African Rainbow Capital Investments (ARCI), has thrown in the towel with its listing on the JSE after years of a persistent discount to underlying assets — a trend that reflects wider investor distaste for investment holding companies.
The imminent delisting of Patrice Motsepe’s investment outfit comes despite the company making progress in closing the gap in the six months to end-December.
ARCI, whose prized assets include TymeBank and Alexforbes, on Tuesday said it would delist from the JSE to return more value to shareholders, as first reported by Business Day in 2023. The investment holding company said its public shareholding was limited with limited liquidity in its shares.
“The ARCI share price also does not reflect the true value of the investment in the ARC Fund and trades at a discount to the net asset value of the ARC Fund, meaning that investors in ARCI are not receiving the true value of their investment. It is anticipated that the offer will result in a return of value for investors,” it said.
The discount refers to the difference between a company’s share price and its net asset value (NAV), which in ARCI’s case has been persistently above 40% since listing on the local bourse.
Due to ARCI’s share price discount to NAV, the 50 companies it owns are worth more individually than they are collectively under the holding company’s umbrella. For example, the group, founded by Motsepe in 2015, values wireless broadband start-up Rain at more than R20bn. It holds a 20.3% stake in Rain.
Still, the shares of investment holding companies, locally and internationally, typically trade at a substantial discount to NAV — leaving executives preoccupied with releasing value trapped in the structure instead of focusing on operations.
ARC and ARC SPV are offering to acquire all the shares they do not already own for a cash consideration of R9.75 per share. This is a premium of 12.6% to the closing price of R8.66 on March 14 and a premium of 21% to the 30-day volume weighted average price of R8.06 per share. The price is a discount of 22.8% to the NAV as set out in the ARCI interim results.
Shareholder approval
The offer is conditional on shareholder approval of the company’s delisting from the JSE and A2X.
ARCI’s decision may reinforce broader investors’ scepticism towards investment holding companies, which for years had thrived on the idea that managing businesses across various sectors of the company makes shareholders richer. The move could put the spotlight on Remgro, which has undertaken corporate actions to tackle this valuation mismatch.
Chris Logan, CIO and owner of Opportune Investments, said investment holding companies are out of favour.
“This should not be the case for well-run investment holding companies as these can generate huge value over time, that is PSG and RMB Holdings both of which are no more. These companies play a vital role in incubating new companies, for example PSG with Capitec and RMB with Outsurance,” Logan said.
“Novus has recently joined the ranks of investment holding companies so perhaps the sector is not dead yet. Investors should tolerate a discount on well-run ones which grow their underlying net asset value strongly through good policies,” Logan said.
ARCI, worth R13.2bn on the stock exchange, has decided to move its headquarters from Mauritius to SA.
“At the time of listing ARCI, the rationale for incorporating ARCI in Mauritius was its business-friendly environment, the tax treaties which Mauritius has in place and not only to attract capital from investors outside SA (and the Common Monetary Area), but also to facilitate investments outside SA, if required by international investors,” ARCI said.
“This strategy has not materialised to the extent expected. ARCI attracted very limited international funding and no funding due to the Mauritian structure.
“Also, ARCI is mainly invested in SA companies... In addition, changes to tax legislation since the ARCI listing have resulted in tax inefficiency for SA resident ARCI shareholders vis-à-vis the underlying SA investments.”
ARCI’s results for the six months to end-December show the company made some inroads in reducing the discount at which the share price is trading. The outfit reported intrinsic NAV growth of 4.1% at R19.3bn in the period under review.
“A highlight of the reporting period is the strong progress that has been made in maturing the portfolio and reducing the discount at which the share price is trading. Over 99% of the portfolio is now defined as high growth or mature, with only six companies, or 1% of the portfolio, remaining in the early stage of their life cycle,” ARCI said.
“This will continue to improve the predictability of earnings and ensure lucrative growth prospects. The tail of the portfolio has been reduced, with the top 10 investments now comprising 86.5% of the portfolio.”
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