We are concerned shareholders of Bell Equipment.
Bell is a South African manufacturer with much to be proud of: technical sophistication in articulated dump trucks (ADTs), an enviable position in the South African aftermarket, a passionate engineering team.
In 2000, Bell’s pioneering advancements in ADT technology attracted a 31% shareholding from John Deere, which Deere retains to this day.
Until 2012, Deere and IA Bell (the Bell family trust) jointly controlled the board, and Bell benefitted from the oversight of two world-class organisations. Not coincidentally, Bell’s returns on capital during the ‘Deere years’ averaged a healthy 13%.
But since Deere’s departure from the board, capital allocation has been rudderless.
Five-year returns on capital have fallen to 6%, meaning that each rand retained in the business has left shareholders worse off than if they had invested in South African treasuries.
A haphazard expansion has seen Bell’s days of inventory swell from 150 in 2012 to a bloated 240 today, the difference representing R1.5 billion – 2.5 times the company’s market capitalisation. Gearing approaches 50%. Nor is this underperformance due to South Africa’s woes; rival Barloworld has hoed the same rows while consistently exceeding its cost of capital.
Unfortunately, Bell’s board has been unable to formulate a strategy to increase returns.
With the exception of Gary and Ashley Bell, its members are without relevant industry experience. And despite Deere’s presence as a strategic shareholder, Deere has not been allowed to contribute its expertise at board level since 2012.
Bell’s lead independent director John Barton and his non-independent peers have not taken shareholder concerns seriously.
Shareholders at a half dozen different investment funds requested a call with Barton in December, were put off until January, put off yet again until March, and were then told Barton would make himself available to answer questions at the company’s annual results presentation in May – a presentation he then failed to attend.
Most recently, Barton used the excuse of a negative press article to cancel all communications with shareholders who dare complain.
Despite the board’s dithering, Bell has the potential for greatness.
Manufacturing is being moved to Germany, allowing Bell to more efficiently cater to the northern hemisphere, where 70% of ADTs are sold. A beachhead has been re-established in the US. Even the Bell family has been buying shares for the first time in years.
We suspect the family sees what we see.
And what do we see?
We see that the cost to a global heavy equipment manufacturer to replicate Bell’s ADT platform would exceed Bell’s net asset value (NAV), suggesting that Bell would be a bargain to an acquirer even at five to six times the current share price.
We see that the South African dealer segment would also be valuable to an acquirer; dealer businesses enjoy network effects that are difficult to replicate, and dealer businesses around the world generally trade for multiples of book value.
We see that in an outright liquidation of equipment and working capital, Bell would be worth several times its current share price.
Lastly, we see that with a proper capital allocation framework, Bell could once again exceed its cost of capital as a standalone company.
Under such a framework, we believe Bell could release up to R1.5 billion in excess working capital, or two-and-a-half times the current market capitalisation.
Repairing the damage of the last five years will take work, and lengthy discussion with Bell employees and shareholders brings us to the conclusion that this work needs to be undertaken by new management.
Current management has done little but lard the balance sheet with unproductive assets, alienate engineering talent, and snub investors who have sought to hold them to account. Complaints from top talent are so strident that we have served the company with a Promotion of Access to Information Act request to learn more about internal HR surveys undertaken recently.
Where to now
We continue to watch with interest to see if Barton’s peers among the independent directors will discharge their fiduciary duties.
But to the extent they are unwilling to act, we believe shareholders must do so.
We therefore make two suggestions:
- Deere and IA Bell, as holders of 70% of Bell shares, must reassert themselves at board level. Their expertise is necessary to install management capable of running what is essentially a multinational technology company.
- We also request that Bell begin a strategic review of all options to crystallise value for shareholders. We know that Bell is worth NAV. The Bell family, recently purchasing shares on the open market, has said sotto voce that they know it.
When Bell listed on the JSE in 1995, investors large and small joined its customers and employees in depending on it for good governance. The difference between that governance is the difference between public shareholders realising R6 and realising NAV of R36.
Kerem Aksoy is chief investment officer of Glacier Pass Partners in New York. Carson Mitchell, managing member at Shipyard Capital Management LLC, splits his time between Puerto Rico and South Africa. They have been Bell Equipment shareholders for more than three and four years respectively, and together own two million shares in the company.