Long4Life published surprisingly good half-year (H1:22) results and, importantly, beat many 2019 full-year (FY19) high-water marks. The group has done well over a difficult period. Founder and CEO Brian Joffe has also decided to step back and into the role of chair.
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Most importantly, and probably key to the recent share price rally, the group disclosed that it “has received an unsolicited expression of interest to acquire all the shares in Long4Life”.
Despite its good results, and before this announcement, the group’s share price has languished below its listing price with only a single small dividend received years ago. At some point, and contrary to the group’s anticlimactic “strategic review”, value had to be unlocked here somehow.
This potential bid may be that catalyst, but who could the bidder be?
What follows here is pure speculation, but let me walk you through my thought process.
What size could this deal be?
Long4Life’s R3.6 billion market cap is below its book value of R4.6 billion. A 20% to 40% premium to the current share price would bridge this gap and put the group’s takeover price at just under R5 billion, approximating its current net asset value (NAV).
Who can (and would be interested to) write a R5 billion cheque?
There is always private equity (domestic and offshore), along with other large pools of capital we do not have line of sight to. Any of these could be the bidder, but few of these would find strong operational reasons to do this (their decisions would be purely financially motivated and looking to generate a return on their capital).
In terms of operational fits, only one possible suitor comes to mind: Mr Price Group.
Long4Life’s major underlying business is its Sports & Recreation segment (Holdsport), which houses Sportsmans Warehouse. This segment – driven mostly by Sportsmans Warehouse – generated R148 million of the group’s R213 million trading profit.
Perhaps more importantly, Sportsmans Warehouse would fit snugly into the Mr Price Sport offering, likely boosting buying power on the back-end and extending geographic reach on the front-end. Also, as retail is a broad category, the ever-invasive Competition Commission would likely not block the deal.
Now, if you look at Page 44 of Mr Price’s newly-launched growth strategy here, you start to see the clear blank spaces the group has identified to grow into as it becomes “the most valuable retailer in Africa”.
Something interesting about this ‘most valuable retailer’ ambition is that the group does not define what type of retailer. In other words, we can expect Mr Price to start to fill the above-noted ‘blank spaces’ and grow into other retailing niches and product offerings – such as DIY, gardening, beverages and personal care.…
Enter Long4Life’s Outdoor Warehouse, Chill Beverages and Sorbet businesses, among a number of others tucked into its folds.
Then consider the fact that Mr Price recently acquired Yuppiechef, showing that the group is indeed making acquisitive moves.
Conveniently, at the last reporting date, Mr Price noted that it had R4.9 billion of cash on balance sheet, earmarked for future growth.
This war chest correlates closely with the potential NAV-driven price tag for Long4Life.
But why hasn’t Mr Price put out a cautionary then? Indeed, Long4Life hasn’t even put out a cautionary.…
Mum’s the word?
Well, firstly, there is no deal on the table. Only an “expression of interest”, which is far from any binding offer. Therefore, Long4Life is considering this approach and, if things move beyond there, I expect a cautionary to be issued by Long4Life.
JSE regulations however only force Mr Price to issue a cautionary if the deal size is larger than 10% of the group’s market cap.
Mr Price’s market cap is R52 billion. Thus, if the offer for Long4Life is greater than R5.2 billion, we might see a cautionary coming out from Mr Price.
Therefore, if Mr Price issues a cautionary too, it will not only confirm my speculation that Mr Price tabled the expression of interest – it will also tell us that Long4Life may be delisted at a price greater than its NAV.
Or I could be wrong, and Mr Price is not the party that expressed interest in acquiring Long4Life.
We will see.…
Keith McLachlan is investment officer at Integral Asset Management.