PSG Group drew the curtains on the investment holding company business model, unveiling a two-pronged deal to spin off stakes in several publicly traded companies before buying out minorities.
It was the latest attempt to deal with the yawning discount to the sum of its parts, which was not solved by it exiting its most successful investment when it unbundled most its holding in 2020.
“Our investment model has fallen out of favour globally,” CEO Piet Mouton told a conference call shortly after unveiling the plan that would ultimately lead to the delisting of PSG.
“The discount you see in listed holding companies negates one of the biggest benefits of being listed: to raise capital from the market.”
PSG will spin off its stakes in PSG Konsult, Curro Holdings, CA&S, Kaap Agri and a portion of its holding in Stadio. Thereafter it will buy back the shares of all its investors except management and founders to pave the way for the departure of the company from the bourse.
The transaction, which is subject to shareholder approval, values PSG Group at roughly R24bn, taking into account the value of the stakes — R91 per share — that would be distributed to shareholders and a R23 per share price tag for the stock repurchase programme.
The nearly R114 per share offer to take the business private is a 38% premium to PSG’s closing price on Friday.
It dramatically narrows the discount at which the company’s share price trades relative to the sum of its parts — from around 30% to 6%.
Shares of PSG jumped above R100 for the first time since it unbundled its stake in Capitec in August 2020. It rose by as much as 31% on Tuesday before trimming gains to close at R97.15 — an increase of 18.72%.
Sprawling empires
The dismantling of PSG follows a similar trend abroad where companies such as General Electric, Toshiba and Siemens have broken up their sprawling business empires in response to investor pressure against what was once seen as a cutting-edge business model. The decision could heap pressure on investment holding companies such as Remgro and Hosken Consolidated Investments at home, where the average valuation shortfall to fair value is more than 40% — at least three times the acceptable level.
PSG has grown rapidly from a small venture capitalist-style investment holding company founded in 1995 by Jannie Mouton and Chris Otto to a conglomerate worth more than R20bn on the JSE. Still, the value of its underlying assets is not reflected in its share price, prompting Mouton in 2020 to spin off its stake in Capitec in the hope the transaction would solve the problem. But even after the deal handed investors R21bn in value, the discount remained stubbornly wide.
“We realised the problem was not going to go away,” Mouton told Business Day, adding that the biggest factor behind the erosion of the appeal of investment holding companies is creeping capital gains and dividend taxes.
If PSG were to sell all its investments, valued at R25.6bn, at current market prices and distribute the cash, shareholders would incur almost R8bn in tax charges.
“There’s a significant argument to be made that investment holding companies [trade] at such a large discount as a result of the tax trap,” Mouton said.
The decision puts an end to the PSG as presently configured, leaving it with companies in the early stages of development. PSG Alpha, the group’s incubator that holds stakes in emerging businesses, is worth R4.44bn and will be mostly retained, as will the R2.84bn stake in Zeder Investments.
Mouton said PSG needs to put sentiment aside and maximise shareholder value, but the decision has not been easy.
“The heat is going to be turned up and people will really have to perform on the investments they make,” he said.
Sasfin’s chief global equity strategist, David Shapiro, said it had been an extraordinary and surprising growth story for PSG, which managed to tap into a new emerging middle class in the 1990s. “It was an opportune time. SA was going through a lot of changes both politically and economically, and [Jannie] Mouton was quick to take advantage of it,” he said.
Shapiro said, however, that picking winners such as Capitec, or even Tencent, seems to have become more difficult for global holding companies, which have also been faced with a rise in private equity activity.
“It is telling that a lot of companies would rather live under the banner of private equity than face the increased and intense scrutiny of the market,” he said.
For the JSE, the investment community and the broader economy, PSG’s decision is not good news as it would become the latest company to leave the rapidly shrinking stock market, which has seen its listings nearly halve from 600 at the turn of the millennium. Mouton cited “excessive” red tape for listed investment holding companies as one of the reasons for taking the business private.
Separately, the JSE, which issued its earnings report on Tuesday, said it is constantly working to try to reduce red tape, launching a consultative process in 2021 that had already been well received.
“We are not stopping there,” CEO Leila Fourie said. “The issue at hand is we have a history, and a legacy, of growing successful companies which have gone on to unlock value for shareholders and narrow the margins at which their shares trade.”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.