Life of Brian: is Joffe throwing in the towel?

Say it isn’t so, Brian, say it isn’t so.

After just four years on the JSE, Long4Life (L4L) — the investment company started by deal-making doyen Brian Joffe — is critically examining its corporate structure.

The delisting hazard lights have come on, especially since other listed investment companies are undergoing similar exercises.

Opportune Investments CEO Chris Logan, a shareholder in L4L, says it would be sad if Joffe was throwing in the towel and planning to delist the company. "You don’t find businessmen with Joffe’s ability very easily … and he’s relatively young compared with Berkshire Hathaway’s Charlie Munger and Warren Buffett. I was hoping to get another 20 good years from Brian."

The problem is that plenty of capital is still leaving the country.

Says Logan: "Hopefully this is a cyclical thing … but it is something that requires hard-headed realism from business leaders like Joffe."

L4L is still suffering from the after-effects of Covid, which had a profound impact on all segments of its portfolio. In short, earnings will be down 24%-32% to a range of 32.5c-29.5c a share for the year ended February.

Meanwhile, among its investment company peers, agribusiness investor Zeder is reviewing its strategic rationale and has received unsolicited offers for some of its investments. Brait is selling assets, and might separately list its consumer brands business, Premier Group.

L4L was one of the most popular new listings in recent years, and easily raised R2bn without as much as a single investment on its books in April 2017. Joffe’s legendary track record in building acquisitive value at Bidvest (and Bidcorp) since the late 1980s had many investors betting on L4L as a fast-growing small-cap play.

But an initial flurry of deal-making slowed in the past two years and L4L has mainly mobilised its large cash pile to buy its own shares on the open market. With the shares sometimes offering a discount of as much as 50%, the company felt share buybacks were the most prudent use of capital.

At the time of writing, L4L shares were at 412c. Understandable then, predictions that this deep discount to NAV (627c a share at last count) would trigger some action. At this point the odds seem to favour an unbundling and disposals, and there is conjecture that this will ultimately lead to an offer to minority shareholders and a delisting from the JSE.

That, however, may be jumping the gun. At this point Joffe — the founder, CEO and meaningful shareholder in L4L — is not ready to engage.

Presumably more detail will be forthcoming in mid-May when L4L releases its final results to end-February.

Officially, the company has engaged Investec Bank’s corporate finance division to advise on its "corporate structure and focus in order to maximise shareholder value".

Joffe’s frustrations aren’t unique.

Investment companies, even such stalwart counters as Remgro and PSG, have seen share price discounts to intrinsic value widen well beyond the traditional 15%-25% range.

The frustration is that L4L attracts a deep discount despite the fact that it offers the only entry point for investors to a selection of fairly attractive unlisted consumer sector assets, such as Sportsmans Warehouse, Outdoor Warehouse, beauty specialist Sorbet and beverages businesses Inhle and Chill.

And considering that the interim earnings number was a fractional 0.8c a share, L4L has made a rather encouraging recovery in the second half as lockdown restrictions were eased.

Joffe indicated that trading performance overall was at similar levels to the comparable six months ended February 29 2020, notwithstanding the impact of Covid on Sorbet and Clayton (health care) as well as the alcohol ban, which would have affected mainly Chill with its focus on mixers.

Joffe did, however, report that operating cash flows during the year were "excellent, with significant improvement in the funds employed across all the divisions".

If the FM stepped into Investec’s shoes, what would be the logical plan to boost value for shareholders?

One nettle that might need grasping sooner rather than later is the beverages segment. While Inhle — largely a contract bottler — seems to produce fizzier profits, Chill — which makes Fitch & Leedes mixers, Score Energy Drink, mineral water, spirit coolers and canned wine — has been worryingly flat over the past two years.

Fitch & Leedes certainly found a niche in the mixer market (tonic water, ginger ale, bitter lemon and so on) but it seems clear that Coca-Cola’s Schweppes has taken umbrage at an upstart eating into its market share.

Chill has to cope with competition from Red Bull and Monster in the energy drink segment, as well as Distell in affordable wine and ready-to-drink beverages.

One solution might entail merging or selling Inhle and Chill into another niche beverages business — either taking a stake in the new enlarged venture or cashing out completely. Such a ploy was followed with some success by packaging group Bowler Metcalf, which merged its Quality Beverages business (soft drinks, mineral water and energy drinks) into Shoreline. Later Bowler sold its stake in Shoreline to The Beverage Co to create a markedly larger player, and returned the proceeds to shareholders in form of dividends.

Sorbet, one suspects, is a recovery play — the length of which will depend on the lingering effects of Covid. While Sorbet’s performance remains subdued, the pre-pandemic business was vibrant, and certainly expandable.

The sportswear and outdoor equipment segments look likely to be star performers in the second half. Would there be a temptation to unbundle and relist these operations back on the JSE?

It would be the third time Sportsmans Warehouse and Outdoor Warehouse returned to the JSE, in slightly different forms, having previously been listed as Moresport and Holdsport.

These niche retail operations have never been rated as highly as Shoprite, Mr Price, Spar or TFG. But they have proved dependable performers with reassuring cash flows and steady margins.

Unbundling the retail segment would perhaps give L4L — which still had cash of more than R800m at the end of August 2020 — more flexibility in deal-making.

If there was any enthusiasm to retain a JSE listing, then a restructured portfolio comprising Sorbet and the small Clayton health and Veldskoen footwear operations would mean that any smaller deals added to the portfolio could move the needle at L4L. The company could also continue its share buyback exercises if the discount to NAV persisted. What’s more, speculative dalliances such as the recent tilts at Clover, Spur Corp (both subsequently sold) and City Lodge might be more significant.

Gut feel is that investors would still back Joffe even if the L4L listing was "scaled down" to allow for a growth and value reset.