Cognition: cognitive dissonance

Cognition Holdings,* these days touted as the digital platform of media group Caxton, has paid a pretty price to settle up with a group of dissenting shareholders.

These shareholders — including Primedia founder William Kirsh — resisted waiving their rights to a mandatory offer following Cognition’s acquisition last year of online real estate platform Private Property.

Cognition bought Caxton’s 50.01% stake in Private Property for R127m in exchange for an issue of about 105.8-million shares, at 120c a share. This pushed Caxton’s stake in Cognition from 34.7% to 63%.

But dogged resistance by a small group of shareholders forced Cognition to repurchase just over 14-million shares (almost 6% of the company’s issued shares) at a significantly higher "fair value" of 166c a share.

At the time of writing, Cognition’s thinly traded shares were trading at 85c (after dribbling down to a 47c low in late August). The dissenting shareholders must be relieved to have a 166c exit ticket.

In the year to end-June, Private Property contributed revenue of R64m and chipped in R2.3m to the bottom line. If the Private Property business had been acquired from July 2018 the figures would have been around R150m and R15.8m — meaning about R7.8m in profits for Cognition.

It is a fairly underwhelming start by Private Property (which has a formidable rival in Naspers-owned Property24). In December it appointed a new CEO, Amasi Mwela, who has been tasked with identifying new areas of "opportunity, growth and operational enhancement".

Cognition CEO Mark Smith says the longer-term aim is to create "a structured trajectory for this platform to become the leading property platform in SA".

The boards of Private Property and Cognition have agreed to reinvest a portion of Private Property’s 2020 and 2021 profits into implementing this plan.

This will mean Cognition shareholders can expect lower profits for the next two years — though Cognition is confident top line will increase and cash-flow generation remain strong.

Private Property’s performance is critical for Cognition. The trajectory of this specialist digital business might well determine minority shareholder enthusiasm for Cognition’s plans to accommodate other digital assets on its platform — including those interests currently being nurtured by controlling shareholder Caxton.

Whether some or all of these owner-managed digital businesses wend their way to Cognition remains to be seen. They include Guzzle.co.za, a digital retail catalogue listing site; content aggregator All4Women.co.za; HealthSpas.co.za; safari travel agency Safari.com; video-sharing platform Tysflo.com; Carmag.co.za; Response24.co.za, an incident management and response technology platform; and accommodation reservations site Afristay.com.

Safari.com appears to be the biggest digital play, and Caxton has already hinted at ushering this business towards Cognition.

At face value, Cognition has the war chest to acquire any (or even all) of these digital assets if the business model proves encouraging. But while the group’s balance sheet shows cash balances of R123m, the real position is not quite as compelling.

One needs to remember that Cognition — despite a marked drop in profits — declared a dividend of 10c a share. This will take out around R24m, while the buyback of dissenting shareholders will cost another R23m.

Here lies the quandary for Cognition. Will Caxton be prepared to take more scrip as settlement if Cognition takes over the other digital assets? Caxton would reinforce an already dominant position in Cognition, possibly raising the spectre of an eventual buyout offer to minority shareholders.

If Cognition mobilises cash to acquire some (or all) of Caxton’s digital assets, the group’s balance sheet might no longer have the leverage — at least in the short to medium term — to acquire "game-changing" digital assets (other than those being peddled by Caxton).

The ability to issue scrip to fund a transaction — or raise fresh capital, for that matter — also seems severely limited, with the illiquid share trading at a hefty discount to fair value.

It looks like a frustrating stalemate that might erode hopes that Caxton can replicate Naspers’s technology successes with the "digitisation" of Cognition.

* The writer’s spouse holds shares in Cognition