Johann Rupert’s “aha” moment sparks Reinet’s R10bn share buyback

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