Namibian investment company Trustco — fortunate to have been unshackled from a recent R1bn loan made by its founding executive and main shareholder, Quinton van Rooyen — continues to bewilder.
This week Trustco stumped up an eye-popping R2bn to buy loss-making Constantia Insurance, a subsidiary of JSE-listed Conduit Capital. Before the proposed takeover was detailed, Conduit carried a market capitalisation of less than R900m.
Once again this is a curious related-party deal involving Sean Riskowitz, the US-based CEO of Conduit, who is — via a number of investment entities, including Constantia — also a major shareholder in Trustco. Riskowitz is also a 20% shareholder in Trustco’s unlisted Namibian insurance arm, Legal Shield Holdings (LSH), courtesy of a R1.2bn investment that the Riskowitz Value Fund (RVF) made in early 2018. The R1.2bn figure is important, and I’ll revisit it later.
Trustco says it wants to expand its Namibian-based insurance business into SA, where Constantia offers wide-ranging medical cover as well as niche motor and property lines. At face value, Constantia looks a decent little business, with insurance premiums growing from R788m in 2015 to more than R2bn this financial year. Conduit’s annual report sets a five-year strategy to grow to more than R3.5bn in premiums at a 95% (or better) combined ratio (net claims plus expenses divided by net earned premium).
Once again this is a curious related-party deal involving Sean Riskowitz, the US-based CEO of Conduit
In reality, it’s been tough, and during the past financial year Conduit recapitalised Constantia to the tune of R230m, with further liquidity arrangements also put in place. Constantia incurred insurance expenses of R1.17bn versus income from insurance operations of R882m — which meant a substantial underwriting loss of R287m.
What is probably more alarming is that the value of Constantia’s investable assets dropped from R1bn at end-June 2018 to less than R540m at end-June 2019. This was mainly due to operating losses, but also unrealised investment losses resulting from the mark to market of the investment portfolio. This was partly offset by injecting additional capital into Constantia, leaving the equity portfolio with a market value of almost R800m.
Taste of ashes
Conduit does not give away much detail on the investments, but it’s common knowledge that the group has taken a bath on small caps like Taste Holdings as well as, to a lesser extent, Calgro M3, Finbond and, yes, Trustco.
The portfolio probably looks even worse now that Taste has lost pretty much all of its flavour after a costly opt-out from its fast-food strategy. It now has a minuscule market value of less than R90m.
Funny that Conduit’s annual report argues that market analysts tend not to fully understand small or medium companies. "We are not about to attempt to educate the wider market, because if we are successful, we may lose some (or all) of our competitive advantage."
Regrettable arguments aside, the point is that Trustco must surely be paying well over the top for Constantia. The deal, though, will be settled in paper — and not Trustco scrip.
Around 232,000 shares in LSH will be issued to Conduit at a price of about R8,600 a share.
There are roughly 1.2-million LSH shares in issue, which infers a valuation of R10.3bn for the insurance subsidiary — which also holds Trustco’s property assets. When RVF bought 20% of LSH in early 2018, the inferred value of the insurance business was R6bn. So that’s inferring a 60% growth in the value of LSH in less than two years — a feat unlikely to be matched by any other JSE insurance or property counters.
RVF certainly won’t be unhappy that its R1.2bn investment in LSH has a transaction carry value of more than R2bn — leaving aside, for just a moment, those pesky related-party issues.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.