Why PSG is ending its 27-year JSE run

There will be cheers and tears over the decision by PSG Group to unbundle and delist from the JSE. Inevitably, there may even be a few jeers.

Yet PSG, without question, has been one of the most successful investors — and investments — on the JSE, ever.

In 2015, when PSG was arguably at its pinnacle, then chair and founder Jannie Mouton noted that on a total return index capital — growth and dividends — the group had grown at 50.8% a year over the 19 years since its formation.

In other words, had you bought R100,000 worth of PSG shares in November 1995 (when Mouton and friends took over recruitment business PAG) and reinvested all your dividends, your investment would by 2015 have been worth an astonishing R279m.

"It was an incredibly hard decision to delist," says CEO Piet Mouton, Jannie Mouton’s son.

"The PSG group has been part of our family for over 25 years ... so much so that my dad would speak about the business at family braais. It was like his favourite child and my sister once had to remind him he had other children," he tells the FM.

Considering the scale of this week’s value unlock, which translates into a huge premium to the average share price of the past few months, major gripes seem unlikely.

Before the deal was tabled, PSG was trading at a 35% discount to its sum of the parts (SOTP) value of R124 a share.

In other words, says Mouton, "if an investment holding company was to raise R100 while trading at a 30% discount, it would be worth R70 immediately thereafter — that is serious value destruction".

The discount, he says, "leads to investment holding companies hoarding cash for potential future transactions, thereby becoming significantly more conservative. Cash diminishes returns and combined with greater conservatism in managing the portfolio, it reinforces the discount principle."

After all, one of the reasons to be listed as an investment holding company is to raise capital on equity markets to do deals.

It wasn’t always this way either: PSG, in the past, was extremely successful in capital raising, occasionally using a share price that traded at a premium to its net portfolio value.

Over the years (see accompanying timeline), PSG has given rise to a slew of listed investments. The most successful of these was its starting up and listing of Capitec Bank in the late 1990s.

From a single branch in a busy working-class node of Cape Town’s unfashionable northern suburbs, Capitec has grown into one of the biggest banks in SA and still gives headaches to its older rivals like Absa, FNB, Standard Bank and Nedbank.

PSG also spawned agribusiness investor Zeder (which nurtured Pioneer Foods until its recent sale to PepsiCo) and financial services conglomerate PSG Konsult, as well as private education ventures Stadio Holdings and Curro.

Lesser-known achievements have included turning spectacular profits on short-lived investments in technology business EOH and the old JSE Ltd as well as, if rumours are to be believed, unlisted Keeromstraat 30 Beleggings shares (which attached to the control structure of Naspers).

Of course, PSG did not always get its way. A notion to merge liquor group KWV into Pioneer Foods’ Ceres Beverages was scuppered, and short-lived PSG Investment Bank ended underwhelmingly when it was bought by Absa.

Chris Logan, chief information officer of Opportune Investments and an investor who has endured several altercations with PSG over the years, says a bold move to unlock value is commendable — but it’s a great pity PSG intends leaving the bourse.

"It’s undoubtedly been the most dynamic investment house on the JSE. It’s sad that the JSE will no longer be hosting a company that is probably still capable of bringing the next Capitec to market. In fact, the JSE really needs 20 more companies like PSG."

That said, Logan says it was clear to most observers that there was a change in demeanour among PSG’s leadership — especially Piet Mouton — around being listed, which was not helped by increasingly restrictive levels of regulation. Mouton said last year: "We are concerned about the ever-increasing red tape at a government level, but it is a worrying level of red tape that we now see at the JSE."

This week, he told the FM it is "restrictive" to hold a 15% (of portfolio value) cash buffer, adding that PSG has become hesitant to make new investments as cash might not be easily accessible again.

"Inactivity makes the business unexciting. We could have maintained the status quo and kept going. But it does not feel right for the management team being remunerated while waiting for market sentiment to change."

Mouton also deplored the many listed holdings in PSG, which in effect allow investors to customise their own PSG portfolio.

PSG had already seen the benefits of unbundling its Capitec shareholding in 2020, where a chunky bit of value was unlocked for PSG shareholders.

At the end of the financial year to end-February 2021, the Capitec unbundling represented a value unlock of R21bn, or R94.48 a share, to PSG shareholders. Even after the ravages of Covid, shareholders who kept their Capitec shares — and assuming the historic SOTP discount — are looking at a value unlock of R16.9bn, or R77.57 a share.

While PSG shares shot up 19% on the news, the company’s unbundling isn’t entirely unexpected. There were several clues around a pending radical restructuring at PSG when the group, after unbundling Capitec, adopted an ad hoc dividend policy and stopped all share buybacks. It also made its first moves in terms of a structural cleanup by buying back all its perpetual preference shares last year.

Anthony Clark of SmallTalkDaily Research concurs. "As a R19bn investment business [after the recent unbundling and subsequent sale of its holding in Capitec Bank] PSG was stuck between a rock and hard place. It would have needed a heap of cash to build the business up to scale again."

The main part of the proposed restructuring will see PSG unbundling its 60.8% stake in PSG Konsult (worth about R11bn) in the ratio of 3.87 shares for every PSG share held, and its 63.6% stake in Curro (R4.8bn) in the ratio of 1.8 shares for every PSG share.

PSG intends to keep its stake in Zeder, where it still has plans to maximise value for the portfolio, which includes seed business Zaad and fruit marketing giant Capespan. But Zeder will unbundle its stake in listed agricultural services business Kaap Agri, and PSG in turn will unbundle the Kaap Agri shares to shareholders. PSG will also unbundle its 47% holding in CA Sales Holdings, the Botswana-based fast-moving consumer goods distributor which intends to supplement its existing alternative bourse listings with a JSE listing.

As for Stadio, PSG shareholders will get 25% of the company. PSG says Stadio is still at an early point of its growth trajectory — which includes building two private university campuses — and will probably still need support from an anchor shareholder.

Mouton stresses the decision around the unbundling proposal was not taken easily. "It’s like breaking up with a longtime girlfriend and saying: ‘It’s not you, it’s me.’ We had to break up with five different longtime girlfriends."

He does point out that various scenarios were considered but that, in reality, there was no other elegant solution for shareholders.

PSG did consider buying back its shares, but Mouton argues that even a big spend on share buybacks would have a negligible effect on PSG’s SOTP value. "If we buy back R1bn of shares, we increase the SOTP value per share by about 2%, and if we use all our cash resources to repurchase shares, the SOTP value per share will increase by about 6%."

There was also the option of taking the various listed investments private, but buying out minority shareholders at decent premiums would have required a serious pile of cash.

Shareholders are receiving quality businesses in the unbundling — well-established businesses with strong balance sheets and no immediate requirement for additional capital. In other words, these no longer need an anchor shareholder to continue growing.

There is further comfort for shareholders in that the controlling consortium of PSG — including the Mouton family — will remain long-term shareholders in all these businesses.

Mouton estimates the collective value of the proposed unbundling transactions is about R91 a share, with PSG offering minority shareholders R23 a share in cash for the remaining interests, which include the majority stake in Zeder, full control of PSG Alpha and a R2.9bn cash pile. The total offer of R114 a share represents a 38.4% premium to the pre-announcement share price, but does lag the end-February SOTP figure of R124 a share.

A back-of-matchbox calculation will show that just the cash pile (worth about R13.80 a share) and the holding in PSG Alpha (worth R10 a share, stripping out the maintained stake in Stadio and unbundled CA Sales) equal the cash offer buyout.

Some punters might argue that after PSG’s record of long-term value creation it would be petty to begrudge any perceived upside on the remaining bits and pieces. PSG might also point out that a number of the unlisted assets carry substantial risk.

Clark says any quibbles about the R23 a share cash offer not representing full value for the remaining assets would be viewed against the terms of the indivisible transaction. "Basically, if shareholders don’t support and approve the proposed deal, they don’t get to unlock the 35% discount on the mostly listed investments ... which is where the bulk of the value lies."