STUART THEOBALD: Flurry of takeover moves creates false idea of a bright future

Posted in: Economics, i-Blog, Politics on July 22, 2019

PepsiCo’s bid for Pioneer Foods is part of a deal-making spree by investors who need nerves of steel and a long-term view

This column was first published in Business Day 

SA’s companies are being targeted in a deal-making spree. Last week, PepsiCo launched a bid for Pioneer Foods, Clover got Competition Commission approval to be bought out by Israel’s Central Bottling Company, and Aton was blocked from taking over Murray & Roberts (M&R). From this action alone, you’d think that the SA economy has bright prospects.

Well, it certainly doesn’t. Last week provided yet more evidence of political dysfunction with the scene set for a constitutional crisis over the public protector’s call for remedial action against President Cyril Ramaphosa.

Despite the quarter-point interest rate cut in the same week, the economic outlook remains bleak, with no prospect of even surpassing 2% growth in the medium term. The political dysfunction is making it impossible to deal decisively with Eskom or the many policy blockages in the way of a decisive shift in economic outlook.

But anything is a buy at the right price. In SA decent assets with decent potential returns are available on the cheap.

The Pioneer Foods bid by PepsiCo had been rumoured in some corners of the market (Financial Mail columnist Marc Hasenfuss tipped it the day before it was announced), but the premium it offered was certainly a surprise. The two companies have a long relationship: Pioneer was once Pepsi’s local bottler.

No doubt there have been conversations already between Ethos and PepsiCo about a potential deal

The bid price is 56% higher than the trading range of the share in the previous 30 days, which appears generous, valuing the company at R24bn (a number that will make a big contribution to Ramaphosa’s foreign investment targets). But two years ago, when PepsiCo is last thought to have pondered a bid, the share price was about 30% higher than the current offer. The New York giant could well think it is getting a bargain.

The next step surely is an offer for Pepsi SA, the local producer of the main Pepsi brands that sits in The Beverage Company, a soft drinks business owned by private equity house Ethos and Nedbank. No doubt there have been conversations already between Ethos and PepsiCo about a potential deal.

The Clover deal has a lot in common with the Pioneer one. CBC Israel is the bottler of Coca-Cola in its home country and owns an array of food, dairy and brewing interests globally. Its R25-a-share offer for Clover was a 70% premium on the 30-day price when it was made in February and values the company at R4.8bn.

The market clearly thought the competition authorities would throw up a barrier, with the share price trading some way off the offer price until the commission’s approval was announced last week.

CBC’s Israeli roots led to caution that the deal may be thwarted by politics, with Brimstone already having pulled out of the bidding consortium over concerns regarding Israel’s human rights record. With the commission’s all clear, the deal looks very likely to proceed, though now with the interesting complication of the much more vigorous Pepsi to compete with.

Block a surprise

Not so for M&R. The commission has recommended that deal be blocked on the grounds that bidder Aton is a close competitor and the companies would control too much of the market between them. Germany’s Aton has been pursuing a hostile bid for the company for years and has steadily built up a 44% stake, making a bid of R17 a share for the rest in mid-2018.

The M&R board has been resisting, declaring fair value to be in the R20-R22 range. The commission’s block on the deal came as a surprise, wiping 17% off the M&R share price to just R11.80.

Aton had simultaneously been building a stake in struggling Aveng, which M&R had wanted to buy in 2018, arguably in an effort to bulk itself up to beyond the reach of Aton.

The German engineering company has a big share of the shaft-sinking and underground development market globally through its ownership of Canada’s Redpath, and M&R was set to be a lucrative addition to its portfolio. Now it will be somewhat hamstrung, having acquired its shares mostly at a significant premium to the current share price. Selling out will book a big loss so it will likely stay put with its 44% and attempt to influence the company while pondering how to get the commission to change its mind.

It will also be nursing losses in its 25% interest in Aveng, which has since become a penny stock.

These deals were set in motion after the election of Ramaphosa as ANC leader but before the current standoff that is making the president seem isolated against the assorted forces of Zuma-aligned apparatchiks in the ANC. Friday’s public protector report alleging Ramaphosa deliberately misled parliament creates a major distraction from the job of actually leading the country. Deeper dysfunction is clear in the inability of the cabinet to agree on a convincing plan for Eskom, let alone the rest of the state-owned corporations.

In that political atmosphere it takes nerves of steel to make a multibillion-rand bid for an SA asset.

Aton and CBC are family-owned companies that are thinking long term without immediate shareholder pressures. The rest of us would do well to take a leaf from their books and look at SA assets with a step removed from the maddening political mess.

• Theobald is chairman of Intellidex.

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