Dipula deal no sure thing

Dipula Income Fund’s dual share concept may be outdated, but there are mixed views about whether Resilient Reit’s proposed R1bn investment in the black-managed fund is a win-win for everyone.

If approved, the R1bn equity raise and share buyback scheme will make Resilient a sizable shareholder of Dipula. More importantly, it will pave the way for Dipula to collapse its split A and B structure.

The deal essentially involves two interlinked parts. First, Dipula will become a 50% co-owner of Resilient’s Circus Triangle mall in Mthatha in the Eastern Cape in exchange for a chunk of Dipula B shares. This part of the transaction is valued at R400m. Second, Dipula will do a R595.5m equity raise, underwritten by Resilient.

The upshot is that Resilient will gain a stake of between 15% and 30% in Dipula — depending on what portion of the equity raise it takes up — as well as a seat on its board. The deal is subject to Dipula using the proceeds of the equity raise to simplify the unpopular dual capital structure by way of a share repurchase and/or swap scheme.

Dipula’s offer to A shareholders as it stands now is to buy back their shares for a cash price of R6.61 a share or, alternatively, to exchange A shares for B shares at a ratio of 2.2 B shares for each A share.

The deal can only proceed if at least 50% of Dipula’s shareholders (A and B combined) approve the capital raise and the issuing of additional B shares to fund the stake in Resilient’s 33,820m² Circus Triangle mall. In addition, at least 75% of shareholders need to approve the collapse of the dual share structure.

The problem is that there’s a view that Dipula A shareholders may be short-changed in the current pricing terms. Sesfikile Capital director Evan Jankelowitz points out that the cash offer of R6.61 is a sizable 16% discount to the clean price, while the share swap offer represents a 4% discount. He says: "Holders of A shares are being offered a discount to current prices while also giving up the preferential right to dividends and the earnings protection they now enjoy." Jankelowitz says Sesfikile, which holds shares in Dipula, understands the difficulty in operating a company in the current climate with a dual share structure and therefore is not opposed to collapsing the structure, "provided it’s done under the right circumstances at the right price".

Dipula is one of fewer than a handful of property stocks that still offer investors the choice of two shares. The practice, which is unique to the SA listed property sector, was introduced nearly 20 years ago to cater for investors with different risk profiles.

A shares are typically favoured by investors with a low appetite for risk, as these shares have a preferential right to dividends, with annual growth typically capped at the lower of 5% or the consumer price index. A shares are therefore regarded as a good alternative to bonds and cash for pensioners or other income-dependent investors looking for a predictable annuity-type cash flow.

B shares are the higher-risk option, as they receive the balance of the distributable income only after A shareholders have been paid.

When a real estate investment trust (Reit) and its underlying assets perform well, the upside for B shareholders is amplified. But during tough times, the downside for B shareholders is equally pronounced, as has been the case in recent years. In fact, Dipula B shareholders received zero dividends last year.

Though management has indicated that dividend payouts to B shareholders will be resumed for the year to end-August, Stanlib portfolio manager Ahmed Motara says not everyone is in favour of collapsing the dual share structure. He says: "There are different reasons for investors to hold the A or the B shares."

Motara adds that there are also differing opinions about what the intrinsic value of Dipula’s A shares is and what a fair offer price and share swap ratio are.

However, he believes it will ultimately be in the best interest of all Dipula shareholders to collapse the A and B structure. He says: "There is a tacit acknowledgement by many market participants that the A and B structure is archaic and introduces unwanted complexity, as well as potentially prejudicing one share class from participating proportionately in the underlying distributable income of the company."

Dipula CEO Izak Petersen concedes that the proposed share buyback and swap offer constitute a discount to the share price, but says the long-term benefits for all shareholders far outweigh the short-term downside for A shareholders. He says A and B investors will inevitably pull in different directions. "But the reality is that we need to do something to align everyone’s interests and ensure the company remains sustainable."

Petersen says it is a fair deal. "We wouldn’t have proposed it to shareholders if it wasn’t," he says. "Yes, A shareholders will lose out on a guaranteed income stream. But the dividend entitlement creates a false sense of security." He explains: "If we continue with the dual A and B structure, we may no longer be able to trade as a viable concern or pay any dividends."

Petersen blames the dual share structure for the nearly 40% discount to NAV at which the company (the aggregate of A and B shares) is trading, which he says makes it extremely expensive to raise capital to maintain and grow Dipula’s assets. "We have one of the lowest gearing levels in the sector, yet we are trading a far deeper discount than any other Reit."

He says it won’t make sense to try to shore up cash reserves by selling Dipula’s assets at what is likely to be a discount in this weak trading climate. He maintains that simplifying the company’s share structure will boost liquidity and tradability, "which in turn should lead to a healthy rerating of the share price".

Shareholders will be asked to vote on the deal in January.