Rothschild & Co has given its seal of approval to the R20bn-plus management-led buyout of Barloworld, taking CEO Dominic Sewela and his Saudi partners a step closer to ownership of one of the biggest names in corporate SA.
The endorsement by Rothschild, which was appointed as an independent expert to assess the valuation of the deal, is accompanied by Barloworld’s board urging shareholders to vote in favour of the deal late next month.
Sewela and Saudi Arabia’s Gulf Falcon Holding, whose parent company already owns 19% of Barloworld, is offering as much as R123 a share, valuing the company at just over 4.3 times its historical ebitda and handing shareholders a premium of about 90% to the average share price, adjusted for trading volumes, before the talks went public early last year. The deal values Barloworld at about R23bn.
“Based on the results of the procedures performed, the valuation work and qualitative considerations, and subject to the limitations set out herein, Rothschild & Co is of the opinion that the offer and the per share scheme consideration are fair and reasonable,” Rothschild said in a letter attached to the 92-page circular, a detailed regulatory document about the offer and its terms.
The endorsement may assuage shareholders such as Silchester International Investors, which is pushing for a higher offer. It is demanding no less than 130 per share, not far from the stock’s peak in early 2018.
Using the sum of the parts method, Rothschild aggregated the fair value of Barloworld’s sprawling business, including its Southern Africa and Mongolia earthmoving equipment operations and its consumer industries segment. It also used the discounted cash flow (DFC) approach, weaving together historical and forecast financial data and considering every possible variable from price and volume growth to market dynamics, GDP, inflation, margins and discount rates.
Rothschild did not value Barloworld’s Russian unit as a regular business because of it war with Ukraine and subsequent sanctions. Instead, it focused on the potential to repatriate money and current foreign exchange controls. For lesser-known subsidiaries and investments, it used the carrying value and sense-checking against peer companies.
Rothschild arrived at a valuation range of between 105.53 and R119.42 a share, well below Sewela and his partner’s offer, giving the board confidence to rally shareholder support for the offer.
Conflict of interest
The deal also raised eyebrows in the investor community due to Sewela’s dual role as CEO of Barloworld and a central figure in the consortium seeking to buy the company, fearing that his dual role creates an inherent conflict of interest that is almost impossible to mitigate.
“Since the publication of a cautionary announcement on November 15 2024, Barloworld has received a number of questions in relation to its governance procedures, and the transaction process followed,” Barloworld said in the circular.
An independent board, constituted almost immediately after the consortium made an approach, set up governance protocols to manage the situation. These included nondisclosure agreements, a conduct protocol for Sewela, and a steering committee composed of unconflicted executives and external advisers.
“The independent board regularly confirmed (and continues to confirm) that this position still holds, and each of the above executives is required to disclose to Barloworld immediately if they become aware of any facts or circumstances that may result in them being conflicted and/or becoming concert parties,” Barloworld said.
“The independent board is confident that sufficient safeguards were (and remain) in place to ensure that Barloworld is managed efficiently and with minimum disruption, while the (offer) is considered by the independent board and the Barloworld ordinary shareholders.”
Rothschild was granted equal access to the due diligence information available to Sewela and Gulf Falcon Holding and was not identified or named during the process to any member of the consortium to prevent the possibility of undue influence in the process.
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