The great delisting swindle
Don`t for a moment think Ivan Epstein, Leo Baxter and Robbie Brozin are alone. The three CEOs represent just the most recent participants in the JSE`s version of the chicken run, which has seen 170-odd companies delist from the local bourse since the start of 2001. In the same period, there have been a paltry 15 new listings – of which only six have come from outside the property sector or from company unbundlings (Astral and Kumba, for example).To be fair, some of these delistings have been the result of consolidation (such as BOE and Medi-Clinic). Others have been the casualties of massive unbundlings. But the bottom line – which has gone largely unspoken – is that many companies have taken advantage of the poor market conditions to buy out their minority shareholders for a pittance, leaving themselves with thriving businesses.Make no mistake, many small-cap stocks – like Softline, MB Technologies and Nando`s – may well have been undervalued in the bear market. However, to suggest that those trading prices be taken as a final benchmark for the value of the company is patently absurd, especially when being used to justify offering a risible price to investors who have taken a long-term view on the share.Here`s the real murky underbelly of the delistings boom: even as the average investor is taking a hammering, the top management of many of the companies that have delisted is decidedly wealthy. Some were already very rich when they took their companies to market, but others were able to take advantage of the heady ratings accorded to newly listed companies in the late 1990s, by selling off portions of their shares at ludicrously high prices. It is the smaller minorities, who bought at those high prices and have faithfully – and often on the advice of management – held onto their shares subsequently, who are left holding the empty bag.The predicament of minorities is a world away from those of the leaders of these firms. MB Technologies` Baxter ekes out an existence in a Sunninghill mansion, while Antonie Roux, who presided over the destruction of some R460 million in shareholder value while at the helm of M-Web, is now regarded, we are told, as something of a hero in Naspers circles for delivering back to them a company that is miraculously close to profitable.Brozin, of Nando`s, can`t be feeling too foul either, having won approval to delist at 70 cents a share – a nifty 30 percent erosion in value for a business which is beating its earnings forecasts, is a premium South African brand and is, by management`s own admission, booming internationally. To use his company`s own catchphrase: the craving has spoken. The taste left in the shareholders` mouths is unlikely to be that of mild peri peri.Then there was Jason Xenopolous, who was hailed as a wunderkind on the South African business stage when he took web content player Metropolis to market. Fourteen months – and R80 million – later, the party was over, leaving shareholders with a monumental headache and Xenopolous skipping nimbly back to his former passion, making movies.And the list goes on. Can anyone reasonably argue that the De Beers delisting was in the national interest? Was Investec`s behaviour above reproach when it blocked the Mettle delisting at 60 cents, then rolled over and played dead a year later when the offer had dropped to 44 cents a share? Who got the money for HCI`s share of Vodacom?Even Henry Nicholas, the rapacious chief executive of Broadcom who profited to the tune of $799 million even as his company`s stock tanked from $274 a share to around $22, knows the score: “If you sold your shares to somebody at the top of the market, somebody has bought shares from you. Imagine it`s your mother or grandmother – now she`s lost half her money.”The JSE`s response, as articulated by none other than top dog Russell Loubser himself, has largely been along the lines of “the market`s no place for sissies”. What the JSE has failed to realise is that investing is largely an act of faith. Without the confidence that companies are being run honestly and investors aren`t being given the finger, the bourse will battle to maintain credibility. Tetchy at the top“People deeply believed, as an article of faith, in the integrity of the system and the markets,” Morgan Stanley strategist Barton Biggs wrote recently in Fortune magazine. “Sure, it may at times have seemed like a casino, but at least it was an honest casino. Now many people are questioning that basic assumption. Are they players in a loser`s game?”All the same, Softline`s Epstein gets a little tetchy when it is put to him that delisting robs minority shareholders of any possible upside after sharing in the downside. “For the past several years we`ve been telling the market that we have a good company. Yet the drop in the sector has pushed our share down. Did they rob us of value by selling us down the street? Our results underscore the strength of our business.”Softline`s corporate adviser, Ben de Bruyn of Brait, says the market`s valuation of the company has taken away the major reason it listed in the first place: to raise capital. “It`s now more effective to raise funding in a private environment,” says De Bruyn. “And we`re seeing this with many companies.”One can see his point, but Softline`s delisting plan remains controversial. The company handled the IT listings boom better than most, and even seemed to be weathering the worst of the global IT downturn. As Epstein himself points out, the last interims showed a strong balance sheet with improving cash flows and better operating margins.Cobie Legrange, senior investment analyst at m-Cubed Asset Management, says Softline is a classic case of a good business with good potential which cannot see the benefit of being listed any more.Softline stock touched R12.80 at the height of the IT hype, but lately has been trading mostly between 85 cents and 95 cents. The buy-out price of 130 cents prices the counter on a thin historical ratio to earnings of 5.4. To suggest that this is an attractive premium to the recent trading prices of below 100 cents is disingenuous, as prospects for the share have been brightened by management optimism about further margin improvements.“Softline is probably a better private than public business but this unfortunately is a decision that needs to be made when a company is conceptualised. Once a company becomes public they not only have a responsibility to minorities but also need to be happy with the way the market appraises them,” says Legrange.“Softline could have been caught in the let`s-get-rich-by-listing trap, which has caught many smaller South African companies,” says Legrange.Legrange also takes issue with Epstein`s assertion that the market is the best indicator of the value of a company. “The value of the business should consider all of a company`s assets and liabilities and its potential to create revenue. This is the value of a company.“Understandably, this becomes difficult when one appraises a business such as Softline which has many intangible assets, but it still does not mean that one can take the market price of a company and call that the fair price to pay minorities,” says Legrange.“If one looks at the flip side of this argument, why did Softline never offer minorities 450 cents a share back in 2000?” Blame someone elseBrait`s De Bruyn says that one needs to ask about institutions` involvement. “Institutions come out and make certain value judgements. They`ve been calling Softline a ‘sell` for ages, but now all of a sudden they say there`s a whole lot more value. If they believe that, why didn`t they take a stake in it? If it`s worth double what it is, why didn`t they support them?”(The same goes for the analysts, for whom life is one long sunny day while they are able to prognosticate on the market without feeling it in their own pockets. Why should they care? The market goes up, the market goes down – it`s all the same to them. Perhaps if they were held responsible for their forecasts, or shared some of the risk, they would think twice about airing their opinions. But we digress.)If Softline`s delisting can be regarded as contentious, then what of the delisting of MB Technologies?Not only did Baxter head up the management team to buy his company back, but then lowered his initial bid by 30 cents on the advice of corporate advisers.Of course, it was only the small shareholders who were there from the start who got scorched: management, major shareholder E Oppenheimer & Son and Absa-backed equity fund Clidet formed part of the buyout consortium, which begs the question as to exactly who knew what. No wonder the more cynical market-watchers call delisting the ultimate insider trade.“We`re accused of screwing the minorities for 30 cents a share, and I`m quite miffed about that,” Baxter told Brainstorm several months ago. “What about the inefficiencies of this market? What about how pointless it is to be listed in this kind of environment? What about how ridiculous this market actually is?”It is also high time that some of the hoary chestnuts surrounding M-Web – and its parent, Naspers – were put to bed for once and for all. As much as the company protests to the contrary, many investors feel hard done by through the company`s all too brief stay on the JSE.A look at the facts shows that M-Web burnt its way through R460 million in four years. In the six months to September 2001 alone, it lost R152 million on revenue of R160.8 million. The funds poured in while the share value of M-Web fell from 450 cents when it was launched in August 1999 to 125 cents.But this probably didn`t affect Naspers in any meaningful way. Much, if not all, of that R460 million was spent establishing M-Web as a brand, and paying above the odds prices for some ill-advised acquisitions. It is likely that a large portion of the money was funnelled back through various media in the Naspers stable via advertising expenditure, such as M-Net, DStv or Naspers`s various print titles.Institutional investors then apparently demanded a buy-out of minority shareholders in M-Web. At the time of the delisting, then chief executive Antonie Roux talked of the importance of integrating the group`s subscription and media platforms. “In this way we will be able to expand our subscribers` experience seamlessly to television and other services,” he told Business Day.The delisting, he went on to say, would give the company a chance to expand the business with internal funding, which was conveniently available after the reorganisation of Naspers, which unlocked more than $220 million held by subsidiary MIH Limited.Public shareholders – who held 18 percent of M-Web`s shares – were offered Naspers shares in exchange for their stakes. Sister company MIH Holdings retained its 20 percent share in M-Web while Naspers, which at the time owned 54.9 percent of M-Web, hung onto the remaining shares – and the company.So minorities were forced to re-route their direct investment in a promising Internet company into an indirect one, through the Naspers parent. Naspers head honcho Koos Bekker said as much at the time of delisting, pointing out gleefully that M-Web was on target to become profitable within the next two years.Of course, not everyone profits from delistings. Homechoice was not so much a case of greedy management as inept management. In the words of m-Cubed`s Legrange: “Homechoice seems to have a problem when it comes to running their business.”Despite having to borrow R130 million from its bankers, raise R175 million twice, and accept ceding a 20 percent stake in the company to Commercial Finance Corporation (CFC), it just couldn`t seem to make money.“Any investor invested in this company is by no means buying a sure winner, and investing in this firm could be likened to gambling,” comments Legrange.“If this company does not delist it is probably safe to assume that they would file for bankruptcy, which has already been on the cards. So even though minorities are getting a raw deal at 18 cents a share as an offer, it is probably better than the deal they would get if the business were liquidated,” concludes Legrange.And investors still need to be careful about investing hard-earned cash in some bright-looking small company. David Shapiro, the hedge fund and arbitrage head at Corpcapital, believes the delistings trend will continue for the next year or two.Shapiro provides the standard line about the huge expense of being listed, as well as pointing out that onerous corporate governance requirements are forcing companies to question why they should remain listed. “Those that are generating enough cash, will take themselves off the market,” he says.Interestingly, Corpcapital itself may be ripe for a delisting, says Legrange. Since giving back its banking licence, the management buyout of the firms` corporate finance division and the departure of a number of high profile executives, the company is now looking more like an investment company with holdings in a property business and a private equity business. Bigger players eye exitThere is still hope though that it may emerge stronger than before; but as what business? A property business that could be a good listed entity, or a private equity business that would probably be better unlisted.Alwyn van der Merwe, senior portfolio manager at Old Mutual Asset Management (OMAM), says that, generally, the small cap and IT sectors have been the worst affected.“Until now, that is. We are now starting to see some of the bigger players saying it`s time to get out. There has been huge risk aversion from investors over the last couple of years, and which company owner or management team really wants a shareholder looking over their shoulders as share prices come down, anyway?“The companies that delist from any particular sector are not good for institutional business, either,” says Van der Merwe. “The fewer companies in a market sector, the smaller our choice when looking for future investment opportunities. This doesn`t bode well for us and, indirectly, for people who invest in our funds.”“The lack of interest amongst investors is largely due to the dramatic decline in the companies` market valuations and their shares tradeability,” says Faizal Moolla, financial services analyst at Metropolitan Asset Managers. “These factors – combined with the negative sentiment towards equity in general as an investment destination – support the increasing trend in delistings.”Granted, the costs of remaining listed for smaller companies can also be stiff, although they knew what they were in for when they listed in the first place. And although having to comply with JSE listings requirements is usually to the benefit of both shareholders and the company in the long run, they can place a hefty financial burden on companies.Public companies are also often expected to satisfy impatient shareholders quickly, which can lead to the “need” to massage the numbers to keep things looking rosy. Who can forget Enron and Tyco? Or Leisurenet and Tigon?Liquidity is a more difficult problem the JSE will have to address. With only 160 of the more than 450 companies listed on the JSE making up 99 percent of the market, the remaining 300-odd companies are clearly difficult to trade.“I think a lot of the small companies have not got full value for their listing on the JSE,” Shapiro said recently. “That`s an issue that the JSE itself has to look at, and I think they are looking at that very, very carefully.”And indeed, the JSE claims to be in the process of developing an alternative exchange. The details about this exchange are blue-sky at best and the idea has been bandied about for some time without much progress. According to the JSE`s Noah Greenhill: “We are developing this alternative exchange to attract smaller companies. We hope to launch in either the third or fourth quarter this year.”Until then, Metropolitan`s Moolla has this last bit of advice for investors who still have an appetite: “Assess your investment time horizon and determine whether you want to make a quick gain in the short term or whether you believe that the company`s share price will appreciate over the longer term.“With the long-term strategy, investors should focus on companies with excellent management teams, good product and service offering, with low debt on their balance sheet and good cash flow generation.“It is critical that investors look at the longer term growth prospects of companies and ensure that this is fairly reflected in the share price before selling at low levels.”Oh, and one other thing: Caveat emptor. Let the buyer beware.With additional reporting by Angelo Coppola.
31 May 2003
Don`t for a moment think Ivan Epstein, Leo Baxter and Robbie Brozin are alone. The three CEOs represent just the most recent participants in the JSE`s version of the chicken run, which has seen 170-odd companies delist from the local bourse since the start of 2001. In the same period, there have been a paltry 15 new listings – of which only six have come from outside the property sector or from company unbundlings (Astral and Kumba, for example).
Make no mistake, many small-cap stocks – like Softline, MB Technologies and Nando`s – may well have been undervalued in the bear market. However, to suggest that those trading prices be taken as a final benchmark for the value of the company is patently absurd, especially when being used to justify offering a risible price to investors who have taken a long-term view on the share.
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