It’s sad to see PSG Group disappear

Starting from nothing in 1995, a handful of businessmen built companies worth more than R280bn.
The unbundling – if approved along with the repurchase – will immediately wipe out the discount to NAV and give shareholders a windfall. Image: Supplied

“It has been an extremely difficult decision,” said PSG Group CEO Piet Mouton when explaining the directors’ proposal to unbundle all the interests the group holds in diverse listed companies, as announced on Monday.

“Unfortunately, our investment model, and those with similar structures, has fallen out of favour globally. The ever-increasing discounts at which investment holdings companies trade now negate the benefits of being listed.”

The proposal entails the distribution of the shares in all the listed entities that PSG has assembled over time, most of which it built up from nothing.

Effectively, PSG is taking one for the team (shareholders).

The much smaller PSG will own only a few young companies that will need careful care to survive and grow.

“Some might fail,” says Mouton.

Read:

PSG Group is giving up its interests in multi-billion rand companies such as PSG Konsult, Curro and Zeder. It distributed its most valuable assets, its shareholding in Capitec, during October 2020.

Founding idea

Mouton referred to the birth of PSG Group in 1995, when founders Jannie Mouton (his father) and Chris Otto started PSG with the idea of building a financial services group.

That was when banks started buying into stockbrokers. Jannie Mouton left the stockbroking firm carrying his name, Senekal Mouton Kitshoff (SMK), and bought control of the small listed PAG, little more than a cash shell at the time.

PSG capitalised on emerging trends, such as buying into agricultural cooperatives when restructuring started.

And, of course, it founded Capitec Bank to offer modern banking services with less paper, simpler products, lower costs and longer business hours than was the norm in the banking industry then.

Mouton and Otto also stayed in stockbroking, while adding additional services to offer clients a one-stop financial shop. The success of the venture culminated in the listing of PSG Konsult.

Soon, PSG Group could not resist another temptation – the glaring opportunity of decent schooling for the middle class. It invested in Stadio and Curro.

In short, PSG Group built up a group of interesting, growing companies. In the process it enriched investors by billions.

The total value of the listed companies exceeds R280 billion at current market prices.

Total market capitalisation (Rbn)

Value
Capitec 239.85
Zeder 5.51
Curro 8.04
PSG Konsult 18.30
Stadio 3.09
CA Sales Holdings 3.23
Cash 2.91
Unlisted 2.00
Total 282.93

Source: Based on ruling share prices

PSG also built up a nice cash reserve of nearly R3 billion, while directors value the portfolio of smaller unlisted companies at R2 billion.

The circular outlining the scheme of arrangement promises that C Sales Holdings, currently listed on the Botswana Stock Exchange and the Cape Town Stock Exchange, will apply to list on the JSE to improve tradeability.

Courage

The decision to unbundle PSG certainty took courage.

Mouton (Piet) told shareholders during his presentation that there really isn’t any other option, other than management just “receiving remuneration” while waiting for market sentiment to change in favour of holding companies.

Read: Another flurry of delistings hits JSE

He noted that the proposal is subject to regulatory conditions, and that the two steps of the proposal are linked.

The first, the unbundling of the shares in the underlying investments, will only proceed if shareholders are willing to agree to the second step, to sell their remaining PSG shares (representing the remaining unlisted assets) in a share buyback to PSG Group.

The proposal effectively makes provision that PSG management and staff will own the remains of the PSG Group after the unbundling of the listed assets.

Mouton notes that the “remaining” shareholders will not vote on the proposal at the upcoming meeting to ratify the scheme.

Two steps

“However, important to note is that steps 1 and 2 are linked – meaning that shareholders need to approve both the unbundlings and the cash repurchase offer for the transaction to be implemented.

“To be clear, should the unbundlings be approved, but not the repurchase, then the proposed transaction will fail. Then, PSG will continue to operate in its current form as an investment holding company,” says Mouton.

His arguments for dismantling PSG make sense.

There is not much benefit in any investment holding company maintaining a listing if investors do not value management’s expertise and the security of a “big brother”.

“The benefits of a listed company is access to capital markets to raise new capital and to use shares for acquisitions,” says Mouton, adding that neither holds true for an investment holding company trading at a hefty discount to net asset value (NAV).

It destroys shareholders’ value to issue undervalued shares for acquisitions, as well as raising capital, when shares are trading at a discount of 30% to NAV.

“If we raise R100 in capital, it is worth only R70 the next day,” says Mouton. He also notes that an investment holding company owning sizeable stakes in a listed entity can be bad for the underlying company. “It reduces liquidity and a smaller free float of shares has consequences for a company when it comes to inclusion in market indexes.

“There are many entries to get exposure to underlying investments, all contributing to the discount,” he says.

PSG also points out that the tax regime towards investment holding companies contributes to the shares trading at a discount. Capital gains tax on the sale of shares and subsequent dividend tax to distribute proceeds would amount to billions if PSG was to decide to go that route.

Windfall

The unbundling presents a windfall to shareholders in that it immediately wipes out the discount to NAV. Figures presented during the presentations to shareholders reiterated that this discount rarely fell to less than 30% and reached nearly 40% at times.

“It is the single biggest issue for shareholders. It was raised in every meeting with investors over the years and in every presentation to shareholders,” says Mouton.

The share price immediately jumped when PSG (unexpectedly) announced its plans on Monday – by some 22%.

It ended the day 18% higher as shareholders digested the implications.

Casparus Treurnicht, analyst at Gryphon Asset Management, says PSG Group shareholders are obviously better off than the previous day.

“However, if you ask me if I would like to be a PSG shareholder today, probably not.

“The assets to be unbundled are still in a growth phase, but the main sponsor of their capital is walking away from them. Not a great sign,” says Treurnicht.

Despite his caution, he admits that the transaction makes sense.

“The break-up was expected to some extent, but not the magnitude of the entire transaction,” he says.

He adds that the approach differs from that of other investment holding companies, most of which would only take one step at a time.

SA largest investment holding company, Remgro, obviously comes to mind. Shareholders have often called for the distribution of some of its underlying investments to unlock value, in particular its interest in Mediclinic.

Treurnicht says Remgo is different in that management prefers to remain listed and perform one big corporate action now and again. “They have done the banking transaction lately and you’ll probably see more in the food and logistics space soon,” he says.

In the end, it is sad that the entrepreneurial PSG will disappear from the JSE, and that investors do not value the special skills these businessmen bring to the table.

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Adriaan: you mention Remgro. To me Naspers comes to mind. If this is one way of getting rid of the discount to NAV, why would they not follow suit? Even the Prosus scheme not have the desired effect for them.

Your last paragraph puzzles me a bit: as an investor I cetainly value their skills. My issue was the commissions charged but that’s just me. Others will differ and I have no issue with that. At Naspers my issue was with remuneration at the top and shareholder voting schemes. To each his own I suppose. You pay your money and you back the horse of your choice.

Boepens: at least PSG did not have a rigged shareholder structure where even a special majority by ‘ordinary’ shareholders cannot force the company or board to do something (or not do something).

The overhead of all the investee companies having their own expensive hired help and then another layer of VERY expensive hired help at PSG level is simply not sustainable. Who runs the investee : it is a listed company with its own board and CEO that certainly should not be checking in with one of its investors being PSG in this case. Plus, one bad decision at HoldCo can taint or endanger six generally good other holdings.

End of comments.

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