Brian Joffe casts out for the big fish

Long4Life — the "small" investment company headed by deal-making doyen Brian Joffe — is hoping to find a great big acquisition to catapult it to another level in the next few months.

This was the word from Joffe at Long4Life’s investment presentation last week, an event that suggested there was some sheepishness that the company was still sitting on more than R1bn in cash and had not met the market’s expectations of making rapid acquisitions.

This seems clear from the fact that since listing in 2017, Long4Life’s share price has tumbled 26.1%. In that time, Joffe’s company has invested in many lifestyle-orientated companies — sports and outdoor retailing as well as cosmetics and beauty therapy, niche beverages, health care and footwear. Still, investors have been waiting for the "big one" — the life-changing acquisition to carry the company’s longer-term strategy.

Thankfully, Joffe reiterated that Long4Life is not keen to make a series of small acquisitions.

At the end of February, Long4Life’s cash balance was R1.1bn. With gearing, the company could probably make an acquisition of R2bn, and possibly up to R3.5bn, if it can mobilise scrip or issue new shares for cash.

The last two options seem unlikely at this point, with the stock priced at a lowly five times earnings before interest, tax, depreciation and amortisation multiple — too cheap a level to issue new shares.

In his commentary on the financial results, Joffe said that Long4Life had looked at several opportunities in the past year, but "sellers’ expectations and asset valuations have not reflected the difficult economic climate and in many instances have not met the group’s valuation criteria".

In other words, sellers want too much money. But presumably, as the tighter economy pinches and political uncertainty rattles business confidence, vendor expectations will be tempered.

Investors will be reassured that Joffe isn’t willing to overpay. Brokerage Vestact described the numbers last week as "decent", pointing out that it’s a "solid SA Inc play".

It added: "They are in all the right areas and management have a great track record. It is small and not very liquid, but if you think the SA middle class is about to thrive, you should buy some of these shares."

This is especially if you believe a big opportunity is just over the horizon. But Joffe is also acutely aware that a mistimed advance would be devastating to investor sentiment.

Last year, Long4Life walked away from a R3.9bn acquisition of footwear brands business Rage Distribution, because it didn’t meet the company’s demanding investment criteria.

But with an open brief to invest in the "broader lifestyle segment", Long4Life is a dream counter for excitable market watchers prone to wide speculation.

Joffe’s preference to snag the big fish also runs counter to his track record at Bidvest, his former business. There, he stitched together a series of rapid small acquisitions of cash-generative companies, with strong and entrepreneurial management.

One intriguing "small" investment that Long4Life has made is its 36% stake in ClaytonCare health-care group — a subacute medical rehabilitation group with 83 beds.

Joffe described the deal as "opportunistic", but he did tell investors that there might be an opportunity to build a platform at ClaytonCare.

This is a highly specialised medical investment. But if Long4Life is still a willing opportunist, it may consider a shot at another specialised medical services business, like JSE-listed day clinics specialist Advanced Health. Advanced, which is now valued at just R215m, has been struggling for profitable traction as it rolls out its facilities in SA.

Interestingly, tucked away in Long4Life’s cash flow statement was a line item of R25m, recorded as the "proceeds on disposal of investments". Quizzed about this at the investor presentation, Joffe explained that it was the profit on the sale of shares in the JSE-listed beverages group Clover.

"We saw Clover as an opportunity and took a small stake. I was stupid enough to sell early."

Presumably, Long4Life bought shares ahead of the recent takeover bid when Clover’s market value ranged between R2bn and R2.5bn.

One has to wonder whether Joffe had bigger plans in terms of mixing the dairy-aligned beverages company with Long4Life’s existing beverages interests in Inhle and Chill. If anything, the Clover dalliance confirms that Joffe’s deal-making instincts are as sharp as ever.

Not that there aren’t other opportunities out there. These include fast-food operations like Burger King (owned by Grand Parade Investments) and Starbucks (Taste Holdings) or even Pioneer Foods’ beverages division (Ceres and Liqui Fruit).

A more realistic option — at least in the FM’s view — might be tilting at poorly valued but profitable counters like Nu World (consumer goods), or Brait’s stake in Virgin Active.

Though the focus is on Long4Life’s "big deal", the assets it has already assembled are doing just fine.

The sports and recreation hub (largely the Sportmans Warehouse and Outdoor Warehouse businesses) generated R2.1bn in revenue and R321m in trading profit (at a 15% trading margin) last year. Equally, the beverages segment managed revenues of R1.35bn at a trading margin of 11% for trading profit of R153m, while the personal care operations (mainly Sorbet) generated revenue of R173m and trading profit of R38.9m (giving it a margin of 22%).

Cash flows from operations were reassuring at R465m — equivalent to 102% of trading profit.

These fundamentals might not be front of mind for investors right now, but may be eyed more critically should the Long4Life share price drift down, if there is a delay in executing on a large acquisition.