Long4Life: Brian Joffe second act is a bet on SA’s Rama-recovery

LONDON — For a quarter of his 27 years at Bidvest, Brian Joffe worked closely with now SA president Cyril Ramaphosa. His Long4Life is betting on Rama-recovery succeeding. – Alec Hogg.This is the Rational Perspective – I'm Alec Hogg. In this episode Brian Joffe's second act is a bet on Rama-recovery. It's exactly 30-years since the chartered accountant created Bidvest, a multinational conglomerate, which peaked at an evaluation of R160bn before the unbundling of its food service arm. With that deal done Joffe felt happy to leave his creation and soon afterwards embark on a second-act called Long4Life..___STEADY_PAYWALL___.Investors love the story of this experienced entrepreneur returning to the fray, especially small punters, who saw it as chance to get in on the ground floor with a partner, who has legendary deal making and capital allocating talent. We're among the fans having allocated 8% of our BizNews SA Champions portfolio to Joffe's new creation but it's been a rough ride. Initially, Long4Life shares traded at a generous premium to their prelisted issue price but as the SA economy came under increasing pressure so too, have Long4Life's shares. .This year so far, the stock lost a third of its value. It now trades just above the level at which Joffe himself invested R100m. He's clearly chafing at what's happened to the share price, and not surprising given the competitive nature of this one-time golfing professional. But first things first, let's find out how Long4Life was born?.When I saw Jacko Maree from Standard Bank, after the unbundling, which they were involved in. He said to me, you should do something now and you should do something new, and that sort of got me going..You decided then to put your own money in, raised a couple of billon rands. Who came along for the ride with you?.The principle baker is with Standard Bank and Investec, but there were a few other institutions that made up the difference, so we raised R2bn at the time. Investec and Standard Back, as I recall, they put in about R400m of that..And the share price then. They came in at R5, you put yours in at R4, if I work back you could have done better..We were losing money..By putting the money in the bank..Well, Alec that's life. Sometimes you get it right and sometimes you get it wrong. But It's a 5-day game so one to look at currently. We obviously have very difficult market conditions and the situation process is a little bit exacerbated by the fact that when we bought Holdsports we principally had a share swap and obviously the institutions that swapped into the Long4Life shares, base cost, reduced significantly relative to the Long4Life price. So, they're not losing money, so it's a bit of an overhang that currently exists and I guess, over the next short while it will unwind itself..Some interesting recaps – as a younger man Joffe worked at Standard Bank, where he and the banks subsequent, Jacko Maree were colleagues. What became Bidvest was created out of a business called UNISEC that was previously owned by Standard Bank. So Maree knows all about Joffe' talents. For its part Investec was also involved with the birth of Bidvest. It was the company's primary banker. The Holdsport takeover a company better known through its flagship brand, Sportsman's Warehouse was confirmed by Long4Life shareholders last October, just six-months after the listing..In the context of the new company this was a huge bet. The sporting goods retailer, now generates almost two/thirds of Long4Life's revenues and profits, and virtually 10 times that of 200 store beauty salon franchise Sorbet, which was bought soon after the April 2017 listing. While Holdsports brought some scale, it also required a more than doubling in Long4Life's issued shares. A decision which caught suddenly diluted supporters by surprise. So, why did Joffe use equity, the most expensive currency around to do the deal?.There are two reasons. Firstly, the value of the Holdsport deal, as I recall it, was about R2.5bn and we only had R2bn, so the institutions, in order to be able to buy it, which was then, more or less, the market price. They exit at the time. They principally wanted to be involved in the Long4Life story going forward. So, both from a financial and an affordability point of view, this was the only real way that we could get that deal done..Are you happy that you did it with hindsight?.Yes, I'm happy that we did it of course, because that gave us the first bulk-up in order for us to be able to start Long4Life. It wasn't the cheapest deal that I've ever done. But I think what I wanted was to get some kind of scale quickly. So, the three acquisitions that we made in the early days, as I've said, I'm not saying they were the cheapest but it gave us some kind of size, which put us into, at least play. Whereas, if we had just stuck around with our R2bn – it would have taken us a lot longer..So, you've invested half of what you raised up front, so I presume you're now looking for bolt-on' or new acquisitions that are certainly going to have to be aggressive buyouts?.Yes, correct. We've got an opportunity now, hang around and wait to see better values, which I think we will see. I think there seems to be a little bit, I don't want to call it a meltdown, but there's certainly some kind of volatility which is in on the downside. I think that we will see some better value, going forward. We principally concentrated, so the mood in SA is not great, at the moment but that's the opportunity for us..Looking more broadly, Long4Life's greatest opportunity, perhaps could lay in its CEOs unique insight on where the homeland, SA, is heading. For the seven-years, from 2005 to 2012, as Bidvest CEO, Joffe worked closely with the company's then chairman, who is now SA's president, Cyril Ramaphosa..Cyril is a very straightforward, very competent person and you are seeing now the revelation of him. I think that we'll see that, going forward. I respect him highly and I've had a long association with him. I'm optimistic that if he's given the pace, and to me that's the real issue If he's given the pace to do what he wants to do – I think that he'll do well..But having that insight, running this business, sitting on R1bn worth of cash must give you an advantage because you're seeing the future or the likely future in a different way to potentially, those people wanting to sell..Look, it is a bit of an advantage but the one thing is, small caps are not the flavour of the day, and as you know, I've never really been one that's been in favour of small, market capitalisation shares. So, I think unless find the ability to bulk up reasonably quickly I think we're going to get caught in the same under-rating (if that's an English word) or the shares don't get properly rated because of there scale. So, the small caps never have been able to gain much traction, which is different to what the situation was in 1988/89, when we started Bidvest because there we had a totally different space. We had the same political uncertainty but we had different ratings because of sanctions and the likes..What have you learnt from Bidvest? What mistakes that you made at Bidvest will you not repeat this time around?.Bidvest was, for me, it was an amazing event and we didn't make too many mistakes. Every business makes mistakes but I think fundamentally, the principles that we built Bidvest by were, I think there were sound principles and I would obviously like to repeat them here..You had a team around you. You had people around you that you'd known, you grew with, you developed, you built. Have you managed to pull any of those over across to you?.No, look, we've got a team of people here. There's one or two people in the group that come out of Bidvest, they were not in Bidvest at the time that I left so, no, not my intention to do that. I respect Bidvest, it's part of my life and I wish it well..But Bidvest also did well by globalising, by expanding outside the country. Are you not going to do that? .Well, not yet because I said, or unfortunately or fortunately we're small. I think that you can have R5bn or R2bn – in international terms is very little. With no share rating it's hard to even contemplate that kind of thing so, our concentration is SA. We've got to be real with it and we've got to build it one piece at a time and hopefully the rating will return..I suppose you get in that cycle where, you are small so you can't sell equity. You are, what did you call it, underrated or D-rated?.Yes, underrated and also you don't have the scale. So, when you're in a big cap, If the market does go against you, you still have significant wear in order to participate in transactions so, in the case of small caps, you don't have the ability to participate in anything, which is meaningful. So, you're limited in where you can look. But, as I said, I don't want to sound pessimistic. I think from our point of view, we're optimistic that we've got a game plan that over the medium term will succeed and we've just got to do it one piece at a time..What's medium term?.Two years..And you're at about R4bn market-cap now – what would you say you'd need to get to, to not have this problem of being a small-cap?.Alec, that' a trick question. .It wasn't meant to be..It's difficult to predict, I'm not talking about Long4Life. I'm saying that you have to be somewhere north of R10bn, in order to be some kind of player in SA. If you want to play in the international arena you've got to more than R20bn to R25bn in my opinion..Brian, are people knocking on your door? If Warren Buffett were to leave Berkshire Hathaway, I've got no doubt he'll be inundated even at 88, with lots of people wanting to do business with him. Are you having the same in a SA sense?.Well, it's twofold. There are a lot of people that do come through the door but there's also a lot of intimation. People are a bit intimidated by the fact that this reputation of mine sort of says, 'I don't do deals that are lucrative for the seller.' People believe that I only do very cheap deals. It's a bit twofold, I guess. In reality, at the end of the day, you can only buy businesses at the market price. If one thinks that every deal you can do is at below market, I think that's just folly..Using Buffett again, people knock on his door for different reasons. They don't go there to try and get the highest price because they know that they could find some fool to pay them more. But on the other hand they have gone there because of what he can add, from the capital allocation expertise that he has, which clearly is your particular strength..Look our model is a little bit different than in the case of Warren Buffett. Warren Buffett is an investor. He buys minority stakes. He doesn't really participate greatly in managing and the like. In our particular case what we really are trying to do is to buy 100% of the business which takes the entrepreneur who is selling out of his environment. In many instances, unless you find somebody who is looking to immigrate, or retire, or whatever – these people are wanting to hang onto their assets. That's why it's a little bit more difficult in our space because of our, I suppose, desire to 100%..So, your model is then to get turnaround opportunities or businesses that you can then rebound?.Yes, correct..Rather than good businesses where the entrepreneur stays..Yes, so we would like people who are finding that their businesses are not performing well – those are the ones we'd like to see come through the door..But why would you go for that kind of business, Brian?.Well, if you're going to buy the best businesses then you've got no upside. What is the upside? You're just going to perpetuate what some other manager is doing, and get his growth rates. What we would like to be able to do is to buy those businesses that are underperforming. Make them into performing businesses and then still get the growth upside, so it's a different thing. Even in the case of Bidvest, many of the acquisitions were underperforming businesses. The initial Chipkins – it's a case in point, it wasn't necessarily a bad business but the Chipkins saw it from their point of view that they couldn't get to another level so that's why they did the deal..What about being 71 years old? At a time when most of his peers are dipping into their retirement plans, Joffe is very much in the fray..If you take the modern generation. I think the 70s, I don't feel very much older than I felt when I was 40 – I'm enjoying what I'm doing. I think I have the experience and so, we bat on. I'm having fun and hopefully the people who are working in the organisation are having fun too..And this new business, Clayton, that you bought post the financial results, which we're going to talk about in a moment, to the end of August. Is this a new area that you'd like to build around?.Well we're in the lifestyle space. We needed a strategic foothold in order to be able to build a business in health. This gives us some access into a regulated space and with some good ideas that we've got in order to be able to grow and consolidate that space. Look, it's a smallish acquisition at this of point time, and we'll see how we go..But there is a new area in the wellness space. What got you excited?.I think that retirement and old age you could take the booming population of those people that are now in the 70 to 90 space. I think that's a big market, and it's not necessarily the you're only in your own direct retirement space and health space. But also, it affects grandchildren. It's just a space that I think that there's a market opportunity. So, if you take Sportsman's Warehouse for example – one of the biggest attractions to me at Sportsman's Warehouse is the children aspect, or not necessarily the children but the grandchildren aspect. Many people bring their grandchildren shopping at Sportsman's Warehouse. It's quite incredible to see and so the opportunity in and around grandchildren, and grandparents I think is a big opportunity..When you have a look at the breakdown of Long4Life at the moment, from the entrants to the end of August certainly the sports or Holdspports or Sportsman's Warehouse, etc, it's the biggest chunk by far, almost two-thirds..Well that's about 60%, yes..Then you've got a nice group or chunk in chilled beverages but this wellness space seems small, relative..Look if you take its wellness and health. So, if you take sorbet, for example, it's related well-being, beauty, so when you start to scale that up you can get into Botox and all that kind of stuff. That's more medical than it is beauty, and it gets into aesthetics. It's a big space and it's a changing space. We've got some ideas of what we would like to do there..So, Brian, with the three-arm that you have at the moment, are you going to look for another arm, to add to it, or are these the focus areas at Long4Life?.What I don't want to do… I can't answer the question but I can give it to you in the negative. What we don't want is to land up with a whole lot of small businesses and having to manage this broad spectrum of little business in diverse activities. That's very difficult to do so, we'd like to scale up the three we've got. If we find something else, which fits our criteria, then maybe..Your watchwords at Bidvest were entrepreneurial and decentralised. Are you running for the same…?.Same here. .Exactly the same?.Same..Where are you finding the entrepreneurs? Where are you finding the people to help you?.Well, the people are basically in the businesses so, the three business that we've acquired the three lots of people, Ian Fuhr, Grant Hobbs, and Cobus Loubser they come out of the businesses themselves and those businesses have got good people in them..We haven't spoken beverages – why did you go into that, into Chill? What was the appeal?.Appeal was opportunistic. Somebody came along and said, 'Do you want to be in the beverage business? I said, 'okay, sounds good to me.' It's an emerging niche market so, if you take the customer profiles of the beverages that that they sell – it's an interesting business..Yes, and one that will grow, even though the economy is under stress. It certainly looks so, from the six-months..Well, certainly in the energy drink part of the market. That's obviously a big potential space..Brian, every year in Buffett's Annual Report – he writes there that if you've got a business that suits our criteria phone me, I'm waiting with bated breath next to the phone. Do you have a message like that out there to entrepreneurs in SA which is going through a period where some people are losing? They aren't as positive as you are about the future?.Okay, so the message is, 'My name not Warren Buffett. My name is Brian Joffe. If you have any businesses or any ideas that would help me build Long4Life I'd appreciate hearing from you.' I'm even happy to give you my mobile number..Okay, but you're not waiting with bated breath next to the phone?.No, I am. I get a lot of calls. I get three or four calls a day from people who've got a willingness to do something. Not all three or four are worth exploring but I have the calls and people are wanting magic – there's no magic. You can't create magic out of nothing. You've got to have something in order to be able to create the magic. A lot of people say, 'I've got this business, I'm not making money, will you do this, that or whatever?' It's just not possible. People are sometimes dreaming..Just honing back here. There's R1bn in cash. You are ungeared, totally ungeared, what kind of gearing level, given your experience in the past, would you be comfortable carrying?.Obviously, depending on the acquisition but I would say that, from our point of view we've got capacity to do about R2.5bn transaction without any equity..Are you hunting elephants, in other words? Would you prefer to get one R2.5bn acquisition?.No, I think the chances of us finding a R2.5bn acquisition offering are probably slip. The pond has got lots of sharks in it, with a lot of people looking for deals. Once you start to get to that kind of level, there are many participants in the market. When we're at this kind of level, then you are dealing in, say R1bn or R2bn, there's a big talk of sharks in that particular space in SA. A billion in SA used to be a lot but it's a lot less these days..Give his track record, Brian Joffe, might well be smarting at Long4Life's low share price but he's confident that given say two-years, that will all be sorted out. Helped along the way by a belief that his former chairman, Cyril Ramaphosa, has a plan that will work out just fine for SA..This has been the Rational Perspective. I'm Alec Hogg. Until the next time, cheerio.

Long4Life: Brian Joffe second act is a bet on SA’s Rama-recovery

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