Remgro’s unbundling of RMB Holdings (RMH) is not the beginning of the end for one of the JSE’s oldest investment companies, according to CEO Jannie Durand.
Remgro, started by the Rupert family in the late 1940s, has after all been one of the most enduring counters on the exchange.
"We think we can still add value to the underlying investments … some of our companies are in tough spots at the moment," says Durand.
But the proposal to unbundle its 28.7% stake in financial services group RMH (the parent company of banking giant FirstRand) and a direct 3.9% stake in FirstRand is indeed profound.
It is certainly the boldest move since the "enforced" unbundling of British American Tobacco in 2008, and far more significant than other previous unbundling exercises like Impala Platinum and Trans Hex Group.
It has also prompted speculation about what else might be cast off.
The wheels usually move very slowly at this investment behemoth, which holds a portfolio with a net value of more than R130bn.
But the FM’s contention in late September (see "Rumbling over Remgro", Money & Investing, September 26-October 2) that investor impatience with its deep share discount could lead to profound changes has proved to be prescient.
The RMH/FirstRand proposal is also well timed, coming just a few weeks ahead of Remgro’s AGM.
Remgro executives recently faced a grilling at the hands of some shareholders after the release of year to end-September numbers. The main bone of contention was whether "structural deficiencies" at Remgro were causing a wider share price discount on the reported intrinsic NAV.
One specific criticism from Shane Watkins of All Weather Capital was that "these days investors don’t like pyramids at all. They don’t even like two-level pyramids. But in your case you have numerous three-level pyramids [i.e. RMH]."
The RMH (and FirstRand) unbundling proposal should take some sting out of the AGM — though shareholders might still be keen to know whether Remgro is mulling further portfolio restructuring.
At the investor presentation in September, Durand disclosed that the board had discussed the structure of Remgro. But he indicated there was still a firm belief that the holding company added value to its underlying investments. "If we don’t add value, we need to reassess our role in that company."
He also called for patience, stressing that any efforts to resolve structural deficiencies would not happen overnight. "We are looking at it critically. But it would be unfair in an open analysts’ forum to say exactly what would change if we have made any decisions."
Speaking to the FM this week, Durand said the RMH/FirstRand unbundling proposal had not been triggered by the "structural deficiencies" narrative.
"We would not be pressured into a hasty decision by shareholders. We are simply doing what is best for the business."
Some market watchers reckon Remgro’s major stake in RMI Holdings, which has sizeable stakes in listed insurance businesses like Discovery and MMI Holdings (but also holds shares in unlisted Outsurance), might be another candidate for unbundling.
Even after the unbundling, Remgro’s portfolio value will be dominated by listed investments — which include Mediclinic International, insurance hub RMI, liquor group Distell and food business RCL, as well as smaller positions like Grindrod, Grindrod Shipping and Caxton & CTP.
Lentus Asset management chief investment officer Nic Norman-Smith is ambivalent about the unbundling development. "I liked Remgro before the announcement … and I still like it afterwards," he tells the FM.
But he reckons the unbundling could be a catalyst for the market to start acknowledging some of the other parts of Remgro’s sprawling investment portfolio.
At the end of September the "banking hub" was valued at R48.5bn — about 35% of Remgro’s intrinsic value (excluding estimated capital gains tax). This hub, more importantly, accounted for 44% of headline earnings and, by inference, a serious chunk of the dividend flows.
The unbundling will reduce intrinsic NAV to about R90bn, and this means second-largest investment Mediclinic International will account (at this week’s share price) for more than a quarter of Remgro’s intrinsic NAV.
Should Mediclinic increase the pace of its recovery, Remgro may again be burdened with a heavy portfolio weighting in health care (as it did before Mediclinic’s acquisition spree hobbled profit growth).
At last count Remgro’s investments in the four biggest unlisted positions — fibre-optic business Dark Fibre Africa (or Community Investment Ventures Holdings, CIVH), spreads business Siqalo, industrial gases specialist Air Products and energy group Total SA — were collectively worth about R22bn.
At the end of September this would have represented about 16% of the intrinsic NAV estimate. Sans RMH/FirstRand, the unlisted portion will represent about a quarter of intrinsic NAV.
This heavier unlisted weighting might spark increased market interest — especially if Remgro has plans for corporate action at Siqalo (a merger with RCL Foods, which must be ripe for delisting from the JSE, seems logical) and big growth ambitions at Dark Fibre Africa.
Siqalo was last valued at about R6bn, and Dark Fibre Africa (in its CIVH guise) at R8.4bn.
Removing RMH/FirstRand from the equation arguably also makes it easier for Remgro to pursue acquisitions and investments that can move the intrinsic NAV needle.
At the recent results presentation Durand played down the chances of Remgro allocating capital to new investments, though he did concede there were overgeared companies that might offer assets at "good prices".
With cash generation to the centre still compelling, a new-look Remgro might well be a sprightlier beast when it comes to future deal-making.
• The writer holds shares in Remgro
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