Barloworld opens Khula Sizwe public BEE offer

By Riaz Gardee*

Barloworld is a leading distributor of global brands providing rental, logistics and fleet management solutions. Some of its well-known brands include Caterpillar, Avis, BMW, Mercedes Benz, Toyota and Ford. Barloworld was established 117 years ago in Durban by Major Billy Barlow and now has operations in 16 countries, 17,400 employees and a JSE market capitalisation of R29bn. The company announced a public offer to establish a black-owned and managed property company with assets of R2.9bn.

Transaction terms

Barloworld will dispose of its properties at a 5% discount to Khula Sizwe for R2.7bn implying a 9% yield. The transaction is structured as a sale and leaseback as Barloworld operates from these premises. This acquisition will be 80% (R2.2bn) funded by external loans and 20% (R544m) by equity. Of the 20% equity component R163m will be raised from the black qualifying public via 16.3m shares at R10 each and the balance by management and Barloworld’s Employees Trust. As a result the shareholding and debt:equity component will be as follows:

Shareholder % R’m
Black Public 30% 163.4
Management 38% 207.0
Employee Trust 32% 174.0
Total Equity 100% 544.4
Total Debt 2,172.0
Debt + Equity 2,716.4

The properties will be leased to Barloworld for 10 years escalating at 8% per annum on a triple net lease. This means all expenses for the property shall be borne by Barloworld, the lessee. Approximately 95% of the portfolio is motor retail and industrial properties across South Africa. Thereafter the intention is to list on a trading platform. The table below sets out a comparison of the key metrics to selected JSE listed property companies:

Name Price/share Rands Market Cap Rbn Historic Yield Discount to NAV Loan to Value
Attacq 14.30 10.7 8.0% 40% 36%
Growthpoint 24.08 71.5 8.9% 6% 36%
Hospitality Property Fund 10.20 5.9 10.7% 44% 15%
Hyprop 72.02 18.4 10.6% 30% 30%
Investec Property Fund 15.75 11.6 9.1% 12% 33%
Liberty 2 Degrees 6.60 6.0 8.9% 30% 16%
Redefine 9.70 55.9 10.4% 11% 40%
Vukile 20.20 18.6 8.9% 0% 41%
Khula Sizwe 10.00 2.7 9.0% 5% 75%

Whilst the initial yield is in line with other much larger property counters Khula Sizwe has a trading restriction for the next 5 years and available at a smaller discount to the other counters. Furthermore as the initial property yield of 9% approximates the debt finance rate and expenses the escalations will mainly be used to reduce the outstanding debt. Hence investors have been are urged to adopt a 15 year investment horizon to fully benefit from the deal.

Conclusion

Buying into a ‘dealership’ property portfolio backed by an A-grade listed tenant with a 10 year lease, 8% escalations and minimum 5 year lock-in needs to be compared to other listed counters to match the investor’s risk appetite and investment criteria. This could suit a retail investor who has a long-term horizon, is adverse to share price volatility and requires slow and steady growth. A classic case of the hare and the tortoise.

Online applications are open to the public from 10 April 2019 to 31 May 2019 at barloworldkhulasizwe.com with the minimum investment amount of R2500 and no maximum limit.

  • Riaz Gardee is a mergers & acquisitions specialist, financial writer and contributor to various media platforms including print, online, radio and television. You can follow him on Twitter @RiazGardee.