Cash-poor Consolidated Infrastructure Group (CIG) is getting the financial lifeline it needs, but at a price.
The owner of Conlog and ConCo and a player in SA’s renewable energy sector on Friday signed a R300m loan from Canadian investment group Fairfax, at prime plus 4%.
The loan is a prelude to an R800m rights offer, which Fairfax has agreed to underwrite and priced at R4 per CIG share. At Thursday’s close of R3.25 the offer represents a premium of 23% and is larger than CIG’s market cap of about R700m.
In the event that CIG shareholders approve the deal, Fairfax will earn an upfront fee of 2.5% on the R800m. But Fairfax and CIG also have the option of converting the R300m loan into shares, in which case the interest reduces to prime plus 2%.
CEO Raoul Gamsu disagreed that CIG was getting its cash over a barrel. "You have to look holistically as a consequence of the structure we had agreed with our other funders where we would have paid higher rates. Now, the bankers and bondholders have agreed they’ll take a haircut back to levels they were before so, on an annualised basis we’re better off on the interest bill we would have paid," he said.
In 2017, CIG was forced, cap in hand, to its bankers after a collapse in profit at its Conco division led to a R150m loss for the year ended August, and a breach of its interest cover covenants. Gamsu said other options to recapitalise the business had been considered — including asset sales — but that the deal with Fairfax would be CIG’s best opportunity to turn ailing ConCo around and give it much-needed breathing room — as well as a "cornerstone" partner. "In many cases you end up selling the good assets earlier and you aren’t able to ride the cycle anyway," he said.
As it is, CIG has a long way to go: in a trading update accompanying the offer details, the company warned of a 470% to 480% slump in headline earnings for the six months ended February, due to disruption caused by its restructuring, "low levels of execution" and what Gamsu called a "brutal" trading environment in SA.
Conco made a loss of R852m and CIG has now impaired its entire goodwill of R397m, and raised a provision of R100m to help with retrenchment and restructuring costs.
Fairfax’s role is interesting: the investment firm, whose billionaire founder Prem Watsa is regarded as "Canada’s Warren Buffett", spent part of 2017 courting cement producer PPC, before walking away from an offer to buy the business.
That deal would have formed part of a greater push into Africa, backed by $500m of capital, part of which Fairfax has already used to buy stakes in reinsurer Africa Re, underwriter Camargue and Bryte Insurance, the new brand of Zurich Insurance in SA and Botswana.
If no CIG investors follow their rights then Fairfax will end up with a 52.7% stake in CIG, which builds up to a 58.7% stake if the loan is converted. CIG will ask shareholders to waive Fairfax’s obligation to extend a mandatory offer to minorities.