PSG shares leap on JSE delisting announcement

CEO Piet Mouton explains why he believes this particular path to be the best thing for all stakeholders.

FIFI PETERS: Let’s get into that PSG story. The shares on the JSE flew today after the company announced it was undergoing a major restructuring. It’s an investment-holding company which presently owns significant stakes in companies like Curro, the private education group, Zeder, which plays in the agriculture space, PSG Konsult, which is in financial services, and Kaap Agri. The group today announced that it’s planning to unbundle the stakes. It believes that doing so will create the value for shareholders that it has desired all this time.

The shares opened 22% higher this morning. They’ve since closed some 18% higher or so, but they are still the top gainer in the session.

We’ve got Piet Mouton, the CEO of PSG on the Market Update for more. Piet, I know CEOs will often say, no, we don’t look at the share price, it’s not our job to monitor that. But how are you feeling about how the market received the news of the path that the group is undergoing?

PIET MOUTON: Good evening, Fifi. Most of the time we don’t watch the share price on a daily basis because there’s not much you can do about it. But I took a lot of interest in how the market reacted today. I think one’s got to take into account that it was detailed, unfortunately not a finalised thing at this stage. There are still one or two hurdles we have to jump through before we come up with a complete announcement, which should be roughly in April and, until there’s certainty in the market, people tend to look [at it] a little bit. This is a normal trend of this nature.

Remember, the underlying investments which underpin the valuation of the unbundled shares I think came back a little bit today, as people might be worried about the potential overhang – which I think is overreaction because, if there’s ever going to be a slight or a short overhang, it will only happen in August this year. So to adjust your portfolio today already is I think a little premature. But the market reacts like the market reacts. I think it’s generally positive

FIFI PETERS: It prices in for the future. And it has priced in, as you are saying, that it’s a cautionary; there are still one or two hurdles to get through before it’s a done deal. But it has kind of concluded that it’s almost there, it’s almost a slam-dunk.

So let’s just talk a bit about those one or two hurdles that you still have to overcome. What are they?

PIET MOUTON: I think most of them are technical in nature, so I don’t think there are going to be material changes leading up to it. But until it has finalised its regulatory approvals in certain instances, we’ve got to get through that. That’s why the board will take the final decision with the year-end results only in April. I don’t think there’s anything major that can happen from now until then that will change the investment or the decision meaningfully.

FIFI PETERS: All right. I’d just like to understand. Inasmuch as the market has given you the thumbs-up if we use the share price as the barometer, it was also surprised by your announcement today. I’d like to understand when you, as the company, as the group, started thinking about this restructuring and why you believe that this particular path is the best thing for all stakeholders involved.

PIET MOUTON: Maybe, Fifi, if you go back a little, we’ve been trading at a substantial discount for five years now. Now that clearly negates the biggest reason to be listed – to raise capital in the equity markets. It’s quite simple, we raise R100 today and by tomorrow it’s worth R70 because of the discount at which one trades. So it closes the equity market for us, and it’s a problem that all investment-holding companies sit with. And then inadvertently you become more conservative in managing your portfolio because you can’t get additional access to cash if you need it. It’s been a problem that we’ve had to deal with.

A lot of our time with investors is also [spent] talking about unlocking value, so essentially we went through a couple of motions. The first step, as the previous market commentator said, was when we unbundled Capitec two years ago. Following that we were trading at a 30% discount [to net asset value], and we thought, well, our next move, if we make another move, is going to be to unlock the value for PSG shareholders, but also to take PSG private, so that we’re not beholden to this 30% discount at which we trade. I think it’s an elegant solution we found at the end of the day.

So shareholders get the bulk of the value, plus the unbundling, plus a cash payout, and the remaining shareholders get essentially the unlisted investments which we can then continue to manage and support in a unlisted environment.

FIFI PETERS: Right. Just to the point of Capitec, just following on from Capitec, this time around it looks like the company has taken the decision to go big or go home by unbundling almost everything.

But I’d like to get your thoughts on why you think the initial Capitec unbundling didn’t work.

PIET MOUTON: I think it did work – obviously to me. We unlocked about R21 billion of value for shareholders. So to my mind it worked well. But the problem was even after we unbundled it, we still traded at a 21% discount. So I just think we take one last swing at the bat and return all the listed shareholdings to shareholders so they can have a direct stake, and then we want to take the rest of the company private because there’s no point in leaving the rump there and still trade at a 30% discount. If left there, I think it would actually trade at bigger discount, given the size of the company. The assets that are remaining in that alpha portfolio are only about R2.5 billion.

FIFI PETERS: So to the decision then to go private and to delist from the JSE was the primary reason – the fact that the investment-holding model is not conducive. Perhaps it doesn’t work in you guys’ favour. Or were there other reasons that prevented – or may prevent – you from staying listed on the JSE?

PIET MOUTON: I just think globally investment holding companies, listed investment holding companies, have fallen out of favour. The alternative models like private equity are better, and there are numerous reasons for it, which are highlighted in the presentation I gave to the market. Investors don’t like the fact that we’ve got permanent capital. There is a tax trap in investment holding companies, which is not prevalent in private equity markets. The fact is, if you look at PSG, the bulk of our holdings are listed, so people don’t have to buy into PSG; they can invest directly in the underlying portfolio. It’s quite complex to try and understand and get all the drivers, all the different PSG Group companies. People look at education and might only want to invest in Curro, and other people look at financial services and want to buy PSG Konsult.

In time this will be a significant benefit to these companies that we are unbundling, because they actually have very low liquidity at the moment, given our large stakes. So they will benefit going forward. We unbundled them because we also believe they’ve got extremely good management and they’re well capitalised businesses.

FIFI PETERS: So they’re going to be fine without you as the big brother?

PIET MOUTON: They’ll be more than fine without us. Remember what we also said: we are not totally going to step away, we’re going to remain shareholders in this business because, remember, we also get the unbundled shares, and I’m going to remain and my management team are going to remain on the boards of these companies where we represent PSG currently. We’re just going to represent shareholders in general on these boards. So we’re not stepping away completely. We’ll just have a slightly smaller say in what happens at these companies.

FIFI PETERS: Lastly Pete, what does the future then hold for the group as a private entity?

PIET MOUTON: Well, I think it’s smaller. We’re going to continue to try and build these unlisted investments that we’ve got. Like I said, the portfolio is significantly smaller so I do think it creates excitement again. We’re in the portfolio, especially with Capitec. When it was still R60/70 billion it was difficult to move the needle. Now, when the portfolio is smaller and we do find the successor, it will look more material. I think for those of us who are left behind that’s an exciting prospect.

FIFI PETERS: So acquisitions on the cards, possibly.

PIET MOUTON: Yeah, but smaller ones. When you’ve got a R2.5 billion portfolio and you make a R250 million acquisition, that’s 10% of your portfolio. If your portfolio is R25 billion and you do a R250 million acquisition, it’s 1%. Do you follow where I’m going with this?

FIFI PETERS: Got you.

PIET MOUTON: And there are more R250 million good opportunities, I think, than there are R2.5 billion opportunities.

FIFI PETERS: Got you. I hear there are some steep discounts over in Russia, just following the rerating of stocks there. [Piet Mouton laughing loudly] Thanks for your humour, thanks for your humour, Piet. We’ll leave it there.

That was Piet Mouton, the CEO of PSG, talking to us about that big deal announced by the group earlier today that sent its shares soaring to the number one spot on the JSE.

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