EDITORIAL: Remgro making the worst of a bad situation for RCL
Remgro, the investment heavyweight chaired and controlled by Johann Rupert, framed a plan to splash out just over R800m to raise its stake in the consumer foods maker RCL Foods as an easy payout for minorities in the illiquid stock.
It might well be true, especially if you are a shareholder who had a burning desire to get out of one of the most illiquid stocks on the JSE. In the past 12 months, just under 5% of the company’s nearly R8bn market capitalisation was traded, underscoring Remgro’s already tight grip on one of the biggest names in the SA consumer foods industry.
But Remgro is making the worst of an already bad situation for minorities in RCL Foods.
As it already owns more than three-quarters of the supplier of chicken to fast-food chains such as Nando’s, KFC and Chicken Licken, the purchase of as much as 100-million shares will increase its shareholding to more than 80% and, importantly, lock up even more of the company’s thinly traded shares.
Remgro’s move is the opposite of what one would normally expect when solving a liquidity problem in a company’s shares. The main reason investors are not able to easily get in and out of RCL Foods is that there’s a limited number of shares that are freely available for the broader public trade.
The idea that Remgro is simply being fair as it extends the same offer to other shareholders after picking up an additional 1.2% in November is masking an opportunistic attempt to cement its control over RCL Foods.
Sure, since the March selling frenzy that sent the JSE all share index to levels last seen seven years ago, it has been on a gravity-defying run that brushes aside all kinds of economic news.
The broadest measure of the SA stock market performance gained about 4% year-to-date after rebounding more than 56% in March when governments worldwide brought whole industries to a grinding halt and prompted companies to throw out the earnings forecasts.
But RCL Foods is not among those high-flying stocks on the index. Shares in the company have dropped more than 27% so far in 2020 as a weak operational performance coincided with the rollout of unprecedented restrictions that cut it off from its main restaurant clients earlier in the year.
Furthermore, the purchase of up to 100-million shares for R8.05 each is a 2.4% discount to the RCL Foods closing price the day before Remgro put out the announcement. The offer runs until Friday. If it is successful, Remgro would have paid about half what it was prepared to pay in 2007. That offer, pitched at R16 a share, was rejected as too low by the company’s board and some shareholders.
If anything, RCL Foods’s shares could be in demand in coming months after the company pulled off an unexpected coup for its biggest but underperforming poultry division last week when it emerged that it had poached three regarded executives from rival Country Bird to lead a turnaround at Rainbow Chicken. That came soon after RCL Foods picked Rand Merchant Bank to help with an evaluation and review of strategic options regarding the composition of its underlying portfolio.
Then there is the question of why Remgro chooses to spend money in a company it already controls. From where a Remgro investor stands, one could be forgiven for thinking it’s frivolous as their company cannot exercise more control over the strategic direction of RCL Foods than with a chunky 76.6% it already owns.
Remgro is missing the opportunity to sell down its holding in RCL Foods using the proceeds plus the R805m it prepared to buy back its own stock at more than 35% discount to the sum of its parts, which includes blue-chip names such as hospital group Mediclinic International and drinks maker Distell.
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