It might surprise some observers that so far in 2013 there have already been 20 companies delisted from the JSE. There were 17 delistings in 2012, 18 in 2011 and 15 in 2010. That means that in just four years the JSE has seen 70 counters shuffling off its various trading boards. In truth, the good number of the delisting would be deemed corporate transactions that in effect spurred a new listing. Here we can point to SA French (which induced a mirror listing of Torre Industrial Holdings); Marshall Monteagle (which restructured its underlying listed subsidiaries and re-listed); Paladin Capital (which gave rise to the listing of private education venture Curro); or Avusa (which reconfigured as the Times Media Group). Still, the contention might be that most delistings are simply companies that are left for dead, and eventually are terminated by the JSE (usually for not issuing audited financial statements). It’s true that after every listings boom, a good number of companies simply snuff it. Recently we’ve seen companies like Queensgate, Quantum Property Group, AG Industries, Alliance Mining, Country Foods and Kimberley Consolidated Mining booted or about to be ushered off the JSE. There have also been corporate restructurings that have resulted in delistings: Allied Technologies, Mobile Industries, NAIL, Simmer & Jack Mines and New Bond Capital. But more tellingly, many counters like Lonrho Africa (a private equity transaction), Amalgamated Appliances (acquired by Bidvest), Infrasors (acquired by Afrimat), Iquad (acquired by Sasfin), Hardware Warehouse (acquired by Steinhoff) and Cipla Medpro (acquired by the company’s Indian patent holder), were part of well-documented buyouts. In all instances, the share price of the companies listed above was lagging
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either the respective companies’ fundamentals or the underlying value of assets. This allowed the buyers to pitch an offer at a decent premium to the market price but also at a level where considerable long-term upside could be garnered. Even more intriguing are the buyouts and delistings that transpired because the companies concerned were so devoid of meaningful market interest that the controlling shareholders could pitch a buyout offer that arguably discounted the underlying intrinsic value. In 2013, these would include services group Excellerate, property developer IFA Hotels & Resorts, property investment company Sable Holdings, security group Muvoni Technology Group and empowerment investment company Cape Empowerment Ltd. In previous years, promising and interesting counters Mercantile Bank, bakery and catering supplies business Universal Industries, technology services company O-Line, alternative telecoms groups Celcom and Vox, insurance broker Glenrand, a.b.e Construction Chemicals, Dynamic Technology Holdings and industrial services group Set Point were all bought out and delisted. Obviously alert punters can make a nice turn from these market exits. An opportunity effectively offers limited downside risk but also a chance of further upside (especially if strong minority resistance prompts a higher buyout offer, or if a rival bigger emerges with a higher priced offer). But that’s easier said than done. An investor might observe share price weakness and recognise potential for a buyout. But ultimately the investor is buying into share price weakness. The lag in the share price is usually caused by shareholders losing patience with efforts to restore value at the company, preferring to cash out and channel their money into another company with better prospects. Persistent selling will see the share price dribble down to levels that are
completely detached from reality (or realistic value). In these circumstances trying to call the bottom of the share price can be a trying and expensive exercise. In this regard punters should consider the following before lurching at a company they believe will be earmarked for a buyout and delisting. • Does the company have tangible assets that either provide a solid underpin to the share price or are discounted by the share price? If a buyout does not materialise or is called off, an investor needs some security around value. • Does the company have a viable business model? Nothing can erode tangible asset value quicker than a company loses money on a consistent basis. In this instance, beware of companies that are enduring drawn out turnaround plans. • Is the company lumbered with a dangerous debt load? Nothing will scare off a suitor faster than a debt load that cannot be serviced out of operational cash flow. • Does management hold a meaningful stake in the company? Unless it’s a pure asset strip, a suitor would want key management to stay aboard; and, more importantly, keep ‘skin in the game’. • Will the new controlling shareholders or owners allow shareholders to remain aboard after delisting the company? Excellerate and Cape Empowerment are two recent examples of companies where a good number of minority shareholders have remained aboard after delisting. Unlisted shares have certain disadvantages (liquidity being one), but if an investor is certain the new owners can unlock substantial value or deliver of pent-up potential then it’s worth staying aboard. Shareholders who stayed aboard HomeChoice after its delisting in 2003 have been richly rewarded with capital growth and generous dividend payouts over the years.