DealMakers - 2020 Annual
Deal of the Year
Investing in the future
The demerger of software, cybersecurity and cloud services provider, Bytes UK, in December 2020, marks the highpoint of Allied Electronics’ (Altron) restructuring journey, which began in the 2000s. At one point, the company had no fewer than nine separately listed entities, but by 2008, this was consolidated into only two: Altron and Allied Technologies (Altech).
The Venter family-controlled investment holding company achieved good growth, but by 2013, rapidly changing technology and increased competition required a further consolidation from 12 separate operating companies into one listed entity, focused on information and communication technologies. An inability to sell its assets in a timely manner resulted in a growing debt pile.
Financial Adviser: Rand Merchant Bank
Sponsor: Rand Merchant Bank
Legal Adviser: DLA Piper
Transactional Support Services: KPMG, PwC and EY
Comment from the Independent Panel:
In a year of distressed transactions and transactions aimed at value preservation, the panel found Altron’s demerger of Bytes Technology Group a refreshing and clear winner. When a deal so clearly unlocks value (in this case, for the Altron shareholders), one can expect that this will be the first step in this process. This transaction and its execution were extremely complex, requiring a bespoke settlement mechanism negotiated with the JSE, as well as specific TRP and SARB approvals. The panel felt that the timing of this deal demonstrated that unlocking value can be achieved even during the harshest macro-economic conditions.
In late 2016, the company received a R400m cash injection from Value Capital Partners, in return for a 15% shareholding, and its aim was to help reposition Altron from a family-controlled and managed business to an independent entity, and from an asset-heavy old electronics, engineering and equipment business to a ‘cloud business’, driven by the appointment, in 2017, of a new CEO, Mteto Nyati. With the centralisation of the company, it became less dependent on asset sales and increasingly able to repay its debt through free cash flow.
In April 2020, following its annual strategy review, Altron announced that although it had sold a number of non-core businesses, it was still looking for opportunities to unlock value for shareholders and streamline its operations. The demerger of Bytes UK presented one such opportunity, as the UK business was identified as being materially undervalued when compared with its UK peer group. The business, management noted, had increasingly developed a growth trajectory and strategic levers that were different from the rest of the Altron Group. In November, the company announced its firm intention to demerge the UK subsidiary and to separately list it on the LSE, with a secondary listing on the JSE.
The potential transaction, management believed, would bring greater focus and simplicity within the group, which should enhance the returns for shareholders and enable the businesses to grow with discipline, as Altron continues to invest in the jurisdictions in which its core operations are located.
Cognisant of the current state of the capital markets and the impact of market conditions on the success of a potential transaction, a minimum listing value of c.R9.4bn was put in place by management, who were willing to call off the listing if it did not achieve the price target.
Bytes Technology listed in December, with a market capitalisation on the JSE of R16,3bn – an unbundling that is worth more than the entire market capitalisation of a few months ago. This deal was a worthy recipient of the Deal of the Year 2020 award.
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Adding a touch of resilience to its portfolio
February 2020 saw the announcement of Barloworld’s R5,35bn acquisition of Tongaat Hulett Starch (THS), which was in line with its aim to transform its investment portfolio, to focus on Industrial Services and Consumer Foods as key verticals. For Tongaat, the sale reduces its R13bn debt by 40%, and so ensures the long-term sustainability of the group and value creation for shareholders. The agreement it has with lenders is to reduce debt by R8,1bn by March 2021.
THS is one of the largest wet millers in sub-Saharan Africa, operating four wet-milling plants in Gauteng and the Western Cape. The mills have a combined total installed capacity to process more than 850,000 tons of maize per annum, and provide employment for more than 30,000 employees. The sale sees Tongaat exit its involvement in the SA maize sector.
The rationale behind Barloworld’s acquisition was to bolster the resilience of the company, as THS is less cyclical than the businesses in its existing portfolio. THS is highly cash-generative, relatively asset-light, has a leading market position and strong client base, and positions the company for immediate access and further growth in a consumer driven demand market, while remaining focused on core fundamental endowments, such as the ability to serve business-to business Blue Chip multinational customers.
Present in most, if not all, agreements is a clause relating to ‘material adverse changes’ (MAC), and while this provision is rarely invoked, the impact of COVID-19 and the strict lockdown on company earnings saw this triggered in a potentially severe setback for the sale of THS. Barloworld issued a MAC notice to Tongaat in May, stating that a MAC had occurred which would likely lead to a drop of about 82.5% in earnings before interest, taxes, depreciation and amortisation at the starch business for the financial year ending 31 March 2020. With Tongaat firmly of the view that this was not the case, the matter was referred for determination by an independent third party, increasing the complexity, duration and cost of the transaction. This was the first MAC to be decided in South Africa, on a transaction involving two JSE listed companies.
During the MAC determination period, Barloworld continued to perform its obligations in terms of the SPA, and management accounts received demonstrated the resilience of the business following the gradual easing of levels during lockdown.
In August 2020, the independent expert ruled that the business was unlikely to suffer an earnings drop of the magnitude claimed, and the deal was closed end-October. The disposal price was adjusted to R5,26bn and the business rebranded as Ingrain.
Financial Advisers: PwC Corporate Finance, Absa CIB and Nedbank CIB
Sponsors: PwC Corporate Finance, Absa CIB and Nedbank CIB
Legal Advisers: Bowmans, DLA Piper and Webber Wentzel
Transactional Support Services: Rothschild & Co, Java Capital and Deloitte
Back on track to enhance value realisation
The $2bn (R33bn) disposal and consequent creation of a joint venture with LyondellBasell followed a competitive process in which Sasol explored a number of options to reduce its dollar-denominated debt, improve debt covenant compliance and enhance liquidity after a series of cost overruns ($12,9bn from $8,9bn forecast in 2014) and delays at its Lake Charles chemicals project were exacerbated by the collapse of the oil price and a global economic slowdown, as a result of the COVID-19 pandemic. The deal cuts debt to $8bn from $10bn, gives the company an opportunity to stay in while shifting its portfolio toward specialty chemicals, and increases its focus on an area where the company enjoys differentiated capabilities and strong market positons.
Under the agreement, LyondellBasell will acquire 50% of Sasol’s 1,5 million-ton ethane cracker, as well as its 900 million-ton low and linear-low density polyethylene plants and associated infrastructure at Lake Charles. Sasol will retain full ownership of the performance chemicals business in the US. The new joint venture will focus on base-chemical production including ethylene and polyethylene. LyondellBasell will operate the assets on behalf of the joint venture, which will operate under the name, Louisiana Integrated PolyEthylene JV. Each party will provide pro-rata shares of ethane feedstocks and will offtake pro-rata shares of cracker and polyethylene products at cost.
For LyondellBasell, the purchase of a 50% stake and operational control, at a good price and at the bottom of the global chemicals cycle, suggests that the asset will generate cash in 2021, as it rides the cyclical upside. In addition, it provides an opportunity for the company to expand in a core area of its business without the risk that comes with building a new project from the ground up.
The high profile, complex and transformational transaction was successfully executed across a number of jurisdictions, in a virtual environment. The disposal, along with others undertaken during 2020, puts Sasol on a pathway to enhanced cash generation, value realisation for shareholders and business sustainability in a lower oil price environment.
In a trading statement at the end of January 2021, describing the six months to end December as a “strong set of results”, the company alluded to the fact that it may call off its plan to tap shareholders in an unpopular and dilutive $2bn rights offer.
The deal closed on 1 December 2020.
Financial Adviser: Merrill Lynch
Sponsor: Merrill Lynch
Legal Adviser: ENSafrica
Transactional Support Services: PwC, KPMG and Deloitte
Ticking all the right boxes
Edcon, one of the corporate casualties of COVID-19 and owner of value retailer JET, filed for administration in May 2020 after losing R2bn in sales as a result of South Africa’s lockdown restrictions.
The Foschini Group was at a critical point in its own history, dealing with the impact of lockdown on its businesses in SA, the UK and Australia, and embarking on a R3,95bn capital raise to reduce its debt and put measures in place to navigate the way through the pandemic. So the strategic decision to seize the opportunity to acquire the JET business at such a time, and to undertake the process from due diligence to negotiation to implementation virtually, within four months, across several jurisdictions, was no mean feat.
At the time, TFG CEO Anthony Thunström was quoted as saying, “Our strategic focus is on driving sustainable economic growth through successful businesses and investment in retail, local manufacturing and digital transformation, as well as skills development in South Africa. JET ticks every one of these boxes.”
The R480m cash deal sees TFG acquire 382 select JET stores across SA, Botswana, Lesotho, Namibia and Eswatini (with R800m in existing stock), trademarks, a distribution centre in Durban, a loyalty programme and 4,800 of its staff. The deal gives TFG a significant entry into an increasingly important value retail sector, at scale and at an attractive price, which would have been costly and difficult to replicate organically.
The deal puts TFG head to head with the likes of Pepkor’s Ackermans and Pep, and with Mr Price and Pick ’n Pay Clothing, all resilient budget-friendly chains which are expected to be the winners with any improvement in economic activity.
TFG, in its interim results for the six months to end-September 2020, announced that it had received a large profit boost from its acquisition of the JET business, recognising a provisional R694,3m gain on the purchase.
Financial Advisers: Rand Merchant Bank, Matuson Associates (BR Practitioners)
Legal Adviser: ENSafrica
Transactional Support Service: EY