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‘Mondi is doing really well’: Simon Brown – JustOneLap

SABMiller/AB InBev: ‘These are elephants dancing. The ants get hurt.’

HANNA BARRY: We are talking markets now with Simon Brown of JustOneLap. The JSE all-share index closed about 0.33% higher on the day at 52 726 points. The gold index firmed more than 2% and the Top 40 is up 0.28%. It’s really looking green across the board on the index.

A fairly uneventful day, Simon, but we did hear from Tumi about AB InBev’s surprise at SABMiller’s rejection of its offer. Really, it looks like this is potentially going to become a hostile takeover.

SIMON BROWN: Good evening, Hanna. A quiet day on the market. SAB – a bit of fun there. So really what we are seeing is a dance. AB InBev want to pay as little as possible and SAB want as much as possible – and they’ve got to try and find that middle ground. There is a ticking clock going – five PM London next Wednesday AB InBev must either have, as they say, put up or shut up. They can of course actually apply for a two-week extension, and it looks like they might get it. They will apply for it and it’s standard procedure to be granted that.

What surprised me is they’ve got Philip Morris – Altria – with 27%. They are on board. The South Americans who’ve got 14% aren’t. I really thought they would have sown that up by now already, which would have given them the whole amount. So it’s going to be backwards and forwards and an extra 10p here and half a pound there and that sort of thing. But it’s the sort of bid that you can go hostile on.

The problem with hostile is you can’t do due diligence and the like. But, with respect to SAB, it’s beer. This isn’t Adcock Ingram, where Brian Joffe couldn’t do a due diligence and he found a whole lot more problems. This is SAB, this is one of the best management teams globally in any sector and I think they need to do due diligence. So the risk is that SAB suddenly gets them going hostile on them. If I were a betting man – I’m not – I think we’ll see an offer from AB InBev and I think shareholders will take it.

HANNA BARRY: As you say, Altria is on board and the Santo Domingo family at this stage, but AB InBev has said openly it is approaching shareholders. Now, before news of this potential takeover came out with this bid, the SAB share price was trading around R600. It jumped to R750. Effectively AB InBev has offered R840/share. So if I bought SABMiller shares today and then AB InBev did buy SABMiller, I’d make R120-odd on the share. Should I be buying SABMiller?

SIMON BROWN: No. I always stay far away from corporate activity like this. So yes, if the deal comes in, it might be as much as R900, which could see you make 20%, which is very nice. But what if there is no deal? I’ve said I think there will be one, but what if there is not? If there is no deal, you are probably going back to at least R600, so that’s a 20% loss. But in truth you might even go lower.

For five years, perhaps even longer, perhaps eight years, the talk has been you pay a significant premium for SABMiller – and we called it the ABN Bev premium. I’ve virtually been expecting this now for years and years and years. If it’s off the table – and the City of London rules, remember SABMiller is a London company now, no longer South African – you can’t come back for another year. If they pull the bid and don’t do it, what do you own? You own a really, really great beer company, a defensive stock, growing in constant currencies at single-digits. It should be on a PE of generously we could say 10 or 12, or if you want to make it frothy, 15 or 16. It’s north of 30 right now. So forget R600. It could go in time. Your investment has fundamentally changed.

So I look at these and I watch them from the sidelines. If I was a shareholder, I would take my R750 and run, which is currently what you can sell at. And if I’m not a shareholder I don’t want to get involved in that. These are elephants dancing. The ants get hurt.

HANNA BARRY: Absolutely, a very good point. We also saw a trading update out today from Mondi. Tell us about that.

SIMON BROWN: Mondi is just plugging along and doing really well. A deeply unexciting space, paper. They are doing significantly better than Sappi, although Sappi kind of went the glossy magazine [route], which the iPad killed, and they are doing some sucrose and the like. But Mondi is doing really well. They spun out Mpact and Mpact is doing well, and another decent update came out of them. Tim Cohen [of the Financial Mail] tweeted earlier in the day. Anglo American used to own Mondi – spun it out I think in 2010, perhaps 2009, and we are merely a couple of million rands from actually now being larger than Anglo American, which shows you in part Mondi has had a great five or six years as a listed company and Anglo American has had a torrid time since the highs of 2008.

HANNA BARRY: Do you like Mondi as a share? Would you buy into it? I do like it as a share, would you buy into it?

SIMON BROWN: I do like it as a share. Paper in truth simply does not excite me. But they are actually a lot more than paper, and we’ve got to give them credit for that. It’s a stock – and there are many of them on the market. But you look at it you‘d say it’s expensive. Fair point. It’s never not been expensive. Part of that expense is because in a tough industry they’ve done very well and they have really, really good management. And they are in the right spaces within the broader paper [industry]. They are not in the glossy, they are not so much in North America. So Mondi is a good stock.

HANNA BARRY: Thanks, Simon.

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