Are PSG shareholders sacrificing too much — perhaps as much as R2.7bn — if they back proposals to unlock value in the group’s deeply discounted investment portfolio?
Admittedly, this is not a question on all investors’ lips at the moment, and the issue wasn’t raised at the group’s short investor presentation last week. But there have been some stirrings on social media, with estimations that PSG minority shareholders might be leaving quite a chunk of value on the table for the founding Mouton family, friends and senior executives to unlock in future years.
So far, though, PSG’s radical restructuring proposals, which entail unbundling most of its positions in JSE-listed companies and then buying out minority shareholders, have mostly been lauded by the market.
PSG has cleverly proposed an indivisible transaction, which means shareholders cannot support the unbundling of various entities and then decline the cash offer for their shares. It’s a take-it-or-leave-it option, and there is no real choice for shareholders, as a “leave it” decision would simply restore the deep discount the market has placed on PSG’s sum-of-the-parts (SOTP) valuation. It also seems unlikely that more audible carping from shareholders would result in the terms of the proposals being tweaked.
On paper, though, the cash offer for the remnants of PSG is distinctly light. It comes after the unbundling of large holdings in financial services group PSG Konsult and private education business Curro, as well as smaller positions in tertiary education business Stadio, agribusiness Kaap Agri and fast-moving consumer goods distributor CA Sales.
The cash offer is being pitched at R23 a share, which places a value of R4.8bn on the slimmed-down PSG. But the group’s remaining listed holdings in agribusiness Zeder (pregnant with a large special dividend) and its retained stake in Stadio are worth more than R3.1bn alone.
Then there are unlisted investments like retirement home business Evergreen (valued at almost R1bn), distance education specialist Optimi (R562m), Energy Partners (R379m) and various smaller holdings worth almost R340m. That adds more than R2.2bn to the pot, with other net assets — including a substantial cash holding — reflected as R3.6bn.
CEO Piet Mouton estimates the group has paid more than R6.2bn in dividends and R700m in special dividends in the past 26 years
So PSG will, after its extensive unbundling exercise, hold a portfolio and asset value of about R7.7bn (stripping out the value of the recently unbundled Kaap Agri shares from Zeder), which will be subject to a cash offer pitched at a discount of about 38%. That seems like a bargain for the PSG family and friends who are staying aboard the unlisted vehicle, which will include stakes in promising businesses like Zaad (held inside Zeder), Stadio, Evergreen and Optimi.
Context, of course, is important. PSG’s proposed value-unlocking exercise effectively represents a premium of over 40% to the group’s ruling price before the restructuring was announced in late February. The news — which pushed PSG’s share price from R81 to R97 — equated to a R3.3bn value uplift in PSG’s market capitalisation.
Historically, PSG has also rewarded its shareholders well. CEO Piet Mouton estimates the group has paid more than R6.2bn in dividends and R700m in special dividends in the past 26 years. That’s R265m a year from a company that carried a market value of about R30m when founder Jannie Mouton took over the old PAG listing in 1995.
It’s also worth pointing out that R21bn was created for shareholders when PSG unbundled its holding in Capitec Bank in 2020.
The scoreboard will show that PSG has managed a total return of 28% a year since February 2010, when the current management took charge, and a sprightly 38% since its inception in 1995.
These achievements — and there is certainly not another JSE-listed company that can match this long-term growth record — might make most PSG shareholders reluctant to quibble at this point about a few billion rands left on the table.
In truth, other options besides the unbundling and buyout offer weren’t practical.
As for growing a PSG Mk2, Mouton has stressed on various occasions that raising capital using deeply discounted scrip is a pointless and costly exercise.
The other option, of PSG selling off all its investments, also has serious drawbacks, aside from the difficulty of marketing certain unlisted assets (like Capespan, Evergreen and Energy Partners) that might not be in the best part of their growth cycle. Mouton says if PSG could sell all its assets, the capital gains tax (CGT) payable would be a whopping R3.4bn, or a 13% reduction in the SOTP value. What’s more, should such cash proceeds (net of CGT) be returned to shareholders, it would result in an additional dividend-withholding tax (DWT) liability of 20% for the ultimate individual shareholders.
Mouton even went as far as presenting an academic scenario involving the buyout of PSG Konsult for a premium price of R18.62 a share. He explains that PSG’s share of such a deal would be R15bn — but would attract CGT of R3.4bn and DWT of R2.34bn. This would leave PSG with a cash exit of about R9.4bn.
The R23 a share buyout offer might be viewed twofold. First, if a slimmed-down PSG remained listed it might well trade at lower than R23 — given that PSG traded at a discount of 40% before its restructuring proposals were tabled. Second, the discount could deepen, considering that further value-unlocking in the short to medium term will be unlikely, with businesses like Zaad, Evergreen, Energy Partners and Optimi needing to either bulk up or find sustainable growth traction.
That said, PSG has shown an uncanny knack of picking winners at an early stage — most notably Capitec and Curro. The Zaad seed business, which is valued at more than R2bn by PSG subsidiary Zeder, certainly looks listable on an international stock exchange. Evergreen and Optimi might be primed for corporate action, both being attractive to larger rivals in their respective fields.
After the unbundling and inevitable delisting of PSG there will still be huge value-unlock opportunities, and perhaps even one or two opportunities that former PSG shareholders might find invest-worthy as new listings to the JSE.
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