Investment group PSG has issued its “restructuring” circular, and there’s no indication that shareholders will be in line for any additional sweeteners in the unbundling and buyout processes.
Independent expert BDO declared PSG’s restructuring offer to shareholders fair and reasonable, citing an indicative value range of between R97.16 and R109.11 a share. The “most likely” range was set at R102.95 a share.
Still, there have been a few dissenting voices. The FM (“PSG’s R2.7bn Tip to Itself”, Money & Investing, May 5-11) asked if PSG minority shareholders were sacrificing too much — perhaps as much as R2.7bn — if they backed proposals to unlock value in the group’s deeply discounted investment portfolio.
Since that article, there has been a gradual groundswell of grumbling — particularly that the PSG rump, the interests left after the unbundling of the group’s main investments — is worth considerably more than the cash offer of R23 a share.
For the record, PSG is proposing unbundling its interests in financial services hub PSG Konsult, private schools business Curro, agriservices business Kaap Agri and Botswana-based fast-moving consumer goods business CA Sales as well as a partial unbundling of its holding in private tertiary education business Stadio.
PSG proposes paying R23 a share to buy out the remaining parts — most notably agribusiness investor Zeder (which owns seed business Zaad and fruit marketing specialist Capespan) as well as unlisted holdings in PSG Alpha which include Energy Partners, distance learning business Optimi and retirement village developer Evergreen.
Any sudden misgivings around the PSG offer, the FM suspects, might stem more from developments since the unbundling details were first tabled rather than giving up any upside in Zeder and PSG Alpha. At the end of February this year the unbundled share portions were about 8% higher than at present — and that includes the baffling spurt in the share price of CA Sales since listing on the JSE, from under 500c to more than R15.
The three biggest constituents of the unbundling have all suffered marked dips in their respective share prices. PSG Konsult’s share price has dropped from R13.74 to R10.97. It now represents about 42.5% of the value of the unbundled constituents against 53% at the start of March. Curro has seen its share price drop from R13.45 to under R10 — meaning that its initial indicative unbundling value of R24 a share has dribbled down to just R17.30 a share.
Kaap Agri’s shares have slipped from R51.20 to R38.50, and now represent just 476c per PSG share against 633c at the beginning of March.
Overall, the value of the unbundled portion plus the R23 a share offer price now tally up to just under R106 a share from R115.59, when the unbundling proposals were announced. What is interesting is that the initial post-announcement trading price of R97.15 represented a 15.5% discount to the inferred unbundling and cash offer value. At the time of writing, that discount has widened to more than 20%.
The buckling of the Curro, PSG Konsult and Kaap Agri share prices is perhaps not surprising. Aside from some serious jitters in the equity markets, there is a justifiable concern that the unbundling exercises could create an overhang in these share prices. It’s not a stretch to claim that a good number of shareholders were content to hold shares in PSG, because it offered a diversity of assets as well as a renowned team of dealmakers. Some of the unbundled shares might not appeal to PSG shareholders, who may be tempted to sell these off soon after the unbundling exercise is completed.
But back to the R23 a share offer for the leftover rump of PSG. With BDO’s fair and reasonable pronouncement confirming the PSG offer (at ruling market prices) is still at the upper end of the value range, there might be less carping about the quantum of the cash offer.
A PSG insider confirmed that PSG will probably use all of its cash holdings to buy out minorities, and may have to take on some gearing for ongoing funding of the remaining investments. He also argued that shareholders needed to be aware of the drop in share prices of PSG’s listed investments. “If the listed investments have lost value in a tougher economic climate then surely one needs to presume that the unlisted investments (in Zeder and PSG Alpha) have also lost value. There is significant risk in this portfolio of businesses.”
In truth, none of the unlisted investments, except perhaps the rapidly expanding Zaad, has shot the lights out in the past few years. It seems likely more funding will be needed for Energy Partners and possibly Evergreen, while Zaad probably needs to bulk up markedly before it can contemplate a listing on an international bourse. Capespan has been up for sale, but it seems clear prospective buyers are not prepared to fork out what PSG/Zeder deem proper value.
No doubt shareholders at next month’s general meeting will voice misgivings about the scheme structure, and especially whether the R23 a share offer for the mainly unlisted investments is really fair. The PSG insider notes: “These, of course, are valid questions. But there are complex answers.”
Perhaps the easiest question to ask is: what would happen to PSG’s share price if the unbundling and buyout proposals, which have been presented as a “take it or leave it” option, are shelved? The FM would venture to say that a 40% discount to the sum of the parts value is probably the correct answer.
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