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Time to break up Brait?

An expensive exercise in misallocating shareholders’ capital …

Brait has a problem. A £350 million convertible bond is due in September next year, which at current prices equates to R6.4 billion.

A rights issue is almost certainly out of the question, given that the firm’s market capitalisation – R6.96 billion – is barely larger (one also needs to ask whether anchor shareholder Christo Wiese would be able to even follow his rights!).

At the release of its annual results to end-March in June, Brait said “in anticipation of the redemption and repayment” of the convertible bonds, it “is progressing a number of opportunities to generate cash proceeds from its investment portfolio”. It added that “to reduce funding costs, proceeds received will be applied to paying down drawn debt on Brait’s rand borrowing facility”.

Post year-end, it received R610 million in a shareholder funding repayment from the refinancing of Virgin Active South Africa’s debt. The shareholder funding, of £1.228 billion as at the end of March, sits in a Virgin Active parent company and is not disclosed in the operating company’s results.

Big headache

While this, together with a further R365 million from Virgin Active and R232 million from Premier during the year, will help settle borrowings – which at the listed Brait entity total a further R6.5 billion – it won’t help the group with the R6.4 billion bond repayment headache.

Because the convertible bond is listed on the Frankfurt Stock Exchange, Brait needs hard currency. Selling SA-based Premier Foods (or even a stake in that business) won’t help.

Disposing of its 63.1% stake in Iceland Foods, which it values at R3.176 billion, won’t help. Prices of UK retail assets have collapsed, and uncertainty related to Brexit is also weighing on the market. Just six months ago, Brait valued its stake in this business at R6.602 billion!

Morgan Stanley brought in

It is no surprise, therefore, that Brait has reportedly enlisted investment bank Morgan Stanley to find a buyer for a minority stake in Virgin Active. Sky News reported that the “most likely outcome was a sale to a pension fund or sovereign wealth fund”.

Investment

 

NAV

Virgin Active

71.9%

R17.363bn

Premier

96.1%

R8.803bn

Iceland Foods

63.1%

R3.176bn

New Look

18.5%

R1.146bn

Other investments

R956m

Total assets (including cash)

 

R32.602bn

Less liabilities

 

R12.894bn

Net asset value (NAV)

 

R19.708bn

 

 

 

Market capitalisation

 

R6.964bn

Virgin Active is the only asset in Brait’s portfolio where it could raise (hard currency) capital by selling a minority stake without its own interest dropping to a minority one.

A separate listing of (a stake in) Virgin Active would achieve the same outcome, but one gets the sense that management prefers to not have the unnecessary overhead that a listed company brings, particularly at Virgin’s scale (the original plan was to list Virgin Active on the JSE in 2015, but Brait swooped in to buy the asset at the eleventh hour).

Best result for shareholders?

Now, given the valuation disconnect – where Brait is trading at a 65% discount to what it quotes as NAV – wouldn’t the best result for shareholders be a complete break-up of the investment holding company? Its underlying assets have nothing in common and, if anything, result in the group being overexposed to UK retail (or at least the UK consumer) at precisely the wrong time.

Premier (with R3.028 billion in shareholder funding due to Brait and an additional R2.053 billion in third-party debt) could fairly easily be separately listed on the JSE. Although not glamourous, it remains a tidy business.

Virgin Active is somewhat trickier as the level of shareholder funding (and third-party debt) is significantly higher, but the business could be separately listed. Since the reconfiguration of Brait’s portfolio (post-Pepkor), this has been the most attractive asset. (Read: Inside Brait’s crown jewel, Virgin Active)

Iceland Foods, which carries a large amount of term debt, could also be listed, although market conditions are hardly ideal (an understatement it ever there was one!).

The slow march towards next September will continue, and Brait may yet pull a rabbit out of a hat with a Virgin stake sale. But not only is there a sizeable amount of debt in each of Brait’s underlying assets, the significant level of debt at the centre is simply not sustainable. Repaying the convertible bond doesn’t solve the whole problem, and shareholders ought to ask whether a stake-sale in Virgin is the best outcome for them.

The R220m fee shareholders pay

Separately, shareholders are also right to be asking why they are paying a ‘corporate advisor’ (management) fee to Brait of R220 million a year for the management of this portfolio.

The group says it is “focused on reducing its net operating costs at the centre through measures including cost rationalisation and increasing its annual fee and annuity income from its portfolio” – and argues that the net operating expenditure for FY2019 represents “0.55% of average assets under management” (down from 0.58% the previous year).

Still, given the ‘performance’ of Brait since the sale of the Pepkor stake in March 2015, one has to ask whether there is still a case for this investment holding company structure to exist in the first place, especially given that it costs shareholders over R200 million a year in fees!

* Hilton Tarrant works at YFM. He can still be contacted at hilton@moneyweb.co.za.

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R220m for putting a large chunk of money into New Look?? These so called experts should be made to pay back their fees for the value they have eroded for shareholders. If only they held on to the Pepkor cash…

yes that hardly measurable term / unit “advisor / management fee” is used to charge the advised / managed entity – does not mean the producer of this advice / management skills made a big success of his /her /its task at all – so much more if “the advisory / management – fee agreement” does not have a set measurable standards to which the delivered service could be measured – but R220 million p.a. can do for some. Keep in mind the “advisory / management service” can not be given by a company / cc but must come from an individual employed or its board and they should be direct accountable for these “services / advice” delivered. “Administration fees” where day to day tasks are done obo another business is in my opinion a total different ball game and miles apart from the “advisor / management fee” charge

If Wiese leaves it should go better? Steinhoff showed he is clearly not a good leading investor – only care for himself whilst using other shareholders money

Shoprite share price may go the same way as long as Weise remains Chairman of the board.

It’s time for the board & shareholders to stand together and ask for Weise to stepdown of his own accord. He will not do such being an arrogant individual that only cares for himself.

So board and shareholders must act rather sooner than later.

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