the g spot
End of the Grand Parade whopper
It’s the beginning of the end for Grand Parade. Its decision to branch out into the restaurant business by bringing Burger King to SA has, in the end, been part of its undoing
It’s the beginning of the end for Grand Parade, the investment company formed in 1997 by thousands of investors from formerly disadvantaged Cape communities. Initially the empowerment partner in the GrandWest casino, Grand Parade listed on the JSE in 2008 and branched out into the restaurant business five years later when it brought Burger King to SA, pumping R750m into the fast-food chain. That has, in the end, been part of its undoing. We asked CEO Mohsin Tajbhai whether the decision to sell out was the only way to unlock value for shareholders.
MT: When this current management team took over we were trading at about a 40% discount to NAV. And the decisions that we made — getting Burger King to be profitable, getting the meat plant to be profitable, Mac Brothers … that assisted in narrowing that discount but I think we’re still trading at about a 25% discount to intrinsic NAV.
One of the ways we were looking to narrow the discount was to reduce our operational involvement, so we went through a bidding process and we received an offer from [pan-African private equity group] Emerging Capital Partners [ECP].
The one option was to hold onto that business and grow our food business as we initially intended and become an operating business.
However, looking at the offer we received, as well as the five-year plan of the business, we found that the current offer of R670m … allowed us to mitigate any execution risk that there was in the business.
Holding onto the business meant there was huge execution risk, given where the economy is going in SA.
This week, for example, we’re waiting for the budget speech and we’re not sure what’s going to happen to VAT but two years ago we had an increase and it totally decreased the profitability in the business.
The other option was to keep a significant minority interest but we would always then be under pressure to in some way unbundle or unwind it.
How much has Grand Parade actually spent on Burger King? About R1bn?
MT: A lot of our investors are looking at the cash that we spent in our business and adding to that the accumulated losses over the five-or six-year period and I don’t think it’s correct to do that.
OK, agreed, we’re not getting back the capital but you have to look at the business in its current context. Yes, we overcapitalised it and made mistakes in the past, but you have to look at where you are now and the offer you’ve received and whether it’s value enhancing or not.
So the offer, in my view, will unlock value for shareholders.
I don’t want to harp on the past, but it feels a bit like it’s all been for naught … Grand Parade had great casino assets that it sold to concentrate on the food business, and now you’re exiting …
MT: Obviously, hindsight is 20-20. This management team is picking up the business at a particular point in time and looking at a way to unlock value.
Have you had any opposition from founder and former major shareholder Hassen Adams?
MT: No, not at all. He was privy to the initial discussions with ECP and supportive of the sale at the valuation.
I mean, it’s a 12 times historical, eight times forward [price multiple] — in this market, there’s not many deals that are done at that level.
MT: The strategy is to wind up now, and unlock value through a controlled sale of assets. It’s not a fire sale.
Is this a comment on BEE companies, investment companies, or just the parlous state of affairs for small caps on the JSE?
MT: I don’t think BEE has anything to do with it. It is the state of small-cap companies — we struggle to attract institutional investors and I think there’s huge pressure for investment holding companies to unwind. And it’s not just us.
What do you think about the way this has played out for the investors who formed Grand Parade? Isn’t it a bit sad?
MT: I don’t know if it’s that sad. Their investment has been paid off several times over, if you just look at the dividends they received. Yes, there will be an end to this story but it’s not necessarily a bad one.
Sure, from present levels … but not from when your share was once R7 …
MT: Let’s look at it in context. These are all community shareholders … this company raised R21m from shareholders [in the beginning] and this is a R1.6bn company. I mean, that’s fantastic value unlock. R7 was a hype when everyone thought Burger King was going to shoot the lights out; 90% of our shareholders probably got in at less than R4.