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Pandemic isn’t stopping corporate deal-making

Showing the disconnect between markets and economic reality?
It could also be an indication of the resilience of capitalism, or the determination of dealmakers to keep generating fees. Image: Shutterstock

Given that we’re in the middle of a pandemic with an accompanying lockdown that looks set to throttle most signs of economic life, it’s remarkable how much corporate deal-making is on the go.

It’s not just the emergency rescue stuff like Edcon’s carve-up-and-sale and Sun International’s rights issue, there is also some mergers-and-acquisitions activity happening, such as Barloworld’s bid for an Asian-based business and Tsogo Sun’s sale of its Seychelles operation.

This might be an indication of the commendable resilience of the capitalist system, or of the disconnect between markets and economic reality. Although it could just be the determination of dealmakers to ensure they are generating fees no matter what.

Big deal

Of course the biggest deal of all will be Prosus’s purchase of eBay’s classifieds unit, which – if it happens – is expected to come with a price tag of around $8 billion.

In the world of technology it seems you either invent stuff or you buy stuff.

Naspers and its odd Amsterdam-listed offspring Prosus have plumped for the latter strategy and have oodles of cash at their disposal to build up the ‘network effect’ deemed so necessary to make profit in technology-based businesses.

Read: eBay wants to keep stake in classifieds sale

The $8 billion that is being speculated by Bloomberg is just $800 million above the final cash offer Prosus made for UK food delivery business Just Eat late last year. That offer, which would have provided Prosus with the ‘network effect’ it needed for its global food delivery business, was of course rejected.

It’s hard to know whether spending money wisely, or at least profitably, is more difficult than making money wisely.

The Prosus team is under huge pressure to earn some of the enormous remuneration it is paid every year by closing the discount between its share price and its stake in Tencent. Buying the right asset at the right price, and then managing it extremely well, would help.

Read: Naspers CEO bags R276m in annual remuneration

Tsogo and TFG

It looks as though Tsogo Sun has managed to make some money wisely with the R465 million sale of part of its Seychelles operation. That must be a huge relief to shareholders and management given the devastating impact of the lockdown, which management says will hold back occupancy rates for two to three years. The market wasn’t too impressed – the news did help the share bounce, but only marginally.

Edcon has been so dismal for so long that it’s difficult to get excited about TFG’s purchase of most of its Jet outlets.

Despite years of poor management the Jet brand is still worth something, but even getting R480 million for stock with a stated value of R800 million might prove a challenge in these tough times. From the employees’ perspective it certainly would be great if 371 of the Jet stores did prove to be viable.

Read: Why TFG’s Jet deal is the bargain of the century

The Jet purchase was announced just days before TFG released details of its R3.95 billion rights issue; 94.3 million new shares will be issued at the knock-down price of R41.90. That’s a 38.5% discount on Friday’s closing price of R68.16. It will be at least a year before anyone can determine whether or not that’s a bargain.

Zeder

Zeder’s decision to sell its 32% stake in egg and broiler producer Quantum Foods for just R5 a share doesn’t look particularly wise right now. Mind you it did look reasonable at the time of the deal in June when the share was trading at 350c. Despite being a solid earner and paying out attractive dividends Quantum’s share price rarely traded near its R9 net asset value. Well, at least not until Zeder sold its stake to Country Bird. Buying by a range of parties – including Quantum management, Astral Foods and UK-based investment company SilverStreet Capital – saw the share reach a high of R9 before drifting back towards R7.

A bidding war could be a long drawn-out affair and would likely involve the competition authorities.

Barloworld

Barloworld has been having quite a busy time on the deal front. It may be trying to get out of the proposed acquisition of Tongaat’s starch business – or just hoping for a cheaper price – but it seems keen to push ahead with its proposed R3.5 billion acquisition of Wagner Asia and reckons the closing date for the deal will be September 1.

Read: Barloworld to cut more than 2 500 jobs

Meanwhile it emerged last week that Zahid Tractor and Heavy Machinery, which is part of the Saudi Arabia-based Zahid Group, has taken advantage of the Covid-19 depressed share price to buy up a 10% stake in Barloworld. This is just one of many bargains being snapped up across the globe by the cash rich oil-producing nation.

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Yes but note that apart from simply moving the deck chairs between shareholders of existing listed companies, almost all the deals relate to international assets. No-one seems to want to go near an SA business and especially a capital intensive one (unless you can buy it for half of the value you are getting in stock – like Jet). Look at businesses like ENX. You cannot give it away. Seems the real story is SA businesses doing everything they can to get out of deals for capital intensive businesses.

End of comments.

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