MARC HASENFUSS: Acquisitive counters: buying trouble?
The centre cannot hold, and things are falling apart. Or so the market maintains, judging by the brittle share prices of JSE "growth-by-acquisition" counters such as Torre Industries, Distribution & Warehousing Network (Dawn), Famous Brands, Stellar Capital Partners, Ascendis, Brait, enX Group and Anchor.
Investor fretting revolves mainly around two issues: operating assets toiling in unfavourable economic conditions; and whether there has been an overpayment for assets.
There is a third consideration. Will executives grasp the nettle to ensure value is salvaged for shareholders, or will value seep away through prolonged pussyfooting?
Sometimes the outcomes for acquisitively assembled companies are downright nasty — remember the fate of shareholders in such illustrious businesses as Macmed Health Care, Brainware, Queensgate and MGX Holdings, to name a few that have (dis)graced the JSE over the decades.
If anything, there is reinforcement of the notion that successful acquisitive counters — think Bidvest/Bidcorp, Hosken Consolidated Investments and PSG Group — are the exception rather than the rule.
That said, not all the acquisitive counters that got their balance sheets in a tangle are necessarily doomed. Sabvest, headed by the unflappable Christopher Seabrooke, patiently turned its fortunes around, and debt-laden Super Group was also steered back to the growth path (with the help of investment institutions that backed successive rescue rights issues). Metrofile was salvaged from the imploded MGX and transformed into a compelling business.
Returning to my sample of under-pressure acquisitive counters, I don’t think there are any corporate catastrophes about to unfold. But there may still be considerable downside to endure.
At this point, counters such as Stellar have dropped to levels reflecting a dastardly discount on some of the core assets (think perennially profitable investments like Prescient and Amecor). Brait is starting to look interesting too, while Dawn might be binary to braver investors. Former market darlings Ascendis and Famous Brands, well, they may not have found a floor yet.
Ironically, while these counters are shaken down, the market is happy to afford a premium rating to Long4Life, unashamedly set up by deal-making doyen Brian Joffe as an acquisitive vehicle. Deal flows are just starting to trickle in, and there’s no fundamental underpin to grasp just yet.
Admittedly, there is opportunity for a well-capitalised investment vehicle to pitch offers for quality assets at reasonable prices. But execution risks remain — even for someone as astute as Joffe.
So ... will I go long on Long4Life? You bet your sweet cash — if it drops below 600c.