By Sasha Naryshkine, Byron Lotter and Michael Treherne
SABMiller this morning has announced that they will be exiting their Tsogo Sun investment, the brewer owns a 39.6 percent stake in the hotels and entertainment group. According to the annual report from March 31, SABSA held 36.8 percent, perhaps excluding the treasury shares it is far greater, all you need to know is that 435 247 904 shares were held by SABSA at the end of the year. All that matters to Tsogo shareholders is that there is a seller of 305 015 346 shares by SAB South Africa (SABSA). The shares will be sold in a book build process, with the results expected next week Friday it seems, according to the release.
So those shares (305 million) will be sold to selected institutional parties, it makes sense for all concerned that strong hands hold these shares. Of course I would expect a discount for those coming in, and those going out (SABSA) will have to accept a liquidity versus cash settlement discount on the closing price of 26.90 ZAR on Friday. For the record the 52 week high for Tsogo is 28.99 ZAR, some time in May. The stock however has been lower than 25 ZAR in recent times too.
That accounts for 305 million shares, there are still 130 million then outstanding, where to for those ones? Well, and this is the only tricky part of this deal (if there is such a thing as a straightforward deal), SABSA has agreed to sell the shares back to Tsogo to a purchase price of 2.8 billion Rand, or “equal to the lower of 81.4% of the Placing Price or ZAR21.50 per Ordinary Share.” Whichever one is lower, that is the price that the company will pay for these shares. More importantly, the company (Tsogo) will then cancel these shares within five days of having bought them back, thus reducing the numbers of shares in issue from nearly 1.1 billion shares to 967 million. How will the company pay for that? Existing reserves and debt facilities.
Included in the repurchase is the executive loan facility provided to the directors of the business, 200 million Rand made available to facilitate the funding of the purchase. You could argue that this is a sweetheart deal for the execs, but if you were HCI (Hosken Consolidated Investments Limited), owning 453 million shares, you would want management to be in boots and all.
I suspect that this is good for all parties. Good for the management team of Tsogo and good for the main shareholder of Tsogo, who now cement managements position and no longer have another shareholder without the energy for these assets. What do I mean by that? For HCI, a 46.8 percent shareholder of Tsogo post the repurchase and cancellation of the shares, this will be worth (even at the depressed price of 25 ZAR currently) 11.325 billion Rand. HCI has a market capitalisation of just shy of 20 billion Rand, so this is a very big deal to them, roughly 57 percent of their current market value.
For the seller, SABMiller who say, will extract 11.7 billion Rand (630 million Pound Sterling), this is hardly a big deal. Their London market capitalisation was 54.63 billion Pounds as on Friday’s close, this is a mere 1.1 percent of their market capitalisation. Again, this represents a deal that is massive in one parties life and tiny in another, and that is why I think that this is excellent all around. Remember how SABMiller got this share in the first place, in the end it was always going to be not core to the overall group.
This article was originally published on Vestact.co.za
