HCI ‘to win’ in Tsogo unbundling
Tsogo Sun’s planned unbundling of its real estate unit is likely to be a boon to its parent, Hosken Consolidated Investments (HCI), analysts say.
Tsogo said on Monday it would shift R23bn of mixed-use casino properties to its Hospitality Property Fund subsidiary as part of its plan to split into three separate units: hotels, gaming and property.
After the transaction, Tsogo would hold 87% of Hospitality, but it wanted to ultimately unbundle those shares to investors, it said. With the addition of the seven properties, Hospitality’s portfolio would be worth about R36bn.
The deal was being done primarily for the benefit of Tsogo’s parent, HCI, said Avior Capital Markets analyst Janine van Wyk. HCI would end up with about 44% in Hospitality if Tsogo went ahead with its plan to unbundle that asset to its shareholders, she said.
"The deal will relay cash flows from Tsogo in order to ultimately increase cash flows directly to the dividend-hungry HCI, which has been outspoken about wanting to do bigger deals in the future," said Van Wyk.
But while Hospitality would provide shareholders with a steady flow of rental income, tenant-concentration risks remained for the real estate investment trust (Reit).
Van Wyk said Tsogo’s management also believed the three business segments could attract higher valuations as separate entities. The group has said it wants its hotel management division, which includes Southern Sun Hotels, to be listed separately on the local exchange. Southern Sun Hotels has more than 90 hotels.
Tsogo said its split into separate listed entities was expected to "unlock value and provide greater investment choice for Tsogo shareholders".
Meanwhile, HCI’s results for the year to March showed that the empowerment conglomerate was already making headway in its property segment, which grew revenue 7% to R503m.
HCI CEO Johnny Copelyn said in May that new development revenue rose due to the Whale Coast Village Mall, The Palms, the Makro Port Elizabeth premises and Shell House, with annual escalations in the portfolio offset slightly by a reduction in revenue in the Gallagher Estate exhibition business.
Besides its main investment in Tsogo, HCI’s other investments include listed counters such as broadcast group eMedia Holdings, industrial group Deneb, investment firm Niveus, and recently listed transport group Hosken Passenger Logistics and Rail.
On Tuesday, Hospitality shares leaped 24.9%, while Tsogo rose just 0.3%. HCI lost 1.6%.
The details of the transaction come as Tsogo winds up its turnaround of Hospitality, which has struggled in the wake of the 2010 Fifa World Cup as higher vacancy rates plagued the local accommodation sector.
Investors had also expressed discontent that the Reit’s income was lumpy, while its now-collapsed dual-share structure was also seen as a handicap.
Tsogo gained control of Hospitality in 2016 when it injected 10 hotels worth nearly R1.8bn into the company. Tsogo cleaned up the ownership structure and took steps to smooth Hospitality’s income. Hospitality is the only hotel-focused Reit listed in SA.
With Alistair Anderson