The unbundling by PSG Group of its 28% stake in Capitec in August had been eagerly awaited by shareholders for years. Pressure had been building for years as the discount of the company’s share price to the sum-of-its-parts value has grown. In the months before PSG’s announcement in April, the discount had reached extremes of 35%.
In time, we will know whether the unbundling has created value for shareholders. After all, this is the reason why a company typically demerges an asset.
The central thesis of management or the board is that the market is not valuing all the assets in a given entity correctly. This generally happens over time as businesses evolve to contain separate divisions that no longer have much reason to ‘belong’ together. Sometimes these operate in completely different sectors or geographic regions, which leads to the assets being valued completely differently. If listed separately, the theory holds that the value of these parts will be worth more than the current whole.
In recent years, there has been a large amount of unbundling activity on the JSE. In at least four of these transactions, the demerged entities have ended up with a market value higher than that of their previous ‘parent’.
Bidvest and Bidcorp
Industrial conglomerate Bidvest took the decision to unbundle its food services division Bidcorp in 2016. At the time, it justified the decision by saying that Bidvest had evolved into a “major diversified industrial group and a global foodservice operator with divergent strategic focuses requiring different management skills”.
This transaction would cater “for new leadership and succession” and would “give shareholders choice” to own “one or the other or both”. Importantly, it said, “each business will have critical mass with a balance sheet to realise ambition”. In other words, they would be “big enough to count but small enough to be agile and remain opportunistic”. Shareholders received one Bidcorp share for each Bidvest one held.
For the year to end-June, Bidvest reported revenue (from continuing operations) of R76.5 billion, with headline earnings per share of 394c. There were significant once-off adjustments which saw it report a normalised headline earnings per share (Heps) number of 869.1c. Bidcorp, by comparison, reported revenue for the same period of R121.1 billion, with Heps of 741.3c.
The pre-unbundling share price of the (Bidvest) group was R370, valuing the business at R121 billion. Today, Bidvest is trading around the R137 level, with a market capitalisation of R47 billion. It reached highs around R250 in January 2018.
Bidcorp, by comparison, trades around R250 with a market capitalisation of R87 billion, close to double that (85%) of Bidvest. Its share price reached highs of around R350 in November last year.
Old Mutual plc and Quilter
As part of Old Mutual plc’s managed separation process, it unbundled the UK wealth business (renamed Quilter) as well as most of its majority holding in Nedbank to shareholders in 2018. At the time, the board of Old Mutual plc said the previous structure (a single group) undervalued the business.
This was because:
- “It prevented Old Mutual plc shareholders from directly accessing the underlying businesses, thus contributing towards a conglomerate discount;
- It inhibited the efficient funding of future growth plans for the individual businesses, restricting them from realising their full potential;
- The evolving regulatory environment in Europe and South Africa added additional costs, complexity and constraints; [and]
- The limited tangible synergies across the four independent businesses did not justify the central operational costs of Old Mutual plc. Instead, the closure of the Old Mutual plc head office in London would result in significant central cost savings.”
In June 2018, shareholders received one Quilter share and three Old Mutual Limited shares for every three Old Mutual plc shares owned. As the final step, in October that year, Old Mutual Limited shareholders received 3.21176 Nedbank shares for every 100 shares held.
At the time, the results of the process were criticised by analysts who said there had been a “lack of shareholder wealth creation so far”.
Today, Quilter trades at around R29 a share, valuing the company at R52 billion. Shares are practically flat year-to-date.
Old Mutual Limited, at around the R10 level, has a market capitalisation of R47 billion. Shares are down 49% so far this year, which has created this bizarre situation where a smaller, specialist wealth manager is worth more than Old Mutual itself. Prior to unbundling, Quilter (then Old Mutual Wealth) had an adjusted net asset value half of that of the Old Mutual Limited business (then Old Mutual Emerging Markets). This equated to 51 pence a share versus 100 pence. From a profitability point of view, the Quilter business was generating approximately half the operating profit of (the now) Old Mutual.
Imperial and Motus
Another unbundling in 2018 saw motor retailer and distributor Motus split from parent Imperial. The latter ended up as a pure logistics business. Both shares have been under significant pressure this year because of the Covid-19 pandemic, with Motus down 49% year to date and Imperial Logistics 37% lower.
Despite this however, today Motus trades at around R41 with a market value of R8 billion while Imperial Logistics trades at around R36 with a market capitalisation of R7.5 billion. Both peaked in early 2019, shortly after the unbundling – Motus at R96 a share, with Imperial Logistics at over R70.
Listen to Nompu Siziba’s interview with Motus CFO Ockert Janse van Rensburg (or read the transcript here):
Investec and Ninety One
The most recent unbundling on the JSE, that of asset management business Ninety One (formerly Investec Asset Management) by Investec in March, has yielded a similar result. Because of the dual-listed structure of both businesses, market capitalisation on the JSE needs to be calculated using the total number of shares in issue (the combined number for both the Limited and plc entities).
Ninety One’s market capitalisation on the JSE (which includes the secondary listing of the plc entity) is approximately R41 billion, compared to Investec’s market cap of R35 billion. Investec holds 25% of the asset manager.
(Until earlier this year, Sibanye Stillwater, previously Sibanye Gold – which was spun out of Gold Fields in 2013 – had spent almost 12 months valued at more than its previous parent.)
But for every Bidcorp, there are multiple other efforts at unlocking value via unbundling on the JSE that have left the market with many more questions rather than an obvious positive result.
And then there are those that made sense for years and finally happened, resulting in more choice for investors (and unlocking value in the process). An obvious example would be MultiChoice, unbundled from Naspers in 2019. This is a sizeable business in its own right, one which had become increasingly irrelevant – and insignificant – in a business the size of Naspers.