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SA corporates’ offshore forays have destroyed over R300bn in value

Local conditions and competitive environments are simply different.
Ill-fated incursion: Had Sasol not entered the US, estimates are that it would be trading at over R400 per share today instead of around R135. Image: David Weaver

South African-based companies are having a horrific time in 2020 with the impacts of a struggling economy and Covid-19 taking their toll, but for many of these businesses the problems started a long time ago.

Corporate South Africa has been on a global diversification spending spree, with mainly very poor – and often disastrous – outcomes.

It is impossible to quantify exactly, but we estimate that corporate SA has destroyed over R300 billion of value over the past decade through these offshore forays, with the biggest culprits being Sasol, Woolworths and Brait.

SA has been stuck in a low-growth rut for many years. The period of Jacob Zuma’s presidency saw domestic corporates lose faith in the country and low demand growth did not justify new investment in capacity. Listed SA company management is regarded very highly in the global context and many of the management teams in question had delivered excellent results and returns at home.

This combination of factors, together with the low cost of financing offshore, saw many local companies shift their strategies to offshore diversification and growth.

SA companies bought global businesses and, in some cases, started almost from scratch (Sasol, Investec, Discovery).

So why has the outcome been so different from the goal?

We have identified what we believe to be the major reasons for this:

  • SA companies tend to pay too much in their desperation to diversify.
  • SA companies often send their ‘B teams’, which are less experienced than the winning team back home, to manage these offshore investments.
  • Locals in these destination countries know more and that is why a buying opportunity is available. Surely, if it was a great business, locals would have snapped it up?
  • South Africans were romanced by low interest rates compared to what they were used to in SA. However, if a business does not make money, it does not matter what the cost of funding is!
  • Local conditions and competitive environments are simply different.

Below, we highlight several JSE-listed companies that have had difficult journeys in their investment endeavours abroad.

Sasol

Sasol spent $13 billion on its US Lake Charles Chemicals Project, after an initial budget of roughly half that amount. This disaster has seen Sasol’s share price plummet and it is now desperately trying to sell off assets as its balance sheet has become unsustainable. We estimate that the Sasol share price would be over R400 per share today if it had never entered the US. Instead, Sasol’s share price is currently trading at around R135.

Woolworths

Woolworths invested over R20 billion in Australian clothing retailer David Jones. At the time, the business had not grown for years. The company believed it could wave a magic wand Down Under, but the Australian retail foray has been a disaster and David Jones could face bankruptcy. The SA Woolworths business has performed exceptionally, but Australia has weighed it down and Woolworths’s share price has plummeted from over R100 per share to around R35 share currently.

Brait

Brait has been among the worst performers from a percentage-loss scenario. The acquisition of New Look in the UK turned out to be a failure and Brait’s share price has declined from over R160 per share to around R3 currently. Subsequent feedback was that Brait’s due diligence of New Look prior to the acquisition was far from sufficient.

Famous Brands

Famous Brands was one of SA’s top business models before it placed a huge bet on Gourmet Burger Kitchen in the UK. It spent over R2 billion on the acquisition, and it was worthless just over a year later after spiralling into massive losses. Famous Brands peaked at over R160 per share and is now trading at less than R40 a share.

Mediclinic

Mediclinic’s Spire investment has not performed, and it paid over the odds for its Swiss hospital business that has battled to grow. Soon after investing in Dubai, the government enacted damaging new legislation. These events have left Mediclinic overgeared. The share price is now under R60, after peaking at above R200 per share.

Truworths

Truworths and The Foschini Group have battled with their respective UK acquisitions, with billions of rand in value being destroyed.

Rebosis

Rebosis Property Fund invested over R1 billion in New Frontier Property, a UK mall business. A few years later it sold its 49.4% stake for R700 (!). This has contributed to Rebosis’s debt-driven downward spiral.

Investec

Investec invested and subsequently withdrew from Israel, the US and Australia. Its UK business is still sub-scale and generating poor returns but is showing positive signs. In the meantime, the SA and asset management business have thrived, but this has been overshadowed by offshore losses.

Standard Bank

Standard Bank moved aggressively into other emerging markets, including Russia and South America, and withdrew several years later, returning its focus to Africa.

Discovery

Discovery invested over R1 billion in an aggressive US expansion plan and subsequently withdrew and changed the model to the current Vitality partner model.

Old Mutual

Old Mutual battled with its European strategy, lost tremendous shareholder value, and subsequently unbundled into an African and UK operation (Quilter). Sanlam, by comparison, largely stuck to Africa and has been a far better share.

Steinhoff

We were not sure whether to include Steinhoff in this article, as it has its unique attributes in that its actions were fraudulent, on top of including many bad acquisitions.

We have not included its R250 billion-plus loss of value in our R300 billion estimate above.

Nigeria

We also include Nigeria here, where many SA companies (including Tiger Brands, Altron and Nampak) have entered and left with their respective tails between their legs. Cash has often been tied up in countries such as Angola as well.

In the interest of fairness, the author of this article presided over the Anchor Group’s acquisition of a UK-based emerging market hedge fund, which subsequently closed. While not material in the context of the above, over R200 million of value was lost.

So, that is the sad story of SA disappointments offshore and there have been far more instances not documented above.

To be fair, there have also been great success stories, with the biggest of these being Naspers’s investment in China’s Tencent. The value creation here has been over R1 trillion (we note that the calculation is subjective due to the pesky 50% share price discount to net asset value!), but SA investors are fortunate that this has overshadowed the collective losses from all of the other SA businesses.

Other success stories include MTN, Sibanye-Stillwater, Mondi, Spar, Nepi Rockcastle, Bidvest/Bidcorp and Super Group.

There are great lessons to be learnt and many of the businesses above still have great SA franchises and cash-generative models.

We are hopeful that SA can improve its attractiveness as an investment destination so that domestic companies can confidently deploy their capital locally at rates of return in line with traditional returns.

Even lower returns, that still beat the cost of capital, must surely in many instances be more attractive than the clearly massive risks in deploying capital offshore.

Peter Armitage is CEO of JSE-listed Anchor Group.

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COMMENTS   32

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Who can forget Old Mutual’s disastrous forey into the USA?

Probably worse than the destruction of shareholders value is that most probably in every instance the responsible directors’ remuneration was not affected at all.

No true correlation between kpi’s and remuneration.

Worse still the public sector’s value destruction is much much worse without even the added risk of going offshore and the taxpayers have paid dearly.

And the bloated public sector had absolutely no remuneration cuts during Covid-19 and there are still no criminal prosecutions for blatant corruption where ample proof exists.

Australia, NZ and the UK have been the worst for SA Investors. A false Eutopia for hard working South Africans. The US has made us a lot of money in the last few years!

Can you please emigrate to a small island where nobody can listen to the nonsense you speak! You’re one of the most irritating flies that buzz and make people upset. Get a life dude. You suck

Hahaaa.

At your flatulent best again???

Flies tend to congregate around a heap of manure. The “flies” do not bother the rest of us, why do they group around you? Maybe it is a sign that your mindset stinks, or maybe it confirms that you are a cadre.

Not a very good comment Dadape. How about your opinion on the contents of the article?

Dadape …you find comments/debates intellectually challenging …perhaps try out Disney.com

So you’re telling us all that you’re a loser? that’s okay, many of the rest of us also lost some. But we pick ourselves up and keep moving forward, we don’t get any better by whingeing and criticising others.

Not only the private sector. Let us not forget that there is a considerable sum, currently estimated at about half a trillion R, that’s now sitting in the UAE, thanks to the Guptas and the Zumas.

That loss will never be returned by the Arabs, no matter what “government” or “diplomatic” agreements are set up.

Didn’t Discovery also burn their fingers in the US too?

Yes, and many others.

Wonder how many Ront were accidently left behind in these countries after all the “failed” ventures ?

What about SAB whose leadership simply got too big for their boots. They considered themselves invincible and bought anything that moved. In the process they brought on board mega shareholders who couldn’t care two hoots about Charles Glass or a hundred years of SA heritage. When the chips were down the SA shareholders and all the SA heritage were swept away whilst a few twits at the top made a lot of ill-deserved money.

How many execs funded their emigration at the expense of shareholders?

I think you’ve hit the nail on the head. If one follows all the failures the pattern is the same and the overall result can only be that the execs have exported their (ill?)-gotten gains overseas under the guise of “investment diversification”. The headlines started way back with the Health Racket. After investigation of the accounting behind it, it became clear just what shenanigans certain people have been up to. So those clever people in other companies followed suit. If such a relatively small company could pull it off then why not them too?
Then of course there are the rumors about the mines exporting gold and other minerals/gems to overseas companies, gaining on export benefits and then selling the bullion at much higher prices once in the hands of the overseas receiving company – which just happens to belong to them via some rather deeply twisted ownership.

Is MTN a really success story for shareholders?
Nigeria never ending issues have taken more than 80% of the share price value for couple of years now!

Probably South Africa’s most successful export has been its human capital. Other success stories…AngloGold, Billiton, Anglo American, GoldFields, Nandos,…

Yes and No.. success depends on the view point.. SA people who refuse to integrate with receiving nation is not strictly a success story.. much like any immigrant that clutches on their prev national identity and form groups of their own.

People who emigrate on their own steam deserve all the success they can get (with the proviso that they don’t disgrace South Africa by heaving like racist troglodytes in their new countries).

People who emigrate at shareholder expense on the other hand…

‘It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’ _W.Buffet

Lesson to corporate SA;
A bad deal at a good price is still a bad deal!

Buying rotten tomatoes for a bargain is not a bargain.

No, the execs simply exported their gains at investors expense. That is what is going on with all these companies. OM was the most blatant of cases ever, all the execs owning the part that made money and that transferred money.

Caught on the treadmill of human nature, more is never enough.

I have always believed that ‘’ dog is to tree’’ what ‘’Globalization’’ is to South Africa Companies and market!
Globalization is reversible – that history has taught us. South Africa has already, for a plethora of reasons, lost many of the gains since 1995. The barriers of trade and commerce can still be resurrected, but surely not without consequences similar to those that followed the stock-market crash of yes, 1929!
Under the ANC regimes and their socialist policies, we failed to grow and prosper, as our economy and our inhabitants were divorced from the opportunities to specialize and engage in the divisions of labor. Maybe that could be the reason why Corporate South Africa has been on a global diversification spending spree, believed that the deepening of specialization and an extension of the division of labor beyond national borders will bring growth and new opportunities. Production has become much more international.
I think most of these SA Companies that tried their luck offshore, didn’t understand that a fully globalized world is one in which unfettered production, trade, and finance are driven by profit-seeking and risk-taking that is wholly indifferent, from the way that things are done in Africa.
‘’SA companies bought global businesses and, in some cases, started almost from scratch (Sasol, Investec, Discovery)’’ – I fail to understand how these three companies really thought that they could compete offshore – maybe they even thought that the benefits of globalization far exceeds its costs, even beyond the realm of economics – which it didn’t!

Pardon me, but are you saying these companies were justified to go Offshore prematurely, because of the dire situation at home?

Arrogance is a South African virtue … so is a false sense of invincibility. The management of these companies actually thought that they could take on the world’s best and beat them.

Yes!

”Piga don’t know pigs stink”

And our pension funds invest in these losers.

The blame for these loss making forays lies with the ANC and it’s leadership under Zuma.
The blatant theft and economic manipulation under this government resulted in massive economic insecurity. What with the tumbling Rand, SOEs collapsing, tax payers being marginalized and BEE policies STILL driving a dying economy….a lot of South African companies were forced into looking for alternate markets…just to stay alive! And then of course, some of them even went futher and started copying what was happening at Government level ….theft, fraud and lies – hence the Steinhoff, VBS, Tongaat debacles.
In my opinion.

So much value has been destroyed that it’s hard to see a lot more of these foolish forays into the UK, Australia and the US.

However, there should be a clear and strongly enforced expectations set that execs and staff can’t use these deals as backdoor for emigration at the expense of shareholders. If there is evidence that this is the case, strong action should be taken.

At all these companies the execs simply moved money overseas for themselves under the guise of diversification. The pattern and story is just so predictable. This kind of shenanigans first made headlines in the shape of the Health Racket long ago. Ever since, sly people have made use of this loophole to export funds for themselves and blame it on poor economic conditions etc. etc. etc. This is the real issue here. One can go and check out all the details in the accounting records and just gasp at the audacity of it all.

End of comments.

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