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One has to turn back the clock to the 1990’s when the South Africa government was looking to privatize assets. One of the units they sold stakes in was the Airports Company of South Africa. During the sale minority shareholders took a 4 percent stake. Fast forward 20-something years and given ACSA’s failure to list, the minority shareholders have no way of exiting the investment. Futuregrowth’s Andrew Canter are part of the minority and are in negotiations with ACSA to sell the stake but price is a major stumbling block. ACSA have upped their offer to R12 per share, which Canter says is well short of the 11 times Enterprise Value of R94 per share. The next step will see both parties go to court. It’s a fascinating story and Alec Hogg caught up with Canter to get more details.
I’m with Andrew Canter, the Chief Investment Officer at Futuregrowth. In your office again, Andrew. There’s some interesting things going on with ACSA. Most people know ACSA as the company that owns the airport – the airport company of South Africa – but there are minority shareholders.
Yes. Most people know ACSA as the state-owned airports company and funnily enough, there are minorities. The minorities in ACSA own just over four percent of the business and have for quite a long time, since the 1990’s.
What’s the history there?
In the 1990’s, there was a big privatization drive across the range of Government, which you may recall. That was the year of Telkom being privatized for example. At the time, they decided to commercialise and privatise ACSA and the way they started doing that was they sold a 20 percent stake to the European Company Aeroporti de Roma. At the same time, they brought in empowerment schemes where they sold about four-point-two percent of the business to empowerment groups and another small portion (I’m thinking it was another one percent or so) to a Management Incentive Scheme. It might have been one-and-a-half percent. Anyway, a few years later, it seems Government changed its strategy and its policy (in about 2003) and they basically got the PIC to buy out Aeroporti di Roma at a ten percent p.a. return on their investment for the five years.
The rest of the minorities were just stuck in there and there was no discussion or dispensation made. It sat there for quite a long time during this era (because ACSA had been paying dividends because there were profitable enterprises running all the airports) but then there was the big investment drive gearing up to 2010 with the rebuild of all the airport, the building of the brand-new airport in Durban. The dividends stopped. Capex went huge. There was the introduction of a regulator and regulator tariffs. The minorities were basically just forgotten about. We weren’t invited to any AGM’s. We weren’t sent any Board Packs. We weren’t sent any AGM Packs. It was as though it went into a black hole.
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How big was that investment drive and were you asked to put more capital in?
No, it was all funded from the balance sheet or from the income statement so there was never any call for additional equity capital, nor were we ever asked whether we approved it, as minorities. We had a four-percent stake and what does that point at? PIC owned 20 percent. Government owned 75 percent. We were a minority, and who cares? They didn’t ask and we were shunted around. Following on that, you would think that after you’d built all these brand-new airports for now, that’s good. That’s how you do infrastructure investments. You put a lot of Capex upfront and then you get to collect your revenue stream for a long time on a reasonable commercial basis, but the tariffs that have come through from the Regulator have not been globally competitive/not offering a very appropriate return on equity. At this point, we’re looking at the situation where the company is run like a State-owned enterprise on a non-commercial basis, which is fine if you’re Transnet or Eskom and you don’t care about the return equity because you’re the Government trying to facilitate development. Well, that’s fine. I fully support that but that this is not a State-owned entity. This is a partially privately-held entity and we have no exit from this company. You can’t transfer the shares without the Minister’s approval (and he ain’t going to give us any approval). They’ve refused to talk to us about the shares for years. There’s no engagement. We have no discussion about dividends. We can’t contact or have a dialogue with the Regulator to get tariffs up and so we’re kind of economic hostages in a business in which we have no say.
How big is the stake? How much is it worth?
Well, that’s an interesting question. It’s probably worth about R500m. On a fair commercial global price for airports trading, it’s worth something more than R2bn.
This is not insignificant.
It’s not insignificant at all and that’s why eventually, after these years of gnashing your teeth and going forth (not back and forth, because they weren’t responding very much), we decided that we really need to push this matter and get the government to pay attention to the fact that we exist, we are shareholders, we are entitled by law, (which we’ll discuss) to a commercial return, and which we’re simply not getting.
Many people looking at the way the taxes on airports have been rising and certainly, what we see from our air tickets, would be surprised to hear that the return that’s been demanded by Government from ACSA, is below the economic rate.
There are several elements to ACSA’s profits. The Regulator uses a single-tool mechanism where he combines the combination of the parking tariffs, the retail tariffs, and the aeronautical site tariffs – all into one basket – to get his return equity. That’s very controversial, by the way. The aeronautical side is the part you should regulate to make sure the prices are fair and competitive. The rest of it is a shopping mall. We shouldn’t be regulating the profits on that. Anyway, they’ve decided it’s a single till. That’s how they’re going to measure it. I can live with that. The issue you raised about each of us as individuals paying a higher tariff for landing fees and such: I’ve eyeballed global landing fees and passenger tariffs. To me, it does not look as though South Africa’s out of line. I must say, when I look at airline tickets and they talk about fees and duties, I think a lot of it are fees stacked on by the airline and not by ACSA.
All right, so fast-forward to where you are at the moment. Government isn’t listening to you so you’re going to court.
A couple of years ago [finally] the ACSA Board got our message after we’d been stroppy and they’ve generously made us an offer to buy us out at just over R10.00 per share. Bear in mind that the NAV on the balance sheet of the business, which is brand-new build airports so we know the NAV is reasonably correct, was R26.00 per share at the time. I’m speaking in rough numbers. Well, then they said ‘okay. Yes, you’re right. It’s too low. They came to R12.00 per share, which is still a 60 percent discount to the current NAV of R27.00’ so it’s just defensive. That’s just NAV. Forget about the PET. When they sold the stake, it was 18 times earnings. On State earnings, I think that would put you on R54.00 per share. The most galling thing about this whole topic is that even as ACSA was buying into the Sao Paulo Airport on what is called an Enterprise Value to EBITDA – a valuation of 35 times EBITDA – for their stake in Sao Paulo, they were bidding us at three to four times EBITDA.
On what basis? Surely, there must have been some discussion.
There was no discussion. That was their price [R12.00/share] and that’s why we’re offended. We have a scatter chart of all the airport transactions that have occurred around the world since 1985. If you look at that scatter chart today, the average Enterprise Value to EBITDA is between 15 and 20 times and here they bid us three times/four times. In the meantime, the Regulator is regulating tariffs that are below the return on debt capital, let alone a return on equity and we are literally, economic hostages. The reason why they bid us so low… As them. It strikes me that the bidding is that low because they think they can. That is the definition of being an economic hostage. That is oppression of minorities and that is what we are suing for. Our suit/legal action in the High Court is ‘An Oppression of Minorities’ case under the Companies Act, saying ‘they are taking advantage of us as minorities and not giving us our economic rights.
What are you wanting to prove in the court? What exactly? ‘Oppression of Minorities’ I understand philosophically, but what is the judge going to rule on?
There last bid to us was R12.00/share. The NAV is just over R27.00/share. The 18 times earnings is R58.00/share and 11 times Enterprise Value (not the 18 or 15 times the world’s trading at) gets you to R94.00/share. That would be a total value of R2bn for this four percent stake.
That is worth going to court for.
It is absolutely worth going to court for. It’s worth fighting and getting attention for. The Government seems to shunt it aside.
How long is this case likely to last?
High Court cases. Let’s assume we’re going to be talking about this one year’s time, for a start. For a start, ACSA has to respond, we have to re-respond. We have to get a court date. There’ll be continuances. It’s going to take a while.
It seems pretty obvious though, what’s going on here. You’re a small shareholder. You can get screwed over unless somebody makes a fuss about it.
I think that Government’s policy – when they’re sued – is to go underground, pull down the shutters, and go to court and we welcome that at this point. This is as much about the principle as it is about the money. We want the money. We think ultimately, at the back end of this, are investors. We need to talk about who funded these empowerment schemes. People seem to think it was just some old grump empowerment guys who never put one cent on the table and never got rich, so tough. Well, the fact of the matter is that funding was, in many cases, done with Pension Money. In the old days of empowerment, you funded Debt Capital so you could get equity positions. This is still how it’s done to some extent. The fact is that when they defaulted on those loans, Pension Funds became the owners of those shares. That’s where we are.
Futuregrowth, through our funds, are owners of those shares. They are Pension Funds we’re investing for. The Government is actually taking money away from pensioners now. The empowerment guys: sure, they got knocked out. They never took risks. I must say though that at least one of the empowerment groups in here did put real cash money on the table to buy their shares and they are also angry about this because they’ve had money locked up now for 20 years, earning no return. They’re equally trapped and they put real money on the table.
Andrew Canter is the Chief Investment Officer at Futuregrowth.
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