DealMakers - Q1 2020
Delistings from the Johannesburg Stock Exchange – what to expect in 2020
by Nick Lazanakis
The reasons that companies delist their shares from public exchanges can vary, but most are voluntary delistings or driven by mergers and acquisitions activity.
The JSE has experienced an unprecedented number of voluntary delistings over the last number of years, particularly among the companies classified as “small” and “mid” capitalisation stocks, which are tightly held with relatively poor liquidity and analyst coverage. Being a public company is expensive and the reporting requirements can be onerous, which, coupled with the lack of liquidity and lack of ability to raise capital on the public markets (particularly in thinly traded stocks), has led many listed entities to review the rationale to remain listed.
With regard to voluntary delistings, 2019 saw Howden Africa effect its delisting plan by means of a share buyback, implemented through a scheme of arrangement to minority shareholders, citing a number of factors including, inter alia:
• the opportunity to provide an exit for minority shareholders;
• duplication of regulatory processes and associated costs as the ultimate holding company, Colfax Corporation (CFX), is also listed on the New York Stock Exchange; and
• no reported short-term plans to raise equity capital in the near term.
The Howden Africa delisting had been expected for a number of years, but it was the conditions experienced in 2019 that arguably made the valuation case more palatable to investors.
Ingenuity Properties followed a similar structure to delist its securities, citing a lack of material benefits to being in the listed environment, having not garnered institutional shareholder support to justify the regulatory processes, listing requirements, and compliance and other costs associated with being listed. In addition, Ingenuity noted that the company had been unable to generate sufficient shareholder spread and liquidity, impeding its ability to raise equity capital in order to fund its development pipeline.
There have also been a number of recent delistings which can be attributed to historically cheap valuations, with the most high-profile examples being the acquisition of Pioneer Foods by PepsiCo (delisted in February 2020) and the acquisition of Clover Industries by Milco. The delisting pipeline also currently includes Metrofile, which announced in December 2019 that the Housatonic Consortium has submitted a conditional, non-binding offer to acquire the company.
While there have been some new listings to compensate, 2019 saw only six new listings, of which a number were inward listings. These inward listings are unique to the SA market and are driven by exchange controls in South Africa. Prosus, with its primary listing in Amsterdam, was unbundled from Naspers and Trencor unbundled its holding in New York-listed Textainer, which was listed on the JSE in December 2019. We know of one new IPO planned for 2020 – the Engen IPO.
A major component of the new listings from 2014 to 2016 was in respect of property stocks. We are now seeing the reversal of that trend with consolidation in that sector. 2019 saw the merger between Gemgrow Properties and Arrowhead Properties, a R16 bn merger of the two JSE-listed real estate investment trusts (REITs); Delta Property Fund and Rebosis Property Fund are currently exploring a merger; but Safari Investments spurned a deal with Comprop.
There are currently 309 equity issuers listed on the main board of the JSE. The number of companies listed on the main board declined from 388 in December 2016 to 377 in December 2017, down to 325 in December 2018.
The number of delistings since 2008 is shown in the table below:
The above table does not provide the full picture of public stocks as there are a further five companies listed on the 4AX and another five on the ZAR X exchanges.
There is already a strong delisting pipeline for 2020, with Avior Capital Markets, Metrofile, Pioneer Foods and Peregrine at varying stages of the delisting process.
While one must appreciate that we are at a low point in the economic cycle and that things will change when the cycle turns, this could take a few more years with no near-term improvements expected. Because of the political uncertainty in South Africa, local retail investors are pessimistic and have been exploring alternate markets, and it is the absence of the retail investor that has hurt SA’s smaller-cap companies the most. The only factor that will see a return of retail investors to the public markets is a recovery in the economy and an increase in the GDP growth on a sustainable basis.
In light of this, we expect that the recent trends will continue into 2020, with further high profile delistings probable.
Lazanakis is a Director, Corporate Finance, BDO South Africa.