PSG Group, the Stellenbosch investment holdings business listed in 1995 by businessman Jannie Mouton, may soon become a fond memory.
In a JSE Sens announcement released on March 1, PSG detailed its intention to unbundle to shareholders a majority of its holdings and undertake an interconditional cash repurchase at R23 per share for the remaining “rump” of PSG Group. Put simply, PSG shareholders have to vote on both the unbundling and the buyout deal or it’s no deal.
It’s a PSG carrot-and-stick approach. The market would gain a sharp reduction in the stubborn discount to PSG’s sum of the parts (SOTP) of about 30% before the announcement. Shareholders would also receive shares in many of its underlying holdings, and PSG would then delist and conduct its business in the shadows.
But this all came at a price. Following the news, PSG rocketed 19% to an intraday high of R106.99. However, at the time of writing, the stock has given back all its “project value unlock” gains and is trading at R84.96, barely 3.8% higher than before the announcement. Year to date PSG is down 5.5%.
At the time of the announcement the discount to the SOTP narrowed sharply on the proposal to unbundle stakes in Curro Holdings (63.6%), CA&S (47.9%), PSG Konsult (60.8%) and a slug of its 42.9% stake in Stadio as well as its 20.4% stake, gained from the Zeder unbundling, in agricultural counter Kaap Agri.
News of the unbundling weighed heavily on many of these JSE-listed counters as the market considered the impact of this enormous liquidity event. Portfolios gaining the stock, should the vote on the PSG deal succeed, would be overloaded with stock. Most prices have weakened materially.
In the remaining PSG “rump” would be the remnants of Zeder Investments, a 17.8% stake in Stadio, BEE company Dipeo, all the assets within private equity subsidiary PSG Alpha and cash of about R3bn. Elements of the institutional market believed the R23 rump buyout cash offer left too much fat on the table for PSG. Sister publication FM believed R2.7bn was what PSG wanted to keep as extra fat for itself to unravel the 27-year-old listed stock. PSG countered that it had to make provision for the cost of unbundling and the tax consequence.
This is valid, but IM thinks that PSG seems to be keeping a bit too much jam for itself. A further twist, which this analyst commented on in June, was that after the value unlock announcement, many of PSG’s underlying holdings paid out substantial dividends. That sum, IM calculates, was R953m, which equates to 426c per share given the shares in issue. Even being conservative and deducting dividend withholding tax, a further 341c per share, or R762m, would have been added to PSG’s substantial cash war chest.
IM questions if this dividend expectation was factored into the original March 1 buyout offer set at R23. If not, and a sum of nearly R1bn has flooded into the PSG purse since the deal announcement, then IM believes shareholders should chivvy PSG ahead of the deal vote to cough up some of the additional 14.8% in dividend value to the R23 offer that has accrued to PSG.
It’s a game of chicken, given the interconditional nature of the deal. Who has more to lose?
The R23 offer, IM now believes, looks rather skimpy and IM expects there to be much grumbling when the vote comes.
It’s a game of chicken, given the interconditional nature of the deal. Who has more to lose? If the deal vote carries the unbundling but dismisses the cheeky buyout, the entirety of the transaction falls apart. Shareholders would then presumably see PSG’s discount to its asset base widen again, but many of the underlying stocks should rally as the major liquidity event is curtailed.
PSG management, eager to be done with the JSE, would lose the opportunity and would presumably be somewhat disgruntled at having to run a publicly listed entity. Both scenarios are somewhat unappetising.
An elegant solution, but one that IM believes is a long shot, is for PSG to revise its R23 offer to give some of the R1bn in dividends back to shareholders to sweeten the deal. The next few months ahead of the vote will be interesting.
PSG Group, trading at R84.96, has it all to play for. The stock is off its recent high and IM puts out this special situations recommendation that there is more value within PSG Group than is reflected in the R23 buyout offer. A sweetened pot would see PSG rally. IM places a speculative buy on PSG Group.
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