Long4Life (L4L) and PSG Group are two very different investment counters but they face the same dilemma: winning over the market. For the moment, neither seems to be doing that.
But the question for investors and would-be buyers is, which company has the likelier chance of a major value unlock? PSG, with its spread of listed businesses, or L4L, which has now received an "expression of interest"?
Both companies have recently had a market run — PSG Group is up 30% year to date, while L4L has rallied 56%.
Not too long ago, PSG traded at a premium to its sum-of-the-parts (SOTP) value, but now it trades at a discount of around 30%.
L4L, which caused a buzz of excitement when it listed in 2017, offers a similar knockdown price on its NAV.
Most investment trusts trade at deep discounts to intrinsic NAV, but perhaps PSG and L4L should be accorded more market respect.
The prime players — L4L’s deal-making doyen Brian Joffe and the Mouton family at PSG — are known as movers and shakers, and have long and impressive track records of adding considerable value to acquisitions.
PSG was instrumental in backing Capitec Bank (subsequently unbundled and the remnants disposed of). Group CEO Piet Mouton justifiably describes this venture as "the best business developed in SA in the last 20 years".
PSG has also enjoyed success in the private education segment with Curro and Stadio, in agribusiness with Zeder and a more gradual value accumulation with financial services business PSG Konsult.
Paul Whitburn, portfolio manager at Rozendal Partners, says the question for investors is if PSG was a "one-trick pony" with Capitec.
But he argues that though some of PSG’s assets are under pressure, its capital allocation is still rational. "PSG will do the right thing."
Joffe’s track record with acquisitive Bidvest/Bidcorp, of course, is the stuff of legend.
Both groups are acutely aware of prevailing market perceptions and both have considerable firepower on their balance sheets to fight a long battle in the value trenches. But they appear to be following divergent strategies to unlock and build value.
The biggest difference between PSG, which has a market value of more than R17bn, and L4L, with a market value of R3.6bn, could be seen in the "body language" of the respective CEOs at recent investor presentations.
Mouton was circumspect and world-weary; Joffe was ebullient and enthusiastic. No surprise, then, that more than a few cogs are spinning at L4L, while PSG is watchful and staid.
In fact, Mouton hardly exudes enthusiasm for deal-making at all, which was evident when he was asked about keeping PSG listed in the future. Over and above government bureaucracy tangling up local businesses, he spoke of worrying levels of red tape at the JSE.
"We have spoken to the JSE … we can’t have a system where being listed puts that company at a disadvantage to companies that have other forms of shareholders."
It’s difficult not to see that as PSG hankering after private equity status in an unlisted space.
Yet PSG, in stark contrast to L4L, also holds the bulk of its investments in the listed space — the biggest being PSG, Konsult (R10bn), with large holdings in Curro (R4.3bn) and Zeder (R2.4bn).
PSG’s unlisted investment nursery, PSG Alpha — which at R4.2bn is bigger than the market value of L4L — actually has more than 40% of its value residing in listed investments like Stadio and fast-moving consumer goods business CA&S (listed on the Botswana Stock Exchange and Cape Town Stock Exchange).
Mouton said "various value-enhancing initiatives" are being considered — including the possibility of unbundling other listed investments, but he refused to elaborate.
One would suspect that PSG Konsult, which is unlikely to need the support of a parent company for future fundraising endeavours, would be the obvious candidate for unbundling.
Zeder looks like it could take a different form if unlisted investments like Capespan and The Logistics Group are sold. A smaller Zeder could be bought out by PSG, which presumably would prefer to hang onto Zeder’s promising Zaad division, the large seed and chemicals business. It might look at unbundling the large stake in listed agriservices business Kaap Agri. But none of these possibilities appear to be on the short-term horizon.
Curro and Stadio are both at critical junctures, and it seems unlikely PSG would look to unbundle either of these at present.
Yet unbundling has worked nicely for PSG in the past. According to Mouton, if PSG shareholders had retained their Capitec shares (and assuming a 32.5% discount to SOTP) that value unlock currently comes in at a rather nifty R16.9bn, or R77.57 a share.
PSG was also able to cash in its last Capitec shares to buy back all the PSG Financial Services perpetual preference shares. Mouton emphasised that this creates flexibility for cheaper funding should the need arise.
Interestingly, PSG has stopped buying back its own stock. Mouton said: "If we buy back R1bn of shares, we increase the SOTP value per share by around 2%, and if we use all our cash resources to repurchase shares, the SOTP value per share will increase by around 6%. We believe such an increase … does not justify the significant reduction in financial flexibility."
Like L4L, PSG’s underrated shares mean it can’t use its own scrip to raise fresh capital, as it has done in the past. But perhaps the bigger problem is that it can’t see anything to buy.
Mouton said PSG has not found any new opportunities that met the group’s investment criteria, citing red tape, the difficulty of doing due diligence in the Covid environment and pricing mismatches.
But PSG needs to bag a significant deal to move the needle on a R24bn investment portfolio. At this point the FM reckons it is most unlikely that PSG will pursue a large investment. There might be more merit in scaling up smaller PSG Alpha investments like retirement village specialist Evergreen, energy management company Energy Partners and distance learning specialist Optimi, as well as bulking up the stake in CA&S.
Curiously, PSG’s potential deal war chest (worth R4bn, if it gears up its R2.6bn cash pile) would, technically speaking, be enough to buy L4L at a small premium.
But L4L will certainly not negotiate its sale (and certainly not to PSG, for that matter) at a small premium — at least judging by Joffe’s newfound enthusiasm for group prospects.
Whoever has made an expression of interest for L4L will need to fork out at least NAV. The emergence of a potential suitor is surprising, considering L4L’s mix of assets: retail (Sportsmans Warehouse and Outdoor Warehouse); health and beauty (Sorbet); beverages (Inhle and Chill); specialised health care (Clayton); and niche footwear (Veldskoen).
Unlike PSG, which holds a number of high-growth positions, most, if not all, of L4L’s portfolio are solid, dependable cash flow generators rather than "shoot the lights out" possibilities.
Still, it is incredible to think that Joffe — who has acquired more companies in his corporate career than anyone else on the JSE — is now a takeover target. The buyer is unlikely to be any of the large investment counters on the JSE. Hosken Consolidated Investments still has too much debt to contemplate a large acquisition, and Ethos Capital Partners has its hands full unlocking value at Brait.
L4L’s investments simply don’t slot in comfortably with existing portfolios at Remgro, Sabvest and PSG. There has been speculation that fashion retailer Mr Price could be interested in L4L, specifically its Sportsmans Warehouse and Outdoor Warehouse offerings.
The FM suspects the bidder might, instead, be a private equity company.
Joffe said the potential bidder is a "credible party" — but emphasised that the deal needs to be done "in a proper manner". If a deal is hovering in the background, L4L is certainly not closing up its other options of value unlocking and growth.
Joffe said last week: "It’s nice to be here, and nice to remain here. We are built for growth, and that’s what we are going to do. We are going to do our very best to get growth over and above everybody’s expectations … including our own."
It’s still business at usual at L4L: "We signed an offer for a business [recently] … and we’ll continue to do that," said Joffe. The group sits with cash of R667m, and Joffe estimates that, with leverage, the firepower for deal-making is R1.5bn.
While Joffe sounds more chipper about life, it’s been a hard slog. L4L exited its position in City Lodge (though at a respectable profit), and the group has dabbled in Clover and Spur Corp, to no real effect.
Joffe also made it clear that L4L’s strategic review is ongoing. The smart money suggested L4L would separately list the sports and outdoor retail segment, allowing this hub to bulk up through selected acquisitions. The sports and leisure segment is jogging along strongly, and with Sportsmans Warehouse set to introduce a new (smaller?) trading format, there could be an extra dash in earnings in the years ahead.
The remaining bits of L4L would then present an interesting proposition. If a discount persists on the collective portfolio value, it may make sense to take the business private. Then again, a smaller portfolio could make deal-making easier, allowing it to build more formidable operating pillars, as Bidvest did in its early days.
Joffe still bemoans the fact that L4L isn’t well "understood" by investors. But if that suggests capitulation, then consider his determination to impress the market.
"Who knows where this thing will go … end of the day we will do the right thing for all stakeholders," he said.
PSG, on the other hand, is a play for time — with a two-year deadline, as it turns out.
Mouton explained: "We are looking at a number of opportunities. We need to retain cash for financial flexibility. But it has a shelf life, and we will have an obligation to return a significant portion of cash to shareholders."
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