Jannie Mouton’s favourite child, PSG, to depart the JSE – CEO Piet Mouton marks ‘end of an era’

Investment holding giant and one of the country’s most successful businesses, PSG, has announced its intention to delist from the JSE.

Published on:

01 Mar 2022, 1:09 pm

Investment holding giant and one of the country's most successful businesses, the PSG Group, has announced its intention to delist from the JSE. It marks the end of an era, with PSG initially listing in 1995 at a mere 7c per share, giving the business a market value of R7m. Since its inception, the business has grown at a compounded annual growth rate of 38% and, since 2010, 28%. That's an incredible performance; investment oracle Warren Buffett has achieved 20.1% per annum, albeit for a much longer period.

For the better part of the last decade, business and consumer sentiment in South Africa has been driven to new lows for several reasons. This has directly affected all businesses, especially listed entities, with erroneous decision-making and subsequent loss of trust in our government not only directly affecting business performance, but an increased 'country risk premium' applied by local and international investors, resulting in lower valuations across the board for what we call South African incorporated businesses (SA Inc). Companies that are exclusively exposed to the South African economy.

PSG has a number of investments, primarily listed businesses, which comprise 91% of the portfolio. Its interests span over a variety of industries: private schooling, tertiary education, financial services and agriculture. It is a conglomerate of sorts and PSG is known as an investment holding company. These types of companies have fallen out of favour in their entirety. Most of South Africa's largest investment holding structures – Naspers, Prosus and Remgro – all trade at discounts between 30% to 50% to the sum-of-the-parts of the investments it owns. PSG's discount to its sum-of-the-parts is just over 30% (prior to today's announcements). Its management's responsibility is to unlock value for shareholders, and this responsibility is of paramount importance within investment holding structures when compared to operational businesses.

When companies trade at such discounts to its net asset value, such as the case with PSG, it makes no sense to raise equity. This is one of the primary benefits of being listed. As Piet Mouton stated in his investor presentation (below for ease of reference): if PSG raises R100 in equity today, tomorrow it is simply worth R70. There are reasons for the negative sentiment and discounts at which these investment holding companies trade. Mouton outlines this superbly in his presentation of the proposed transaction. The reasons this discount exists for the PSG Group is two-fold: the double 'tax trap' … the capital gains tax on selling its investments (ie PSG Konsult, for example); and distributing this capital to shareholders in the form of a dividend would result in another tax event (dividends tax). The second reason is that there are too many entry points for shareholders, given that most of PSG's investments are listed. Investors would rather hold Curro directly, for example, rather than through PSG, which goes back to the unfavourable sentiment against investing holding structures, despite investors being able to purchase these underlying assets at significant discounts through PSG.

PSG is unbundling all of its interests in PSG Konsult, Curro and Kaap Agri, CA&S and a 25.1% stake in Stadio to shareholders. PSG will remain shareholders in Stadio because of where the business is in its life cycle and the value PSG will continue to add in growing the business. Shareholders will also receive a R23 distribution per PSG share, which will be subject to dividends withholding tax. PSG investors are advised to consult their tax advisers regarding the tax consequences of the restructuring of PSG Group.

Subject to shareholder approval, PSG will be delisted from the JSE. Its remaining assets as an unlisted entity will consist of Zeder, Stadio and PSG Alpha. PSG Alpha can be described as the group's private equity arm, which predominately holds early-stage investments. As per the nature of private equity investments – as outlined by Mouton in his investor presentation regarding the restructuring – the performance of these assets has been varied. Some will excel, some will be mediocre and others will outright fail. Mouton and the rest of the management team unequivocally agree that PSG will be better off as an unlisted vehicle owing to many of the issues outlined above, as well as the onerous and burdensome requirements of the JSE that simply stifles opportunity.

Pending approval of the restructuring plan, PSG investors will now hold these assets individually: PSG Konsult, Curro, Kaap Agri, CA&S and Stadio. The calculations are complex, but to make a long story short, investors' shareholding in these individual assets will be based on their pro-rata shareholding in the PSG Group. There are a lot of moving parts. Although uncertain, the value creation in percentage terms should be between 30% to 40%. I stress that this is an educated guess, based purely on the numbers, and the price action in these investee companies mentioned above will affect this percentage figure.

In many ways, it's another sad day for corporate South Africa. When considering the facts and analysing this morning's investor presentation, PSG management has made a bold, rational and level-headed decision. Credit must be given to visionary Jannie Mouton and his founding partners as well as his son Piet, who has led the business during an extremely challenging macroeconomic backdrop in South Africa but still managed to build on his father's legacy.

An end of an era.

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