In what could be an era-ending deal, investment heavyweight PSG is considering unbundling all or a portion its R46bn stake in its fast-growing banking business Capitec.
The proposed spin-off, welcomed by investors, is part of PSG CEO Piet Mouton efforts to close a yawning discount between its market capitalisation and the sum of its parts which include businesses such as budget-friendly private education group Curro and asset management business PSG Konsult.
“We think it’s the right move. Our feeling is that a partial unbundling will not remove the discount, so the only way it would happen is if PSG’s entire stake is unbundled,” said founder and co-chief investment officer of Anchor Capital, Peter Armitage.
Founded by the CEO’s father Jannie Mouton in 1995, PSG has grown rapidly betting on high-growth companies challenging established businesses in finance and private education but it owes most of its market capitalisation to its nearly 31% stake in Capitec, a no-frills lender that has made substantial inroads in the upper echelons of the SA banking industry.
Investors in PSG, whose stake in Capitec – worth R46bn -- accounted for approximately 74% of its value as at the end of February, have watched in dismay as the valuation gap to the sum of their company’s parts widened over the years. The discount averaged 23% for the year ending February 2020, largely in line with other conglomerates, before widening to 32% at the end of the financial year in February.
PSG also cited new legislation – the Conduct of Financial Institutions Bill which had been due to be tabled in parliament before the end of 2019 -- that may deem it a financial conglomerate, a development that would increase its administrative burden as one reason for considering unbundling the stake.
Capitec CFO, Andre Du Plessis, said the bank, which has had an association with PSG for twenty years, is comfortable with the announcement and it understands the reasons for the possible transaction.
"We have a good relationship with many of PSG’s shareholders who would be the ultimate beneficiaries in the case of an unbundling and we are not aware of any reason why this should change," Du Plessis said.
After initially moving higher following the announcement on Wednesday, the share price of PSG closed flat at R159.94 per share. Capitec rose 9.7% to R966.99 per share.
Mouton’s problems mirrors the dilemma faced by Naspers, where its stake in Tencent ended being at times 40% more than its market capitalisation. Naspers tried to fix that by spinning off its pay-TV business MultiChoice and hiving off and separately listing its global e-commerce business, Prosus, in Amsterdam.
African Rainbow Capital, the investment holding house backed by Patrice Motsepe, is in the same boat. The value of underlying assets, which include a stake in Alexander Forbes, dwarf the company’s market capitalisation by three quarters.
“Investors have fallen out of favour with the conglomerate structure, questioning how much value is added by the parent holding company and its contribution to the growth of the underlying investment,” said chief investment officer of Ashburton Investments Patrice Rassou.
Should PSG spin off the entire stake in Capitec, it might be left with same problem as its asset management arm PSG Konsult would account for about 45% of PSG value, said Anchor Capital’s Armitage.
Independent analyst, Chris Gilmour, said PSG would lose its appeal to investors without Capitec in the portfolio.
“PSG Konsult is a solid business, Curro is requiring significant investment upfront required to build all the schools before it comes profitable, while I have never understood the attraction of Zeder, which has been very volatile. So I’m not too sure they are going to attract investors based on what is left in the portfolio,” said Gilmour.
Update: April 29 2020 This article has been updated with new information and comment throughout.
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