There are many investors who wish they had taken a punt on Brian Joffe’s Bidvest Group when it listed on the JSE in 1990.
But, given a second chance, there don’t seem to be that many lining up to take a punt on his new company, Long4Life, which listed in April 2017 at R6 and has gone nowhere, trading currently at R5.75.
Long4Life has announced a proposed R3.9 billion investment in clothing and footwear company Rage, adding to a slew of acquisitions in the leisure and lifestyle sector since its listing, in which it raised R2 billion.
Some investors and analysts still view Long4life as speculative and are waiting for Joffe to prove he can replicate the success of Bidvest. This is a tall order. Things are not the same as in the early days of Bidvest, which was started in 1988, and Joffe is not trying to mimic it.
While there are similarities which reflect Joffe’s way of doing business – a small head office and decentralised autonomous businesses with responsibility for boosting profits and efficiencies and looking for growth – Long4Life has invested predominantly in retail, an area Bidvest stayed out of.
One of the main differences, in Joffe’s experience, is that regulatory hurdles are much greater now, he told Moneyweb Investor. It would take weeks in the early 1990s to consummate deals. Now it takes months. South Africa also no longer has a closed economy, accompanied by sanctions, and high JSE ratings for companies to use expensive paper for cheap deals.
The R3.9 billion price tag for Rage, which has 555 stores on relatively small sites selling its own brand footwear and clothing, does not look cheap. The price is based on Rage achieving revenue of R1.25 billion, earnings before interest, tax, depreciation and amortisation (ebitda) of R360 million and net profit after tax of R263 million for the year to June. Like-for-like turnover growth is currently 16% year-on-year.
Joffe thinks Rage is reasonably priced. “I have never said any deal is cheap,” he says. “The question is whether it is fair.” Continued due diligence still needs to be done. With valuations, the real test is whether the forward-looking position is as good as sellers say it is and whether it is sustainable, he adds. “And this still needs to be tested by us.”
Long4Life is also ceding a significant 22.8% chunk of the business to Rage’s Jeffrey and Merle Gochin, as the price will be settled in shares (around R1.5 billion) and cash (R2.4 billion).
Long4Life currently has internal cash resources and bank debt of around R1.5 billion.
The 22.8% is a lot to give away, “but if you take Bidvest as an example, I have never been fazed about percentage, only absolute return. I did it in the case of Bidvest with the Chipkin family and now I am partnering up with the Gochin family, I don’t see a difference between the two. They are diligent and clever operators.”
Since the Long4Life listing, Joffe has added Sportsmans Warehouse, Outdoor Warehouse and Performance Brands (previously JSE-listed Holdsport), Sorbet, and Inhle Beverages to the portfolio. And since year-end results, he has bought Chill Beverages and Rage.
All the acquisitions fit loosely into a “lifestyle and leisure” investment theme and while there is a strong focus on retail, this was not necessarily the initial intention. “We were not designing this thing to go retail,” Joffe says. “I don’t even know if I know much about retail.”
What Long4Life is looking for is niche businesses that have something unique. Rage, for example, fits perfectly with this strategy, as it is a niche business – a retailer that sells only its own brands with a unique operating model.
While the retail bias may not be intentional, what is intentional is the rapid accumulation of assets since listing, and investors can expect more. “There’s quite a lot of things we are looking at,” Joffe says. By the time the Rage deal is done, Long4Life will have borrowings of about R1.5 billion but the capacity to borrow further to fund growth.
Acquisitions have been more aggressive than Joffe would have liked, “but our point of view is that we need to be a company of reasonable scale and I am not 50, or 40 or 30 anymore, I want to get it to scale reasonably quickly.”
In Long4Life’s results for the 11 months to February, published in May, revenue from acquired businesses for four months was R730.6 million and operating profit R117 million.
Businesses were acquired on the basis of them generating ebitda of about R540 million and are now housed in divisional structures of sport and recreation, personal care and wellness, and beverages.
Long4Life has allocated R100 million to venture capital opportunities in leisure and lifestyle, and has kicked off with 49% of Veldskoen Shoes. Venture capital investments will stick to the theme, and Long4Life will likely stay away from investments in “fourth industrial revolution” businesses. “We are not involved – it is high risk stuff,” Joffe says. “We have allocated R100 million and are looking at investments but this is not going to be the mainstream of what we do.”
Management is focused on extending existing products and services, expanding the geographic footprint and bolt-on acquisitions. Acquisitions have been in niche retail activities rather than mainstream and all are scalable and transportable. Not that Joffe is eyeing opportunities outside South Africa at the moment.
Admitting South Africa is challenging currently, he says: “I hear that retail is bad at the moment, but I am invested in South Africa and the South African economy. We don’t want to diversify over geographies because we are not big enough, simply put. I believe South Africa will come back, and I hope more people are motivated and committed to the medium term future of South Africa.”
Joffe is optimistic the group is being positioned to make the most of a transforming economy. Companies under its belt “have the capability of expansion and an ability to enhance efficiencies to adapt to current market circumstances, but also to pursue other value enhancing businesses.”
Add an entrepreneurial executive and access to a pipeline of acquisitions, and Long4Life could meet its objective of above average growth.
Asked about the acquisition pipeline, specifically whether the group was interested in any of Edgars group assets, which would gel with Rage, Joffe says only “it is common knowledge that there are sales processes underway for parts of Edgars, and we will see.”
Many investors are still sitting on the fence.
FNB Securities says in an investment note that the Rage acquisition should be earnings accretive and add to a diversified pool of assets. But it was less sure about the price, saying the deal “appears relatively demanding on a PE of 14.9 times, somewhat justified by Rage’s anticipated growth trajectory and in line with the average PE of listed local clothing retailers.”
But while Long4Life’s success depends on buying “suitable assets at attractive valuations,” it remains “a speculative bet.”
Lester Davids, trading desk analyst at Unum Capital, said the share price, which has reached a high of 838c and a low of 411c, could move lower in the short term based on a technical analysis, but this should be viewed as an opportunity to accumulate. He said Long4Life is targeting businesses with a proven track record, market-leading brands, established market share, strong consumer equity and the ability to scale up. He said the businesses were capital light, have strong experienced and entrepreneurial management teams and attractive prospects.