Special feature: Asset light vs. asset heavy

ASSET LIGHT VS ASSET HEAVY

In the past three years, many companies have been forced to review their business structures, including a concerted audit of the assets held within the business. Jane Steinacker spoke to leading finance professionals about their asset strategies, and whether to invest in more assets, or let them go. By Jane Steinacker

Previously seen as a remedy for underperforming companies, asset-light strategies are now being used by companies to manoeuvre through the market changes caused by the Covid-19 pandemic and to create continued growth. According to EY’s report, How asset-light strategies and models can boost business growth, “An asset-light strategy or business model involves transferring capabilities, such as people, process and technology, to ‘better owners’ in order to enable companies to transition fixed costs to a variable cost structure, enhance agility, and facilitate a shift of resources that allows a focus on core capabilities”. It’s often a relationship that best suits both parties, allowing one party to shed unnecessary costs and another to purchase the assets and/or capabilities on offer.

Technology driving change

The same report published a poll that held responses from 1,000 C-suite executives. A third (31 percent) said that their asset-light strategies have been considered because of changes in technology, 25 percent said that meeting the changing demands that customers have is a key consideration and 21 percent are dispersing assets and using the capital to fuel economic growth. While a typical asset-light strategy may take between 12 to 18 months to complete, the financial rewards exceed happier shareholders, according to the EY report. “For example, another recent EY LLP study found that companies that transitioned manufacturing ahead of a sale were 17 percentage points more likely to exceed expectations on the valuation of the remaining businesses and were more likely to exceed expectations on the price of the divestment.”

SA companies driving asset-light strategies

This strategy is being embraced by businesses in South Africa, who are already realising the benefits. The most notable is mobile companies releasing ownership of cell towers in favour of using the capital to build other capabilities within the business.

Zaf Mahomed George de Beer

Cell C’s new asset-light operating model, says CFO Zaf Mohamed, is focused on building its platform business: “Cell C would need more than R5 billion capex annually to build a comparable network. This would also take several years to implement.” Instead, the operator is deploying an asset-light infrastructure model and plans to invest capex of R1 billion a year, which includes technologies to support the platform model it is implementing as it evolves to being a technology company. And the financial gains are starting to show. The group reported a R148 million profit before tax for the six months ended June 2021, compared to a R7.6 billion loss for the first half of 2020.

“Our three most valuable assets that are not on our balance sheet and underpin our transformation journey are spectrum, a loyal and profitable customer base, and a resilient brand,” Zaf explains. “Together with our network strategy, consumer-driven digital products and solutions, as well as our focus on a high-performance culture, we have a sound platform from which to compete and assist us to deliver on our strategic intent.”

Shedding non-core assets

In November last year, Omnia sold 90 percent of its share in petroleum company Umongo. This is part of Omnia’s turnaround strategy to focus its attention on the agricultural and mining sector and to dispose of assets that the business deems as being non-core. This will not be the only asset that the company is considering. “Management is committed to the continued strategic execution, which includes the sale of assets identified as non-core,” says group FD Stephan Serfontein.

Umongo, which is part of Omnia’s Chemicals Division, supplies lubricant additives, base oils, process oils and chemicals, as well as technical solutions to lubricant blend manufacturers in sub-Saharan Africa.

“The sale of Umongo delivers an attractive cash receipt for Omnia, as we believe that there are limited synergistic benefits with our agriculture, mining and chemicals businesses,” he explains, adding that the deal will further strengthen Omnia’s capital position, returning over R1 billion in cash.

Stephan said the proceeds of the sale will either return cash to shareholders or be invested in strategic growth opportunities for the company. Grindrod CEO Xolani Mbambo sold 9.6 percent of the company’s Shipping Holdings, the business from which it was born. The shares were sold at $13.50 (about R201) per share, raising gross proceeds of $24.87 million (about R372 million).The proceeds of the sale are going

Herman Bosman Raj Nana

to be allocated to servicing debt and will increase its capital allocation. “Grindrod’s focus”, says Xolani, “will be on ports, terminal and logistic solutions to service Africa’s imports and exports.” Grindrod’s asset-light strategy has not stopped there: the company is in the process of selling the Marine Fuels business and its private equity assets.

Is asset light right for your business?

George de Beer, CFO for Imperial Logistics, says there is a balance between shedding assets that are not of benefit to the business and retaining assets that ensure that the business is able to still service its customers. George refers to this as an ‘asset-right’ model. “With our asset right model it is about owning the assets we need to make sure we can service our clients, but also making sure that we don’t have idle assets,” he says. “We do commodities, but with an asset-light model because we don’t want to own the assets because of commodity cycles. What we do like is specialised freight, tankers, fuel, solvents, food and chemicals, and then contract logistics, where you’ll do distribution on a fixed variable rate,” says George. “There are two things in logistics, you need access to capacity, but you also need access to freight going both ways because you can’t afford freight going there and coming back again. So having those two things and managing sub-contractors and linking volumes both ways is very important. “That’s why we realised assetright was the way to go, because you need to have assets to execute.”

Companies primed to be future fit

Rand Merchant Investments (RMI) CEO and FD Herman Bosman says, “Restructuring marks a significant milestone for the business.”

Focusing on property and casualty insurance, the company will be concentrating on investing in unlisted, futurefit, geographically diverse, short-term insurance assets.

The capital for this strategic direction will be raised by unbundling its life insurance assets in Discovery, where its current share ownership is 25 percent, and Momentum Metropolitan with a share ownership of 27 percent. “They will end up with a direct holding in Discovery and Metropolitan in the same proportion as they hold in us,” he said. Herman adds that direct ownership for RMI’s shareholders will be more efficient, so there will be no friction costs involved in the interim or conduit structure in the meantime, or in the middle of these two things.

Angela Pillay

“The leaner operation model allows for capital to be allocated more appropriately, enabling us to further grow our core activities,” said Angela Pillay, FD, Sasfin

“If we only did the unbundling, our shareholders would have ended up with a disproportionate shareholding in the two companies,” Herman says. The company is also planning a R6.5 billion rights issue, which it considers the most equitable and efficient mechanism to optimise its capital structure as a result of the unbundling. The restructuring will also help RMI tackle its R11.8 billion debt and reduce it closer to R6 billion.

Looking to the future, Herman says that on the one hand he is very excited about RMI’s longer-term future as a more focused investment company. “We will have to start off with two unlisted short-term insurers in our portfolio, and OUTsurance and Hastings have also shown not only that they are growing in difficult market times, but they’ve also shown that they have discernible IP that we think can be applied across a wider portfolio, and this is in fact what they’re doing.” Attacq’s de-gearing has also been in full swing. In the past year the REIT business has sold R2.6 billion worth of assets in the period, including 2 Eglin road in Sunninghill, MAS Real Estate shares and Deloitte’s head office in Waterfall City. According to CFO Raj Nana, Attacq has reduced its gearing ratio to 43.3 percent in the financial year under review, compared with 45.7 percent in the prior year. As a result, the group isn’t planning to incur further debt to undertake further development. The group resolved to not pay a final dividend for the 2021 financial year in order to optimise its capital structure for development capacity. Raj explains that the company will consider resuming a dividend in the 2022 financial year, but it intends to first further improve its gearing position.

Cutting the fat

A leaner operation has been Sasfin FD Angela Pillay’s strategy. Angela has on-shored Sasfin’s Hong Kong operations, exiting some of its non-core assets and preference shares. “The leaner operation model allows for capital to be allocated more appropriately, enabling us to further grow our core activities,” said Angela. The financial benefits that include the leaner operation strategy have born results. Sasfin has reported headline earnings of R141.1 million for the year ended 30 June 2021. According to the company, this improvement was largely driven by an 11.65 percent increase in total income to R1.303 billion and improved credit performance. The group also reported a return on equity improvement to 9.11 percent. Consumer businesses have not escaped the even-

Stephan Serfontein Xolani Mbambo

tual probability of approaching an asset-light model. According to Deloitte’s report, The future of consumer business, businesses need to move from “owning the aisle" to "owning the consumer”. The report said that, “in recent years, however, the digital revolution has transformed the world and today an individual may be both a consumer and a creator. The average individual willingly shares data about themselves in exchange for convenience, such as shopping through digital channels, and this allows for the creation of valuable insight about the individual’s consumer preferences”. The reports add that “asset-light and digitally native start-up brands that are using consumer data as the basis for competition and bypassing the traditional advantages of economies” have a competitive advantage over traditional linear businesses.

This has not been taken lightly by the traditional business model and “consumer-product companies have responded with significant investments in digital channels, customer analytics, and similar programmes”. According to the Boston Consulting Group’s article “When “asset-light is right”, the benefits of this strategy are not best suited to all.

How consumer brands benefit

The report adds that the approach has served some consumer brands well.

“Both integrated and asset-light models – when well chosen – can deliver good results. For example, Zara, a Spanish fashion retailer, benefits richly from its integrated model. It designs and manufactures its lines of fashion apparel in its own facilities and sells them through its global network of company-owned stores. Nike, on the other hand, also delivers superior results with its athletic apparel at a significantly lower level of vertical integration,” it says. But it adds that, “light isn’t always right. Despite the benefits that an asset-light model can deliver, sometimes a vertically integrated model is a better choice. When coordination, speed, know-how, or knowledge sharing is essential – or when core strategic assets, such as vineyards in the Champagne region, are scarce – greater integration can be helpful. Integration can also help ensure that the economic interests of all parties are aligned,” it says. A hybrid approach to asset-light models is also a possibility for companies to consider. By reducing certain assets and co-locating staff to partners, the business reduces expenditure but retains the benefits. The business can also retain sections of its vertical models to retain market share as well as intellectual property in that field. l