So to get a sense of what this might mean let’s chat to Sean Ashton, who is chief investment officer at Anchor Capital. Sean, thanks for your time this evening. What did you make of the news?
SEAN ASHTON: Look, it probably makes sense from a Curro point of view that they would do something like this when you are trading at R12bn worth of market value with very low earnings, and they’ve now got the opportunity to acquire what’s actually an [asset] in the schools business, in the form of ADvTECH for a much lower valuation. So it’s a good opportunity for them to bulk up their portfolio.
SIKI MGABADELI: But, as we know, ADvTECH has also got tertiary education, they’ve also got the personnel placement business. Would that make sense, or do you think they might just want to split those?
SEAN ASHTON: No necessarily. I think they could split them in time to come, but it’s important to realise the quantum. Those have become less important in recent years. The resourcing division is probably 7 or 8% of profit. It’s not all that meaningful. And really you’ve got a situation now where 60% of profits come from schools.
We would argue that the margins they are achieving in those schools are still well below where the potential levels are. So in terms of value, probably more than 70% of the value of ADvTECH today would be their schools portfolio, in our minds.
SIKI MGABADELI: Another question of course is how this might be funded. We know that Curro has already undertaken five rights issues since listing five years ago. Do they have the cash?
SEAN ASHTON: I don’t think they’ve got the cash. When you look at their numbers now, they themselves are still on the development curve. They are generating earnings before interest of probably, if you look at the last year’s numbers, about R135m. So to fund an acquisition of this size – if you look at ADvTECH it’s north of R5bn now – I think it would naturally be with scrip in terms of issuing shares rather than raising debt.
SIKI MGABADELI: Would the Competition authorities need to look at it?
SEAN ASHTON: Potentially. But I think it’s still quite a fragmented market. So I don’t think there is necessarily a Competition stumbling block there. I think they could probably find a way through those challenges.
SIKI MGABADELI: Well, this is one we’ll be watching closely. Thanks, Sean.
So, David, the funding issue – do you think ADvTECH shareholders want Curro scrip?
DAVID SHAPIRO: ADvTECH’s trading at something like a 20 PE, if that, or 25. I don’t know, somewhere around there. You are not going to accept scrip at a 200 PE. You’ve got to be cooked to do that. Why would you do that? I can’t see this getting off the ground unless some magic wand is waved down at Stellenbosch.
SIKI MGABADELI: Maybe PSG could throw some money that way.
DAVID SHAPIRO: They haven’t got R5bn, R6bn. No one is going to pay that kind of money. Anyway, a good talking point. Even Frank Thompson, when it was made, his cautionary basically said look, we have to look at it. If someone makes a bid we have to look at it. That’s what they do. I don’t think there is seriousness behind it.
SIKI MGABADELI: Don’t say that. This is exciting stuff. I like mergers and acquisitions. Makes my job exciting.