Johann Rupert’s Remgro looks to unlock value
His family’s investment vehicle is looking for ways to unlock value
The discount offered by the share price of investment behemoth Remgro to its intrinsic NAV narrowed to less than 15% in mid-March.
These days that is a fairly narrow discount, considering that other listed investment trust-type counters are attracting discounts well in excess of 30%. Remgro’s discount might suggest the market is not expecting any radical efforts to unlock value, but that there are reasonable expectations that Remgro’s brains trust — led by the stoic CEO Jannie Durand — will continue to tinker with the sprawling investment portfolio to hone performance.
The interim results to end-December confirmed Remgro is willing to tackle an issue that has irked many investors: the investment in UK-based Premier Team Holdings (PTH).
PTH owns the Saracens rugby brand and the team’s Allianz stadium — which by no stretch of the imagination can be considered traditional Remgro investment fare.
It was unlikely that loss-making PTH, or any other sports brand investments, would ever move the needle at Remgro, and a number of punters believed the UK rugby investment was something sports-mad Remgro chair and controlling shareholder Johann Rupert might rather have done in his personal capacity, or via his other investment vehicle, Reinet.
Remgro’s investment presentation showed that a deal signed on October 24 would see the sale of its interest in PTH for a nominal amount, as well as a three-year exit from Saracens Copthall LLP (the entity which houses the Allianz stadium) for £8m. While PTH is a small investment, an ongoing bleed could have been embarrassing for Remgro.
But probably the most intriguing potential development at Remgro is whether the Unilever spreads business, which Remgro acquired last year, will be merged with JSE-listed RCL Foods. Remgro now owns 71.2% of RCL.
The spreads business, now rebranded as Siqalo Foods, holds some well-known household brands, like Rama, Flora, Stork and Rondo. With a carrying value of R6bn, Siqalo would be a game-changer for RCL Foods as it continues to diversify away from the cyclicality of the poultry and sugar sectors.
At the interim results investment presentation, Durand declined to respond to questions around possible plans to inject Siqalo into RCL.
The spreads business — which recorded revenues of R1.4bn and impressive operating profits of R316m — is a natural fit into RCL.
One of the suggestions at the investment presentation was that if the spreads business was ushered into RCL to significantly bolster the groceries hub, there might be an opportunity to unbundle the sugar and poultry businesses.
That seems unlikely for now, but with the RCL share price in the doldrums, it is probably as good a time as ever for Remgro to pitch a buyout offer for the 28.65% shareholding it does not already own in the business.
RCL clearly cannot acquire the R6bn spreads business for cash — at least not without a rights issue, which is unlikely with the depressed share price.
A scrip-funded deal would leave Remgro with an overwhelmingly dominant shareholding in RCL, not to mention a headache about the price of that scrip currency.
While it might probably make sense to merge the spreads business into RCL Foods out of the public gaze, a bigger consideration is the opportunity to feed into Remgro’s preference to hold unlisted investments.
At the end of December, more than three-quarters of Remgro’s intrinsic NAV comprised its handful of large listed investments: RMH/ FirstRand, Mediclinic International, RMI, RCL and Distell.
If Remgro offered the only entry point to more promising and substantial unlisted investments, there would arguably be a better chance its shares would re-rate positively.
Aside from the spreads business, the unlisted investments reside mostly in the industrial cluster. None of these is going to shoot the lights out and offer a compelling reason to buy into Remgro (see Market Watch column on page 43).
However, Remgro’s infrastructure silo holds a potential gem in its 54.5% stake in Community Investment Ventures Holdings (CIVH), which in turn holds the fast-growing fibre-optic business Dark Fibre Africa (DFA).
Remgro values its stake in CIVH at R5.6bn, based on ongoing progress at DFA — including a 24% increase in annuity income on the back of monthly annuity flows topping R152m and a R9bn book value of the existing fibre network.
Last year CIVH acquired a 34.9% stake in fibre to the home (FTTH) specialist Vumatel; it is working on acquiring the balance of that business.
DFA’s results were skewed in the interim period by the finance costs of R136m associated with the Vumatel deal and that company’s equity accounted losses of R41m.
The combination of DFA and Vumatel is compelling; the former owns 11,190km of fibre network in metropolitan areas and long-haul routes, and the latter over 8,000km of FTTH network.
It’s worth noting that Remgro — which traditionally marks investments ultra-conservatively — appreciated the value of its investment in CIVH despite a loss of R100m.
Asked whether this meant sustained losses for a prolonged period, executive director Pieter Uys explained it reflected a change in the investment strategy from about 18 months ago, which saw an accelerated roll-out of the fibre network and the depreciation of these investments coming through.
Uys stressed that CIVH is still looking to roll out fibre rapidly, but not at the rate of 18 months ago. He said once the Vumatel deal (to acquire the reminder of the business) is finalised, the businesses could be integrated as a "unit of fibre", which would provide shareholders with more clarity.
"There will be more losses coming through, though."
It is still early days, but some pundits reckon the fibre thrust could be similar to Remgro’s early backing of cellular service provider Vodacom in the mid-1990s.
Presumably any opportunity to increase the shareholding in CIVH will be taken, remembering that Remgro is now in a net cash position of about R1bn.