Shares in investment holding company PSG Group traded down over 77% to under R40 a share on Wednesday. This followed its unbundling of the majority of its Capitec holding to shareholders. PSG shareholders will receive 14 Capitec shares for every 100 PSG Group shares held as of Tuesday (August 25). Shareholders will not see the Capitec shares in their brokerage accounts until Monday (August 31), however.
In the unbundling, PSG Group has offloaded 28.11% in Capitec. It had originally planned on retaining a 4% share, but it reduced its interest in the bank by 1.04% in June. Following the unbundling, it holds 3.2 million shares (2.79%) in Capitec Bank.
PSG Group surprised the market at the end in April when it announced the unbundling. The reason for pursuing this now, despite turbulent equity markets, is twofold.
In the circular to shareholders, PSG Group says the rationale for the unbundling is to:
- “Ease the administrative and regulatory compliance burden that would otherwise be imposed on PSG Group, should PSG Group be classified in terms of the FSRA as belonging to a financial conglomerate, as a result of its shareholding in Capitec, and to avoid the resulting restrictions that could impact on PSG Group’s ability to operate as a dynamic and nimble investment holding company; and
- assist in the reduction of the discount at which PSG Group Shares trade to its sum-of-the- parts (SOTP) value and to unlock value for PSG Group Shareholders.”
The categorisation as “financial conglomerate” would almost certainly be in place (on a “mock” basis) from next year, which will come with a significant regulatory burden. Formal implementation is expected in 2022. Had the status quo continued, PSG Group would have been required to retain surplus capital and it would also require regulatory approval for large transactions, hindering its deal-making ability.
As the largest shareholder in PSG Group with a 19.3% stake, the Mouton family trust has become a material direct shareholder in Capitec. To what extent it will retain this holding remains to be seen.
Immediately post-unbundling, Capitec shares were up nearly 3% before paring gains.
However, the jury will remain out on whether value has been unlocked until trade in both shares settles. In the interim, the discount to the sum-of-the-parts of PSG Group has actually widened.
|Feb 2020||26 Aug (10am)|
|Sum-of-the-parts (SOTP) value per share||R276.43||R77.83|
|PSG Group share price||R186.60||R39.50|
What is left?
Post-unbundling, the self-styled ‘PSG Group 3.0’ will be a far smaller but “more nimble” company.
PSG Konsult is now the largest asset within PSG Group, comprising a third of its sum-of-the-parts.
PSG Alpha, which holds stakes in start-up/emerging businesses is next largest at around 20%. Its portfolio includes stakes in listed Stadio and CSG, as well as holdings in unlisted businesses in the energy (Energy Partners), retirement villages (Evergreen) and consumer goods service (CA&S Group) spaces.
The small stake in Capitec remains material in the new-look group, comprising just less than 20% of the total value.
|Value (26 Aug)||Percentage of SOTP|
|PSG Konsult||R5.832 billion||34%|
|PSG Alpha (incl. Stadio)||R3.626 billion||21%|
|Other (incl. R2.2 bn in cash)||R1.894 billion|
|Perpetual pref funding||(R1.13 billion)|
|Total sum-of-the-parts||R16.919 billion|
The group intends to stick to its historical “investment philosophy”, but the pressure is now clearly on holdings such as Curro and Zeder which have underperformed (in recent years, and for some time, respectively).
Curro is busy raising R1.5 billion in a rights issue, and PSG Group will not only follow its rights but also underwrite a further 40 million shares which will see its stake in the group increase. Zeder continues to trade at a significant discount to the sum-of-its-parts.
At the group’s recent AGM, it announced that it would “in principle not pay an annual dividend” going forward. It contends that shareholders will receive the Capitec dividend directly post-unbundling. It also says the adoption of a “more prudent dividend policy” is due to the fact that “PSG Group may continue to trade at a discount to its SOTP value, and that the equity markets will hence essentially remain closed for capital raisings”.