Inside Imperial's R3bn deal.
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ALEC HOGG: In this Boardroom Talk special podcast Hubert Brody, the chief executive of Imperial Holdings joins us. Hubert we should have known something was on the cards - because when your financial results to the end of June were released, we spoke at quite a lot of length, you and I, about the gearing - where the gearing of Imperial was at 30%, but your target is at around 60%. Today you’ve done something about it.
HUBERT BRODY: Yes, we have. We’ve been indicating for some time that our gearing is at a relatively low level, and we’ve made this acquisition which on enterprise value basis is about R3 billion - so it does push the gearing up somewhat. But even after the transaction we still have significant strength and capacity to do other things.
ALEC HOGG: Where would your debt-equity ratio be after this transaction?
HUBERT BRODY: It would be about 55%.
ALEC HOGG: Is that getting close to your target now?
HUBERT BRODY: Our target is 60% to 80% ...
ALEC HOGG: So it’s close to the bottom end I guess.
HUBERT BRODY: Yes it’s coming close to the bottom end, but it is still significant capacity.
ALEC HOGG: But this is a substantial deal - €270million - the enterprise value of it - you're taking on more debt. The other part - are you funding it all through borrowings?
HUBERT BRODY: The total €270million includes the debt we’re taking over, so for the €270million we needed to create a funding structure with a couple of banks in Europe which we have done and we’ve secured term funding for a long period for the transaction, and the transaction will fund the repayment of the funding package over time. The interest rate is approximately 4.25% - it’s a pre-tax rate that we have on the term funding, so it’s a competitive rate, and that also makes the deal attractive.
ALEC HOGG: Fixed for the long term -that rate - or would that go up should interest rates rise in Europe?
HUBERT BRODY: No that would be the long term rate.
ALEC HOGG: It looks an attractive deal - the company’s name is Lehnkering - is that correct.
HUBERT BRODY: Yes it’s Lehnkering.
ALEC HOGG: And it’s one of the biggest logistics operators in Germany. You seem to be getting bigger and bigger in that country in particular.
HUBERT BRODY: Yes we’ve been in Germany for about 12 years and so we’ve established ourselves. We have a management team that is very well respected there and on the other hand, they're also very much part of the whole Imperial culture. So we feel comfortable in doing transactions in Germany - but then Germany is the heart of the global manufacturing that takes place - it comes out of Germany feeding the rest of Europe, but also globally many developing markets. So it’s an industrial powerhouse and therefore a good place to be.
ALEC HOGG: How big is this business that you’ve bought - Lehnkering - compared with your existing operations in Europe?
HUBERT BRODY: Our existing operations had an annual operating profit of about €38million which we did last year and this business is on about €28million per annum. So it’s about 70% the size.
ALEC HOGG: It’s a big deal for you in the European context.
HUBERT BRODY: Yes it nearly doubles our European operation.
ALEC HOGG: And where does it put you in Germany - for instance, if Angela Merkel wants to talk to business leaders in Germany, would she call up your guys?
HUBERT BRODY: No, we’re still a niche player even though it is maybe big from a South African context. There are some general logistics players in Europe which are very large. We’re particularly focused on a couple of things - number one, inland waterways shipping, then operating ports along the Rhine and certain inter-modal activities that take place in contact logistics. So in these niche areas, we see ourselves as the experts and very competitive. But from a broad point of view, we’re not the same kind of logistics business as we are in South Africa where we’re a general player, touching all areas - that we don’t do there.
ALEC HOGG: I saw in the announcement that part of the funding is going to be in South African rand.
HUBERT BRODY: In fact the package of funding that we’ve put together is all foreign, but we have obtained approval from the South African Reserve Bank if we wish to take capital out to partly fund it. But it depends on certain financial considerations which we must still think through.
ALEC HOGG: I was wondering, because does that not bring in an exchange rate risk?
HUBERT BRODY: We would naturally, whenever we do something like that, consider whether we need to hedge the position.
ALEC HOGG: Alright, so either way there will be no exchange rate risk.
HUBERT BRODY: No.
ALEC HOGG: And the company with 2,700 people - it sounds like a lot of new staff to be taking on board. What is the history behind its current ownership by Lukas, a Swedish business?
HUBERT BRODY: Yes Lukas is a subsidiary of a private equity business by the name of Triton which is a global private equity player and quite well known in Europe. So Lukas is just the holding company in which Triton held it. Triton is a commercially known operation and they’ve owned it since about 2004. Before that, the business belonged to Hapag-Lloyd, a global shipping business, and then the private equity operation bought it and now after about seven years, they need to move their funds on.
ALEC HOGG: The price that you're paying is on a price to earnings (PE) ratio of just over 11 times. How does that compare with businesses like this internationally?
HUBERT BRODY: We’ve done quite a careful benchmarking of what the sort of peer multiples are for businesses with similar logistics businesses and businesses which have similar exposure to the chemical industry as this business has. And if you consider the control premium which is in addition to the normal trading price of such investment, it’s absolutely in line with the norm at the moment.
ALEC HOGG: It is interesting as well that this large acquisition that you’ve conducted is an offshore one. Does that give us an idea of your intentions in future?
HUBERT BRODY: Our offshore exposure is only about 8% of the total of Imperial. We would like our offshore operations to be meaningfully bigger than that. We don’t put a particular number on it, but we would like a larger exposure to offshore logistics activities, because ultimately we have ambitions to be a more international logistics operation than what we are now. Now post the transaction we’re on about 14% - if it moves over time to maybe a fifth of our business that would be fine. But South Africa would in the main always be our main place of operation.
ALEC HOGG: But it is interesting as well to see yourself and another of the big industrial groups - Steinhoff - taking big bets internationally. Steinhoff’s bet of course is substantially larger with its acquisition in France, but it still seems that South Africans are perhaps more confident about Europe than even the Europeans.
HUBERT BRODY: It depends probably on which industry you're in. We’ve considered our industries quite carefully which we are in. If it’s a business that had significant exposure to the southern European countries, or particularly to consumer activities, you know what makes this business attractive is that most of it is based on exports into developing countries and exports across the world from Germany. So that gives us the comfort that it’s quite resilient, and it’s also proven over the last eight years that it’s had a very defensive resilient earnings profile - even through the economic slump three years ago.
ALEC HOGG: When we last spoke a month ago, we were talking about your financial results and there the headline earnings were up 38%, your dividend was lifted from R3.50 to R4.80. Would this transaction have any impact in the current financial year’s numbers?
HUBERT BRODY: The transaction is earnings enhancing. It gives us about 60 cents of extra earnings per annum. In the first year, there wouldn’t be that much because there are certain deal costs and we will only account for it for about three months because it will probably only be effective in about February 2012. But on an annualised basis it’s giving us about 4% to 5% additional headline earnings.
ALEC HOGG: So it looks like the transaction is a good one from any way that you look at it. Have you been stalking them for a long time?
HUBERT BRODY: We’ve known them for many years - some of our staff have even worked there long ago, and they’ve always had a very healthy respect for quality and the fabric of the people, and the business and we’ve been watching them probably for the last 10 years and particularly the last three years or so, since we thought they might become available for sale again.
ALEC HOGG: They're based in Duisburg - how far is that geographically from your existing operations?
HUBERT BRODY: It’s about two blocks down the road...
ALEC HOGG: So it’s pretty perfect - you couldn’t have asked for a better location.
HUBERT BRODY: In that sense it is and a very important other aspect of it is the disciplines that this business is in - the waterways shipping, the ports - it’s all business and industries which we know very well. It just takes us into a bit more of the chemical industry where we would always have liked to apply these skills as well, but the underlying business is something that we are so well versed in and we think we can continue without any hiccups.
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