PSG Group has confirmed that its board “is in the process of investigating, and is seriously considering, the potential unbundling of some or all of its shareholding in Capitec Bank Holdings”.
This follows a week of speculation following its initial unspecific cautionary announcement published following its results announcement last week. In some quarters, this was greeted as confirmation of the “worst-kept secret” on the JSE.
PSG says its “rationale for the potential unbundling” is twofold:
- One, that “certain new legislation may potentially deem PSG Group (as a material shareholder in Capitec) to be a financial conglomerate, which will substantially increase the administrative burden on PSG Group (in relation to regulatory compliance)”; and
- Two, “given the substantial discount at which PSG Group shares trade to its sum-of-the-parts value, the board believes such an unbundling may unlock value for PSG Group shareholders”.
The market initially sold Capitec down following the cautionary, but the share was up 9% while PSG was up 7% in midday trade.
PSG Group CEO Piet Mouton highlighted the regulatory burden last week, saying that while the group had historically believed that being listed was important as, amongst other things, this incentivised management, increased red tape meant that “many more companies would opt to operate in an unlisted environment”.
Jan Meintjes, portfolio manager at Denker Capital, says that while details have not yet been published, Twin Peaks regulation in South Africa allows the new Prudential Authority “to require reporting from financial conglomerates that hold stakes in regulated entities (such as banks, insurers and others). This allows the PA to ask the conglomerates to regularly report on its financial affairs, including providing information on subsidiaries and investments that are not regulated entities”.
“I think it is these reporting requirements that are now being formalised that are putting an additional burden on PSG. [Particularly] in this time of crisis, the PA would like to have a clear line of sight of where capital could be raised from in the event of a need for capital.”
He suggests “it is very possible that higher reporting requirements could have also played a role” in the unbundling of the FirstRand stake by RMB Holdings, “but this was obviously being discussed way before Covid-19 came around”.
Anthony Clark of Small Talk Daily Research notes that since just before Easter, Capitec is down 17% while PSG Group is up 20%. Those on the right side of that trade – and there is a suggestion there were more than a handful – would’ve made a fortune in recent weeks.
The effect of this, says Clark is that the discount to PSG’s sum-of-the-parts value per share has narrowed from 36% to 19%, as “PSG perked itself up and Capitec was nailed”.
This leaves the discount at lower than most other holding companies.
Piet Viljoen, of RECM which is merging with Counterpoint, says this discount problem is not unique to PSG Group. “Globally, investment holding companies are currently viewed quite negatively – even Berkshire Hathaway is trading at a discount to its NAV. These discounts go through cycles – a while ago PSG was trading at a premium to its sum-of-the-parts, and Brait (today at R3 a share) was trading at R180 a share, which represented almost three times its underlying NAV (or sum of parts).
The market just loved them.
“As they say in the classics, love is hate’s next-door neighbour, and the market now hates investment holding companies. PSG specifically has come in for a lot of criticism, as most of what they own is listed, so investors can replicate their holdings almost perfectly. And it’s a bear market, so nobody is ‘smart’ anymore. Remember, these questions weren’t being asked by the market when PSG was at a premium – and PSG was the same company. Nothing has changed at PSG, just the market’s opinion of it. PSG remains a well-run business that generates value for investors”.
Capitec share price will most likely decline
“Obviously,” says Viljoen, “PSG is sensitive about the criticism, hence the unbundling. In my opinion, the unbundling It doesn’t change the value of what you own as a PSG investor, now you will just own two shares instead of one. But if the market thinks this creates value, it will mark up the price of PSG to reduce the discount at which it trades. On the other hand, the Capitec share price will most likely decline, as its shareholding base fragments. Given their recent significant sales of Capitec shares, this seems to be what Capitec management are saying.”
The contradictory result of recent moves is that PSG’s own stake in Capitec is worth less than what it was.
Meintjies, of Denker, says “for PSG the timing is possibly because they are seeing opportunities, with asset prices coming off, but they cannot access capital through the listing because of the discount. So there is a frustration that they cannot use the listing of PSG to raise capital”.
However, Clark questions why, if “the stock [Capitec] is off 50% from its highs… would you suddenly unbundle your entire Capitec stake?”
Rather he sees PSG potentially dropping its stake to the 25.1% level. This means it would remain the single largest shareholder in Capitec and would ensure it retains much of the valuable dividend flow.
The question of why it’s considering an unbundling versus a stake sale is an important one.
With an unbundling, current PSG shareholders will receive a proportion of Capitec shares. A stake sale will raise capital for PSG Group, but how and where would it deploy this?
Mouton family trust to become largest shareholder
In an unbundling (full or partial), the Mouton family trust, as the largest shareholder in PSG Group (19.3% stake) will become a material direct shareholder in Capitec. One wonders to what extent this unbundling is being driven to ensure achieve more appropriate estate planning.
Still, unbundling does come with risks. Clark makes the point that “additional liquidity in Capitec right now wouldn’t exactly engender the stock.”
Last week, Clark questioned whether the Reserve Bank South African would even allow an unbundling, given the current economic environment. But, with RMB Holdings being allowed to proceed with the unbundling of FirstRand, it seems a precedent has been set.
“We just don’t know what’s going through their minds in Stellenbosch,” he says.