Is Remgro planning its exit from the JSE?

The offer to acquire Mediclinic, the delisting of Distell, and the distribution of Discovery, MMI and FirstRand shares point to the start of a big overhaul of SA’s most prominent investment group.
The end result in taking Mediclinic private is that approximately 90% of Remgro's underlying investments would be unlisted. Image: Supplied

An announcement from Remgro regarding its shareholding in Mediclinic should not have come as a surprise.

Investors have been waiting for years, and urging Remgro management to do something with regards to its interest in Mediclinic to unlock the discount between Remgro’s share price and the value of its underlying investments.

The Mediclinic interest is central to unlocking this large discount of more than 30%, as Mediclinic is one the largest investments in the Remgro stable. After recent dealings, the Mediclinic interest was set to become the largest single interest in the group’s portfolio.

The announcement that Remgro and an investment partner want to make an offer to buy out minority shareholders in Mediclinic shows once again that Remgro does things differently.

In the past, investment holding companies simply unbundled their underlying investments to shareholders to unlock value. The most recent example is PSG Group which announced that it will unbundle all its underlying listed interests and only keep a handful of unlisted businesses.

Read:

Remgro is basically doing the opposite.

Rather than distributing shares and reducing its hold over the underlying companies, it is increasing its control by buying out minorities or entering into transactions to reduce outside interference into the running of the companies.

Remgro and an investment partner, MSC Mediterranean Shipping Company, issued an announcement early Thursday morning confirming that the consortium informed Mediclinic management that it might make a cash offer to Mediclinic shareholders to buy their shares.

Remgro owns 44.6% of Mediclinic. It indicated that it is prepared to pay £4.60 per share for the other 55% odd. It actually offered £4.63 per share with the extra three pence being the dividend that Mediclinic declared recently, in the event that a deal is struck before the dividend is paid out.

Remgro says in its announcement that the closing price of Mediclinic was £3.73 on 25 May 2022, being the last business day before the submission of its proposal to the Mediclinic board. The possible offer represented a premium of 23% over the market price then.

On the JSE, Mediclinic jumped nearly 7% on the news to above R85.

The premium reduced to less than 3%, which is actually zero if accounting for share dealing costs.

Rejected, for now

Remgro says in its announcement that the Mediclinic board of directors rejected the offer.

Mediclinic confirmed this separately. “The board of Mediclinic (excluding the Remgro representative) considered the proposal, together with its advisers, and concluded that it significantly undervalued Mediclinic and its future prospects,” it said in a statement signed off by CFO Jurgens Myburgh.

“Accordingly, on 31 May 2022, the board of Mediclinic (excluding the Remgro representative) unanimously rejected the proposal. There can be no certainty that any offer will be made for the company.

Read: Mediclinic rejects ‘unsolicited’ Remgro/SAS Shipping takeover bid

“Shareholders are urged to take no action in relation to the possible offer at this time,” noted Myburgh in the announcement.

Remgro responded that the consortium is considering its position. “There can be no certainty that any offer will be made. Any offer, if made, is likely to be solely in cash,” it answered, but noted that London Stock Exchange (LSE) rules on mergers and acquisitions allow the consortium to vary the form of consideration at its discretion and/or introduce other forms of consideration such as securities in substitution for all or part of the cash consideration.

This indicates that shareholders are likely to hear more about the proposal.

Remgro added that LSE rules require it to either announce a firm intention to make an offer or to formally announce that it does not intend to make an offer for Mediclinic by no later than 5pm on 7 July 2022.

Mediclinic’s rejection of the (first) offer is significant, but not a deal breaker. Board consent and support would be great, but not strictly necessary for Remgro to make an offer to Mediclinic shareholders who can sell their shares to whoever they want and whenever they want.

Board representation

Remgro CEO Jannie Durand is Remgro’s representative on the Mediclinic board, with both Remgro and Mediclinic noting that he excused himself from these deliberations.

Casparus Treurnicht, analyst and portfolio manager at Gryphon Asset Management, says that it is highly likely that the subject would have been discussed from time to time.

Remgro has been the biggest shareholder in the hospital group since Mediclinic listed on the JSE in 1986.

“It makes perfect sense. The timing is perfect too,” says Treurnicht. He explains that holding companies have become unpopular with investors globally as their shares nearly always trade at a discount to their intrinsic value.

“There is a notable trend that favours private equity funds. I won’t be surprised if Remgro also decides to delist, but this might only happen years from now,” says Treurnicht.

He adds that the structure of a listed holding company with listed underlying investments is unpopular for many reasons, including the red tape and regulatory requirements. “Then you have investment managers and analysts telling you how to run your company,” says Treurnicht.

Buying out minorities in Mediclinic would also give Remgro full control over the large and growing cash flow produced by the SA and international hospital groups.

Full control of Mediclinic and other assets would also make it easier to facilitate transactions by using Remgro’s cash reserves of nearly R9 billion.

Transactions

Remgro’s recent transactions give clues to its intentions.

At the last reporting date, end December 2021, the investment in Mediclinic was worth R22.5 billion, according to the calculation of Remgro’s net asset value.

Source: Remgro

The listed Rand Merchant Insurance Holdings (RMIH) was the second biggest then, valued at R21.2 billion. Since then, RMI and Remgro announced the unbundling of a large portion of RMI’s listed interest, namely its shares in Discovery (also listed) and the listed Momentum Metropolitan Holdings.

This distribution will cut RMI’s worth. Its only remaining assets are its interests in short-term insurer Outsurance (unlisted) and other insurance companies, quite a few operating outside SA.

At the same time, Remgro also announced the distribution of more of its FirstRand shares. It classifies the R8.5 billion investment in FirstRand as a portfolio investment.

Distell, in which Remgro holds an interest worth R11.8 billion at end December 2021, is in the process of disappearing from the JSE too in a transaction in which Remgro is selling Distell to Heineken – effectively exchanging its shares in Distell (listed on the JSE) for shares in Heineken (listed in Europe).

Read: Distell shareholders ratify Heineken offer

If Remgro can entice Mediclinic shareholders to part with their shares, it will only have two locally listed companies left. It holds nearly 80% of RCL Foods, valued at R9.3 billion in December 2021, and an interest of less than R1 billion on shipping group Grindrod.

The end result in taking Mediclinic private is that approximately 90% of Remgro’s underlying investments would be unlisted. It is noteworthy that Remgro has tried on several occasions to buy out RCL Foods minorities.

“It is clear that Remgro wants to expand internationally,” says Treurnicht, adding that he wouldn’t be surprised if Remgro announces another international healthcare acquisition in coming years.

Anthony Clark of Small Talk Daily commented that “things always tend to move slowly in Stellenbosch” with regards to Remgro.

“But if they move, they tend to move with big news and momentum. Maybe the Mediclinic deal is part of a bigger restructuring. Remgro has shown its hand and it is clear that they are cleaning up their portfolio,” says Clark.

Better offer

Clark believes that Remgro will increase its offer for Mediclinic and speculates that an offer for RCL Foods will follow soon.

Remgro’s consortium partner in its offer for Mediclinic also raises interesting possibilities. The Mediterranean Shipping Company SA (MSC) seems to have a lot of money.

It is the largest container shipping company in the world, operating 570 container vessels with a total capacity of nearly four million 20-foot containers (or equivalent units). It was founded by Gianluigi Aponte in Italy in 1970 with its headquarters in Switzerland. It is noteworthy that MSC is a private company, owned by the Aponte family.

Being a private company, financial statements are not readily available. The shipping line’s annual sales are estimated at $25 billion and Bloomberg Billionaires Index puts Aponte at number 85 on its list, with an estimated net worth of $18.6 billion. Johann Rupert and family is number 213 on the same list, with assets of $9.8 billion.

Rupert and his friend can finance a few deals.

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comments about the death of investment holding companies would be news to Berkshire Hathaway. A key difference may be that this R10 trillion rand company has average executive compensation of $240,000.

Per year…

Their highest paid executive earns $700,00 a year

With a 5 year record of -9,8% Remgro is hardly a standout pick on the JSE. I hold miniscule stock in Mediclinic and would not give up for less than a 20% premium on the ruling price on the day.

In a quick run through of Remgro directors fees it seems to me, and always has, that the company exists more for the directors than the shareholders. Especially with a divided of .64% compared to the average Fini of 4.34%

I’ve never had a good gut feeling about the way a clique of directors seem to control this and other “Stellenbosch” companies.

End of comments.

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