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Rights issues, competition issues, and a food fight

It’s probably a good idea for corporates to be close to the front of what could become a very long queue.
Given all the fee-earning opportunities it’s hardly surprising the JSE has been under pressure to relax requirements relating to share issues. Image: Waldo Swiegers, Bloomberg

If you’re part of a corporate decision-making team and don’t have an unbelievably wealthy parent like the remarkably lucky Massmart, chances are that you’re contemplating a share issue right now.

Even if you don’t urgently need the cash, you may be thinking that if there isn’t a significant improvement in trading soon, you could be in desperate need of funds a few months down the line. So, as fund manager Jean Pierre Verster says, it’s probably a good idea to be close to the front of what could become a very long queue.

Institutions may be tempted to switch out of low-yielding bonds into equities right now, but that temptation might not last long.

Given the disconnect between comparatively high share prices and operating fundamentals, it does make sense for companies to be tapping the market for funds to see them through what is expected to be a long and grim time ahead.

Sasol has been tagged by analysts as one of the more likely parties to come to the market, although in last week’s update its list of ‘self-help measures’ studiously ignored mention of a rights issue.

Read: Sasol getting back to work

And surely companies such as Woolworths and HCI will have to join the queue before too long?

Sadly for HCI, the Covid-19 lockdown has demonstrated the immense difficulties created by BEE-related gearing in bearish markets.

Investor willingness to support cash calls by clothing retailers – Mr Price and TFG have already put their hands up – might be strengthened by the pending removal of Edcon from the market. Its demise, inevitable since Bain Capital loaded it up with debt all those years ago, is long overdue. It’s a tragedy for employees but what were those high-powered individuals thinking when they pumped in R2.7 billion in late 2018 without much sign of an operational turnaround plan? No doubt the whole sorry story generated lots of fees for consultants and financial advisors.

Holding firm

Talking of which, the flurry of rights issues and share placements will be a boon for sponsors, financial advisors and banks who are set to pick up attractive fees.

It proves yet again that we’re not all in this together; some are definitely doing considerably better than others. Given all the fee-earning opportunities it’s hardly surprising the JSE has been under pressure to relax requirements relating to share issues and allow companies to place as many shares as they like with selected investors.

Inevitably the financial institutions with the most impressive Rolodex of investor names will score.

And in no time at all our listed companies could emerge with completely new shareholder profiles.

To its considerable credit the JSE has held out against these lobbying efforts and is insisting on maintaining the rights of existing shareholders to decide whether or not management should be allowed to issue more shares. There certainly seems no appetite for a relaxation of these regulations among our big institutional fund managers who hold huge tracks of shares on behalf of several million individual savers and investors.

The JSE’s competition issues

The JSE is in the midst of a rather long Competition Tribunal hearing at which it is hoping to secure the reversal of an earlier Competition Commission ruling prohibiting it from acquiring share registry firm Link Market Services (LMS).

The commission’s prohibition was based on the unique position the JSE enjoys as a market player and regulator. “The JSE’s reputation and its relationship with sponsors and issuers is likely to encourage issuers to use the JSE’s suite of services to the possible exclusion of competitors to LMS,” said the commission.

Perhaps the tribunal should also be looking at the JSE’s partnership with The Meeting Specialist (TMS), which is one of four players in the market offering facilities for company meetings. All four have played a critical role in providing the SA investment community with world-class facilities for virtual meetings during the lockdown. But TMS’s partnership with the JSE does give it the sort of unique – and therefore unfair – opportunity not available to the others; the sort of opportunity the commission was rightly concerned about in relation to LMS.

Food fight

Those who followed – blow by blow – the battle for control of Sovereign Foods raged by Kevin James’s Country Bird a few years ago may feel it’s almost too soon for the unlisted entity to be contemplating another control bid.

But this time around, things might not be as complicated for James, who has just bought 30% of Quantum Foods from Zeder.

There are no known blocks of shareholders with the sort of visceral objection to changing control that was evident in the Sovereign Food battle. But even though the remaining investors do not have major holdings they might not be prepared to sell out at the R5 a share Zeder accepted.

Read: Quantum Foods warns of 38% drop in first-half profit

Quantum management is well regarded and the company does have a net asset value of 962c a share. Of course, not adding to its 30% stake might suit James and it might be easier to get it past the competition regulators who did pose a bit of a challenge in the Sovereign Foods battle.

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