This is the 16th year in which the Gold Medal is awarded for the Private Equity Deal of the Year. And nothing comes close to the sort of disruption that COVID-19 presented dealmakers in 2020. Nominations were received from advisory firms which, together with nominations from the DealMakers editorial team, were passed on to an Independent Selection Panel, headed by Bernard Swanepoel and consisting of Naspers SA CEO, Phuthi Mahanyele-Dabengwa and businesswoman, Funke Ighodaro.
The Johannesburg Stock Exchange is in the midst of a delisting crisis.
And Capitalworks take private of publicly traded financial services firm Peregrine touches on the core of the problem, according to CEO and Peregrine Founder, Robert Katz. The cost benefit of remaining listed just doesn’t stack up.
The diversified financial services group, which includes wealth manager Citadel, asset managers Peregrine Capital and UK-based Stenham, and corporate finance advisory firm Java Capital, announced a 7% increase in ongoing segmental earnings to R348m in its most recent annual results for 2020, but the delisting of the Group, after 22 years on the JSE, is a significant moment in the Group’s history.
The R4,2bn offer to qualifying shareholders presented an option to elect to receive a cash consideration of R21 per share and/or a leveraged re-investment option through the subscription of shares in one of Capitalworks’ buyout vehicles (InvestCo share consideration offer, priced at R17.40 per offer share). The attractive structure of the offer resulted in approval from 99.9% of shareholders with the reinvestment election, which will see benefits from the support of Capitalworks as a key anchor shareholder, oversubscribed.
“The costs of listing are high,” says Katz, “and especially for a company our size. It's not only the JSE, it’s the Companies Act as well, which we have to abide by and there are a lot of costs in the system which, if we were unlisted, we wouldn't be having to bear. I'll give you an example. Three Independent non-executives on the audit committee, for a company our size, it’s a cost we have to bear. We have to print and produce annual financial statements which have to go out in printed form, which are expensive to produce. Time spent on the market is a lot of time. It's a case of the responsibilities of a listed company, and the costs of those responsibilities are expensive when you are not issuing scrip, which is one of the main reasons you are listed, to acquire other businesses or as a form of funding. The JSE is not unaware of what we are saying. They can see the statistics, and they can see a lot of companies delisting from the JSE, I'm sure for much of the same reasons, and I'm sure they are not standing still.”
Garth Willis, principal of Capitalworks, believes that the value proposition and rationale for the deal goes much deeper than simply stripping out listing costs though.
“It's a business that we've been tracking for a long period of time,” says Willis. “We see wealth management as being an exciting place to invest and the Citadel offering, in particular… Through our research, we'd identified that as being highly client centric with an incredibly strong focus on relationships with the underlying clients, which is something that is common to us at Capitalworks.”
Relationships are one thing, but Willis stresses that one has to be able to deliver a compelling value proposition to clients.
“Part of our research around Citadel, in particular, was its investment returns and its investment returns, net of costs. And what we saw there was a business that had an established track record and a very strong management team.”
“The trick with the public to private [deal] is it's one thing to identify a value play. It’s another thing to be able to put a value proposition in front of institutional shareholders that they find compelling enough to actually accept,” says Willis.
“The point of success in this transaction was offering existing shareholders the option to either take cash off the table, or to reinvest alongside us. A lot of it was about being able to identify ways of unlocking value that couldn't be achieved in the public market. And that goes far beyond just taking the listing costs off the income statement. Those are a bit of a burden that I would say is a very small contributor to the overall value proposition. The fundamental strategy that we saw was that within Citadel, the management team was the outlier in the period and in the broader stable, in that it was the one management team that didn't have ownership in its own business. And we saw the ability to convert a profit participation into equity as being something that would enable us, as a private equity investor, to be very aligned with the underlying management team, in much the same way that the other stable businesses are.”
And very importantly, that it would align Citadel management with the success and ongoing wealth creation of Citadel's clients.
“So, overall, that's why we courted Peregrine and ultimately launched the offer on the 13th of March. We gathered around the boardroom table in order to sign the various documents, and the pandemic was just on us and we were all working out how to celebrate this momentous signing of our deal through face masks, elbow taps, or whether we should just settle into our various corners of the rooms. That was quite an awkward moment, for a moment that was meant to be exciting.”
On the outlook and possible exit strategy, Katz is philosophical.
“Nothing is as good as you hope it will be, and I'm hopeful that South Africa will be great, and nothing is quite as bad as you expect.”
Financial Advisers: One Capital, Java Capital
Sponsors: Java Capital, Deloitte
Legal Advisers: Cliffe Dekker Hofmeyr, Werksmans, Webber Wentzel
Transactional Support Services: KPMG, PwC and Deloitte
Pick of the best (in alphabetical order)
The other shortlisted nominees
Actis’ acquisition of Octotel and RSAWeb
In October 2020, Actis, via its Neoma Africa fund, entered into a number of agreements to acquire a controlling interest in Octotel, a local fibre-to-the-home operator, and a non-controlling interest in RSAWeb, an internet service provider. Caxton and CTP Publishers and Printers and the Pembani Remgro Infrastructure Fund have fully exited their respective positions in the two entities. The investment into this high growth Digital Infrastructure asset was valued at R2,3bn.
Actis’ principal David Cooke reveals that Actis has been looking at this space for quite a while.
“Over the last couple of years, as a private equity investor across emerging markets, we've identified that we're on the cusp of what some would call a broad digital infrastructure revolution,” explains Cooke. “And we have made some considerable investments in data centres in Asia, China, Korea, and indeed in Africa, where we've invested in a data centre business in Nigeria.”
Indeed, Actis has ambitions to put significant capital behind this to create a Pan African data centre platform, which includes the broad ecosystem of digital infrastructure – not only the data centres, but everything that enables digital connectivity, from towers to fibre.
“That got us to cast our eyes over what was happening in different corners of the world, in those elements of digital infrastructure.” And that all coincided with the founders of Octotel, Internet entrepreneurs Rob Gilmour and Mark Slingsby, having conversations with their institutional backers, Caxton and Pembani, as they were looking for new growth capital.
“When the opportunity came to us in those conversations with those shareholders who, at the time, had appointed Rand Merchant Bank to explore options for them, we jumped at it. This was all just before COVID,”explains Cooke.
Fortunately for Actis, COVID acted as an accelerant to the existing fire of digital transformation sweeping across society. But it did present some challenges from a due diligence perspective.
“We've been using forms of digital communication, whether it's Zoom or Teams and things, for quite some time. I start every week with some form of a video call with my colleagues from Lagos to Nairobi and Cairo, and other parts of the world. But the thought of doing a full due diligence over this format or medium, that was very challenging at first. It's interesting, we're having this debate a lot across our business in some respects, actually. It's changed the way we will do due diligence, some aspects of legal and tax, financial due diligence, where arguably some face-to-face meetings or advice, for example, is less relevant. Of course, the human interaction of how you're getting to know your future partners is different.”
On the exit front, Cooke explains that Actis has modelled some scenarios that will likely see further consolidation in a fragmented space with up to 30 fibre players currently. Ultimately, with the view of exiting to another scale industry player or a pension fund investor, who is looking for the classic infrastructure play with strong cash flows and the stable cash flow generation that these businesses provide. But that is still some way down the line.
For now, Gilmour and Slingsby will remain as shareholders and will continue to lead the existing management teams, and Actis will support the entrepreneur founders in continuing to grow out the business and surf the COVID digital wave.
Financial Adviser: Rand Merchant Bank
Sponsor: AcaciaCap Advisors
Legal Advisers: Webber Wentzel, Fluxmans
Transactional Support Services: EY, BDO and Deloitte
Metier Capital Growth Fund II and Retailability acquisition of Edgars
The saga of fashion retailer, Edcon, has left a trail of lessons in its wake.
Taken private in a highly leveraged R25bn (US$3,5bn at the time) buyout by Bain in 2007, Edcon struggled to grow at a fast enough rate to pay down debt.
Former CEO, Bernie Brookes told investors in 2016 that Edcon had been “living beyond its means….” But Investec Chief Economist Brian Kantor also picked up that the deal was doomed somewhat by poor structuring, especially with regard to Tax.
The retailer limped along and started to show promising signs that a self-help turnaround strategy initiated under CEO Grant Pattison, who was appointed in January 2018, might prove a saving grace.
In March of 2019, Pattison announced that Edcon had concluded its recapitalisation deal with the Public Investment Corporation (the PIC) on behalf of its client, the Unemployment Insurance Fund (the UIF) and participating landlords, which resulted in the implementation of a recapitalisation programme, committing to the contribution of new cash commitments and rent reductions totalling approximately R2,7bn into the Group.
The recapitalisation resulted in the removal of all of Edcon's interest-bearing debt, and introduced a new group structure and set of shareholders.
In February 2020, just before South Africa’s retailers were plunged into a COVID-induced lockdown nightmare, Edcon offloaded its 167-store stationery chain, CNA, to a consortium led by JSE-listed and Mauritian-based Astoria Investments for an undisclosed amount.
Then COVID struck and Pattison broke down in tears on a call to investors, as he saw his dream of resolving the Edcon crisis shredded by the pandemic.
Edcon was placed under business rescue in April 2020. The plan approved was for the sale of parts of the company, including the Edgars business.
Retailability bought Legit from Edcon for R637m in 2016, and clearly made a success of that deal as they returned to buy more of the business – having bought Legit when it was loss-making. Retailability, a fashion retailer and holding company, owns the brands Legit, Beaver Canoe and Style, and operates in over 460 stores across South Africa, Namibia, Botswana, Lesotho, and eSwatini.
Retailability, backed by Metier, saw the potential of the brand and took the opportunity to acquire a significant portion of the Edgars business in South Africa, Botswana, eSwatini, Lesotho and Namibia at a favourable price of R1bn. The deal gives Retailability access to more of the middle to upper end of the mass market.
Grant Howarth, director and principal at Metier, in support of the Capital Growth Funds, believes that the fundamental challenge faced by Retailability in Edgars is the turnaround of its merchandising function, to enable the brand to regain its relevance in the eyes of the South African consumer and stem market share losses.
“We believe that the Retailability team, with its entrepreneurial culture and dynamic trading mindset, has the expertise and track record to achieve this turnaround, given their experience in successfully integrating Legit after acquiring it from Edcon, and their track record of market share gains over the last five years,” explains Howarth.
Howarth believes that the impact of COVID on the regional shopping mall and department stores will be minimised by Edgars diversification.
“Larger malls have had a larger decrease in foot traffic, compared with smaller regional and strip malls, but still contribute the majority of turnover in South African retail so will remain a focus area for Edgars,” says Howarth. “The Edgars business is made up of roughly just over 130 stores, of which only ten are in super-regional malls, with a solid representation in CBDs and smaller regional towns and metropolitan malls, meaning that the Edgars footprint is well diversified across Southern Africa. Retailability also has three other chains in Legit, Beaver Canoe, and Style, which have approximately 450 stores and are concentrated outside of the super-regional and larger malls, with a strong presence in smaller malls, high streets and strip malls across Southern Africa. These chains have been steadily gaining market share over the last five years, and management will apply the insights and experience gained in these divisions to support the turnaround of Edgars.”
What happens now to the sustainable cotton cluster agreements?
“The sustainable cotton cluster agreements entered into by Edcon had two key objectives, being the sustainability of cotton supply and the support of the textile industry in Southern Africa – both of these objectives are core to Retailability’s strategy, culture and ethos. Retailability, including Edgars, currently sources approximately 45% of all inputs from local manufacturers. This has been, and will always be, a key strategic pillar for Retailability. Once we have completed the integration of Edgars and delivered on the turnaround plan, Retailability will re-engage with the cotton cluster.”
Howarth believes that, at its core, Retailability’s strengths lie in its entrepreneurial culture, flexibility and speed of decision-making, which allow it to take advantage of opportunities as and when they arise.
“The opportunity to acquire Edgars arose directly as a result of the impact of COVID and Edcon being placed into business rescue. This has both prolonged our targeted holding period for Retailability, to allow time for the Edgars turnaround strategy to be implemented and deliver its results, and increased our alternatives for exit which could now include an IPO, given the targeted size and scale of Retailability in the next 18-24 months.”
Financial Adviser: Matuson Associates (BR Practitioners)
Legal Advisers: Cliffe Dekker Hofmeyr and ENSafrica
Criteria used for the selection of the shortlist for Private Equity Deal of the Year:
An asset with good private equity characteristics: a cashflow generative business and able to service an appropriate level of debt; a business model that is resilient to competitor action and downturns in the economic cycle; a strong management team that is well aligned with shareholders, and capable of managing a private equity balance sheet; predictable capex requirements that can be appropriately funded.
Deal size is a factor to filter deals, but plays a limited role for acquisitions. It does carry more weight for disposals.
Potential/actual value creation – was the asset acquired at an attractive multiple? If the deal is a disposal, was it sold at an attractive price? What is the estimated times money back and/or internal rate of return?
There is limited information available in the public domain on private equity deals, and even somewhat educated guess work doesn’t provide all answers in all instances.