Piet Mouton, the boss of one of the biggest investors in the SA economy, has come to the difficult but sensible realisation that investment holding companies have fallen out of favour with investors.
Founded in 1995, PSG has transformed itself from a small venture capitalist-style investor into an investment conglomerate with stakes in established names that challenge entrenched players in financial services and private education.
For years, the structure worked in PSG’s favour, enabling it to attract investors to its stock even when virtually all of its underlying businesses were publicly traded, and raise equity capital to buy new businesses. For investors, investing alongside PSG — whose founder Jannie Mouton has drawn comparisons to Warren Buffett — in start-up companies such as Capitec in the early 2000s was reassuring.
But changes in investor sentiment in the age of “synergy” and “competitive advantage”, regulatory red tape and tax implications have started to chip away at the raison d’être for investment holding companies, which for years have been riding on the idea that they make shareholders richer through the management of companies in different economic sectors.
The result is a yawning 30% discount at which PSG shares trade to the sum of its parts that include asset manager PSG Konsult and budget-friendly private education group Curro Holdings. Depending on who you speak to, that is more than double the acceptable level, bringing Mouton to the difficult realisation that his bold move almost two years ago to spin off the company’s stake in Capitec did not address investor distaste for such sprawling business empires.
Direct exposure
The deal, which created more than R20bn in shareholder value and robbed PSG of a steady dividend flow to invest in up-and-coming businesses, failed to achieve one of its primary purposes, so something had to give.
And what Mouton and his team came up with is a coherently laid-out plan that will dismantle PSG, hand investors direct exposure to its underlying companies, free its established businesses such as Curro and PSG Konsult to fend for themselves without the big brother effect that once worked so well, and lead to PSG's departure from the JSE.
In broad brushstrokes, PSG will unbundle its stakes in PSG Konsult, Curro, CA&S, Kaap Agri and 25% in Stadio to shareholders, then buy back the shares of all its investors except the management and founders for R23 each and complete the transaction with its delisting from the JSE. Taking into account the combined value — about R91 per share — of the shares that would be distributed to shareholders, PSG’s offer is nearly R114 per share, a premium of more than 38% to the closing price on Friday and values the company at about R24bn.
That valuation dramatically narrows the shortfall to the sum of its parts to 6%, releasing about R7bn in value trapped in the structure that is increasingly frowned on as investors want simpler corporate structures. The list of overseas companies that have given up the structure is long, but the most striking example is General Electric, whose break-up in 2021 must have convinced even diehard supporters to accept the demise of corporate conglomerates.
Short-lived excitement
The investor community’s explosive excitement is reflected in the company’s share price, which shot up more than 31%, before paring some of the gains to close 19% higher at R97.
But their excitement might be short-lived as the deal means PSG will be the latest company to leave the JSE, meaning there will be less and less to choose from to guard prudently against risk. As we have written before, a shrivelled stock market also matters for the wider economy as it limits options for companies to raise capital for expansion.
PSG’s move, driven partly by Mouton’s vocal criticism of the growing cost of complying with ever-increasing regulations of being listed, should also jolt the JSE into looking at whether there’s scope to cut red tape without letting just about anything to come to the market.
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.