I can’t remember the last time I had my ear properly bent by readers … maybe 25 years ago, when I was covering the unexpected buckling of popular small cap LeisureNet for the FM.
My musings in this column around Reinet Investments not declaring a special dividend — after piling up cash of about €5.5bn following the sale of its stakes in British American Tobacco (BAT) and Pension Insurance Corp (PensCorp) — hit a sympathetic nerve. But the column was largely deemed, as one punter succinctly put it, as being “far too #$%&^@*! polite”.
Fair enough. I can understand that some investors have far more at stake in Reinet than I do. I have also learnt that it’s not clever to go off pop at Johann Rupert, the prime mover (in every sense) at Reinet, without hearing the other side of the story. Whether we will hear any more than the reticent remark in the latest results is debatable, though.
In the meantime, the uncertainty about Reinet has taken a toll. Frankly, a near 20% plunge in the Reinet share price is the “end of the world” (as another punter put it), bearing in mind that the group would have been viewed as a stout defensive position by many investors.
I, for now, remain a shareholder in Reinet and have, at various points during the week, mulled adding to my holding at the lower price point. I am firmly in two minds now thanks to my vitriolic correspondents.
A veteran investor with long experience in fund management says the inexplicable cash hoarding will feed straight into the growing cynics’ view that Reinet was deliberately structured as a fee-extracting vehicle. He points out that since 2009 it has transferred hundreds of millions of euros — billions of rands — from minority shareholders to the Rupert family-controlled asset management company.
At the same time, our veteran investor notes that an “arguably somnolent” management team collected extraordinary compensation largely to monitor the BAT share price and file bi-annual PensCorp reports.
Since March 2009 Reinet has managed a compound growth rate of 8.3% a year (with dividends included), which, while steady, lags pretty much any major market index over the same period. The investor argues: “That Rupert (the controlling shareholder and de facto asset manager at Reinet) is prepared to hold cash at a 30% discount — frustrating minorities indefinitely — suggests that the structure is simply too lucrative for those in charge to relinquish.”
While ‘inside owners’ have exquisite information to make buy/sell decisions, ‘outside owners’ are kept in the dark
— Nic Krige
Research analyst Nic Krige is also more than a little miffed that Reinet decided not to host a results call to engage with “outside owners” in an open forum. “Treating owners like easy marks is also evident in the annual general meeting, which does not allow for electronic participation despite a significant portion of the ownership being domiciled in South Africa.”
Krige maintains the cash on Reinet’s balance sheet ultimately belongs to all the owners of the company and that the failure to hold a results call and to use this opportunity to ensure that outside owners are properly informed is not the action of a great company. “This is especially so given the asymmetrical and unfair dispersion of information. While ‘inside owners’ have exquisite information to make buy/sell decisions, ‘outside owners’ are kept in the dark, compromising their ability to make quality buy/sell decisions.”
Krige says it is not unreasonable to assume that the sale of large assets would invite introspection about whether to return capital to the owners. He calls for Reinet’s relative underperformance to major indices, as well as to the Contrarius Fund (which was started at the same time as Reinet but has generated a far better return), to be openly interrogated. “Masquerading as judicious stewards of shareholder capital promising ‘long-term value creation’ is disingenuous, as it fails to recognise that Reinet’s asset allocation strategy underperformed alternative investments available to investors.”
Ultimately Krige believes it’s time for Reinet to deliver on the promises written on the tin. “A genuine commitment to wealth creation demands that owners be allowed to swap their discounted R65 for the underlying R100 value, freeing them to pursue genuine alpha elsewhere.” He says locking investors into a discount structure is a blatant contradiction of the company’s stated principles as well as the promises of wealth creation made to the owners.
Of course, if equity markets collapse in a heap — which might not be such a remote possibility — Reinet could be sitting pretty, with a wide cash moat and an opportunity to snag great companies at knockdown prices. Perhaps that’s why I am hanging in … for now.
I did, though, take note of a recent report from SBG Securities that tagged Reinet a sell with a target price of R472. SBG painted a “business as usual” scenario, giving a 0% probability to a wind-up/buyout at Reinet. SBG observed that “while the cash value per share is a valuation anchor, it is not an adequate measure of intrinsic value for the stock in our view, given that the cash will be deployed with fee leakage over time.” SBG also says there is a risk that any new assets acquired will have limited public information available, which hinders analysis and valuation.
I’ll leave the last word on the Reinet cash predicament to our veteran investor: “I can’t recall another instance where minority shareholders have been disadvantaged as much as by Rupert’s recent actions. You are effectively now trapped holding cash at a 30%-35% discount … and paying management to hold it for you. You know the NAV will go nowhere, but you also can’t get yourself to sell cash at 65c to the dollar.”
