EDITORIAL: Corporate SA’s indiscriminate offshore expansion coming back to bite it
SA executives can learn a thing or two from Mark Bristow, the straight-talking CEO of Barrick Gold, when it comes to growth and acquisitions.
Bristow, who made his name and fortune with Randgold Resources, famously never had to impair assets or go begging for more shareholder cash when the gold price took a deep and sustained dip after reaching record highs in 2011. This despite the company's major competitors being forced to write off billions of dollars in asset values and raising billions more from shareholders to pay off some of the debt they used to expand their operations at a time when prices only knew one way: up.
Randgold Resources, which built hugely profitable mines in difficult jurisdictions like Mali and the Democratic Republic of Congo (DRC), made investment decisions based on three basic principles. The quality of the asset had to be world class; management had to be excellent; and they wouldn’t just expand the business for the sake of growing.
Or, in Bristow’s language, they didn't “mix cow shit and ice cream”. The deciding factor was always return on investment, not size.
Alas, adding underperforming assets to quality portfolios is what too many SA executives have been doing. Feeling pressure to aggressively expand abroad, especially during the Jacob Zuma years, or driven by ego and the thrill of the deals, many have ventured into new territories with wildly ambitious expectations of what the returns would be.
Think of Famous Brands, and its ill-fated purchase of Gourmet Burger King in the UK, and Woolworths with its David Jones purchase in Australia. It would be hard to convince shareholders, with the benefit of hindsight, that these businesses had world-class management teams or assets — or that they were at least on par with the quality of their existing businesses at home.
Some of the value destruction will be blamed on the uncertainty caused by Brexit, or rising interest rates and a slowing economy globally ... but ultimately it boils down to poor decision-making by well-paid management and boards.
Aspen Pharmacare, which saw its share price decline as much as 51% on Friday after another set of disappointing results, is another growth-by-acquisitions story that has turned into tears for long-term investors. Similar to the gold companies after the global financial crisis, Aspen embarked on an aggressive, debt-fuelled global expansion spree that is now imploding spectacularly.
One problem is that companies often get themselves into a position where they have to sell their “ice cream” businesses —and as a forced seller, often at a discounted price — to help cope with the debt the “cow shit” brought on to the balance sheet. Aspen’s sale of its infant milk business last year is a case in point.
The list goes on. PSG portfolio manager Schalk Louw calculated that in the past two years, five former JSE Top40 stocks — Aspen, Brait, Intu Properties, Mediclinic and Steinhoff — have lost more than R460bn in market capitalisation. That equals roughly half the market value of Glencore.
Some of the value destruction will be blamed on the uncertainty caused by Brexit, or rising interest rates and a slowing economy globally, or tougher regulations, or deliberate wrongdoing by former bosses, but ultimately it boils down to poor decision-making by well-paid management and boards.
Bristow’s belief — that the biggest risk isn’t geopolitical but the quality of the asset — rings true in other industries too, not only mining.
Companies that have enjoyed significant success with their international expansions — arguably because they bought quality assets, or expanded without overpaying or getting deeply indebted — include Sanlam, Standard Bank, FirstRand and Naspers.
A number have also earned their shareholders rich returns by prioritising SA, despite the lacklustre Zuma years. It would take some doing to find better investments than Capitec, which has largely focused on organic growth at home, or PSG, which invested early in Capitec and other successful SA-focused businesses like Curro Holdings, over the past decade.
The lesson is simple: if you want to make money, stick to the ice cream.