EDITORIAL: Investors raise eyebrows at audacious offer for Sun International
Value Capital Partners and Allan Gray give short shrift to bid by Nueva Inversiones Pacifico Sur of R22 per share
It was an easy choice to make for two large shareholders in Sun International if the price reaction since Nueva Inversiones Pacifico Sur swooped in with a R1.5bn offer for a majority stake in the hotels and casino group is anything to go by.
Though the stock has surged by about a quarter since the offer was made public on Wednesday, it is still about 20% below the offer price, suggesting that investors see little prospect of the deal going through.
Value Capital Partners, an investment house best known for using its stakes to push for changes in boards and strategies of companies, and Allan Gray swiftly rejected the offer of R22 per share as too low. The duo collectively own 43% of Sun International, enough to vote down the tie-up.
Even so, there’s no denying that the offer is cheeky and has a whiff of opportunism
Depending on one’s starting point, Value Capital, led by former Brait director Sam Sithole, and Allan Gray are either rejecting a generous premium or simply refusing to let the Chileans buy their company on the cheap.
Claudio and Humberto Fischer, the brothers behind Nueva, are prepared to shell out R22 per share, a premium of almost 50% premium to Sun International’s closing price the day before their offer became public. As part of the deal, Nueva will underwrite its proportion of the R1.2bn rights issue and advance a bridging loan to Sun International.
Framed as an alternative lifeline for Sun International, which is beset by lockdown restrictions at home and in South America, the bid came hours after the hotel group mapped out a sweeping operational overhaul. The plan entailed raising R1.2bn from shareholders, selling surplus land to raise R380m and slashing 1,800 jobs, or 12% of its staff, to survive in the age of Covid-19.
Nueva’s offer sounds like an easy payout for Sun International’s shareholders, especially given the alternative of shoring up the company with the second rights issue in as many years. They were on the hook in 2018 in a R1.6bn equity fund-raising to help pay down debt after Sun International’s R4bn investment in the sprawling Times Square casino in Pretoria coincided with a weakening in consumer spending.
Under the Nueva deal, they won’t have to dig deep in their pockets when Sun International undertakes the equity capital raise, and bullish investors have an opportunity to participate in any potential upside as Nueva is buying only slightly more than half of Sun International.
Still, there’s no denying that the offer is cheeky and has a whiff of opportunism. It comes just as Sun International is preparing for the dice to roll at its casinos, after its share price had taken a pounding from revenue losses due to lockdown restrictions in place since late March.
Nueva’s offer is more than 50% below Sun International’s recent peak of about R47, just nine months ago, making the proposal a nonstarter for investment houses such as Value Capital Partners, which picks stocks that trade at less than their net worth or book value.
Sun International’s board has also dismissed the offer on the grounds that the company is suing Nueva for trying to back out of a deal to buy a stake in its South American division, Sun Dreams. Full details of the dispute are protected by confidentiality clauses, but broadly Sun International is demanding R1.5bn from Nueva, which argues that some conditions regarding the transaction were not met.
If there’s even a slight chance of getting Nueva to pay the same amount for a 15% stake in a division as it would for a controlling stake in the whole group, it makes sense for Sun International’s board to argue that the offer for half of the whole group grossly undervalues it. It’s also correct to raise the dispute as a significant issue in any of Nueva’s proposals.
With the support of its lenders, which have agreed to waive any violations in agreed debt levels as a proportion of its core earnings until June 2021, Sun International’s board is well positioned to fend off the offer in its current form.
Sithole has cast doubt on the sincerity of the bid, but if it is sincere the Fischer brothers will have to address the dispute and come up with a higher offer.