Jury out on Nampak’s next move to service debt

Despite the temporary reprieve achieved by recently announced debt repayment extensions, Nampak is under mounting pressure to conclude the sale of its tubes business and exit East Africa to ensure the size of its rights offer size is acceptable to shareholders.      

The company, which has paid no dividends to shareholders since 2015, will probably also sell equipment and machinery to reduce its R5bn debt burden.

Nampak’s share price fell more than 90% in the past five years as headwinds including forex losses, high levels of gearing including US dollar-denominated debt, and an inability to dispose of assets to meet debt obligations hit the group.

Floundering after an ill-fated expansion into the rest of Africa, Nampak owed R5.2bn at the end of September last year. That sparked a scramble for cash to service debt on time.

Since the start of the Covid-19 pandemic, its lending consortium on several occasions relaxed funding covenants while demanding permanent reduction in debt through sale of assets, a capital raise or both.

Last week the group unveiled new debt-repayment requirements and extensions that came with hefty fees. The temporary reprieve on its debt is also contingent on raising a significant amount of equity through a rights offer, the size of which remains undetermined.

If Nampak can sell a sizeable portion of noncore businesses, it may be able to reduce significantly the size of its rights offer, which it had already previously revised down to R1.5bn from R2bn. But that failed to impress shareholders enough to get their backing as they pointed out the figure far outweighed its market capitalisation.

The group will soon convene an extraordinary general meeting with shareholders to determine the size of a rights offer meant to settle a portion of its debt due in September.

Nampak has also said it had agreed a plan with lenders to sell some of its assets as another way of relieving pressure on its balance sheet, with the proceeds from these disposals amounting to at least R250m, required to be received by no later than December 31 to repay debt.

Although a R49m agreement for the sale of the Tubes business, which falls under its plastics division, was concluded successfully in 2021, the sale was not finalised in 2022 owing to global volatility.

But CEO Erik Smuts recently changed his tune, saying the group expects  conditions precedent to be fulfilled in financial 2023. Not much has been reported on this front so far.

In its most recent pre-closed period conference call, Smuts flagged that Nampak’s divestitures from Ethiopia, Kenya and Tanzania and its general metals business in Nigeria were gaining traction with many offers received for various assets that could realise up to R250m in cash for the group.

Its operations span 10 countries in Africa, many of which depend on commodity prices that volatile and tend to affect currencies disproportionately.  There is also a general lack of foreign currency in these jurisdictions, says Nampak.

Small Talk Daily analyst Anthony Clark agreed that parts of the African business should be sold as it is clear from management’s actions in the past few years that their ability to run those operations and extract money efficiently led to significant forex losses.

He said quickly leaving East African markets would help stop the bleeding, even if it sold assets at a discount to net asset value.

“The very fact that you are removing that working capital deficiency and potential losses from the overall group means that even selling the business at a discount benefits the whole company,” said Clark.  

That’s something that Nampak management “needs to get its heads around. They seem to think they can sell assets at NAV (net asset value) or a premium whereas in many instances these assets are either losing money or tying up huge amounts of working capital, which is a drain on the company.”

Clark he would prefer Nampak to be broken into two entities. This would mean a profitable arm comprising Bevcan as a stand-alone and another arm where the remaining assets would be parcelled off into a separate company to be restructured and which may attract a buyer in time.

“The real jewel inside Nampak is BevCan, which is an absolute necessity for many food and beverage companies in this country,” said Clark. Food and beverage manufacturers would be lost without BevCan.

Nampak’s metals division generates more than two-thirds of its revenue, followed by plastics. Paper is its smallest division.

It remains to be seen whether the 55-year-old group — which has Allan Gray, PSG Asset Management, Nampak Products Ltd, SBG and Peresec Prime Brokers among its major shareholders — will get shareholder backing as it navigates its way out of debt.

gumedemi@businesslive.co.za