Private equity eyeing small- to mid-cap JSE-listed companies

By Jaco Maritz

Earlier this year, private equity firm Emerging Capital Partners reached a deal to acquire the Burger King South Africa franchise and an associated meat processing plant from Grand Parade Investments (GPI) which is listed on the Johannesburg Stock Exchange (JSE).

The Burger King transaction is part of a bigger trend of private equity funds buying either pieces of listed South African businesses or entire companies and delisting them from the stock exchange. Recent examples include:

– In April 2019, Ethos Mid Market Fund and Apex Partners took over 100% of industrial group Torre and delisted it from the JSE. The business was separated into two autonomous entities: Torre Analytical Services was acquired by Ethos Mid Market Fund and Torre Industrial by Apex Partners.

– In February 2020, pan-African agribusiness-focused private equity fund manager Phatisa bought and delisted Rolfes Group, a supplier of agricultural, food, industrial and water chemical management solutions and services for both the South African and international markets.

– Document storage company Metrofile has received an offer from US-based private equity investor Housatonic Partners. On 4 March, Metrofile announced that funding arrangements for the transaction are near final.

– Last month it was revealed that Johannesburg-based Capitalworks made an offer to acquire and delist Peregrine Holdings, a South African wealth and alternative investments company.

Kasief Isaacs, head of unlisted investments for the SADC region at Mergence Investment Managers, says Africa-focused private equity funds have large amounts of dry powder and are increasingly looking at listed targets. He notes he is aware of several potential take-private deals currently in the works that have not yet been announced.

There are many upper-small-cap and mid-cap JSE-listed companies which even before the Covid-19 fallout, traded at significant discounts to their net asset values (NAV), according to Isaacs. The shares of the businesses are often illiquid because they are too small to attract meaningful interest from institutional investors.

Issacs adds some private equity firms are finding it tough to access suitable unlisted opportunities in Africa, which is why they are now considering the listed space.

While there are obvious advantages for private equity to purchase companies at suppressed valuations, the existing shareholders also benefit. A document outlining the Rolfes-Phatisa transaction explained the deal rationale as follows: “Due to the small-cap and illiquid nature of the share, the share price has achieved no real growth in the last few years. The transaction gives Rolfes shareholders the ability to exit their investment at an attractive premium.” Phatisa paid a 33% premium on the 30-day volume-weighted average traded price of Rolfes at the time the transaction was initially proposed.

Similarly, GPI sold the merits of the Burger King deal to shareholders by highlighting the trapped value in the company. “Management and the board have decided that the best way to unlock value for shareholders is through a controlled sale of assets. This shift in strategy should result in a significant value unlock for all shareholders. The sale of GPI’s interest in Burger King South Africa and Grand Foods Meat Plant represents the first phase of this value unlock strategy. In the opinion of the board, the offer received for GPI’s interest in Burger King South Africa is a reasonable offer and is higher than an independent third-party valuation of the business obtained by the board and based on the current five-year plan for the business,” said the company in a statement.

In some cases, listing on the JSE hadn’t delivered the benefits many companies expected, particularly if the additional compliance and cost burden of being a publicly traded entity is considered. “A lot of companies went into a listing to be able to attract bigger pools of capital. But for many of them, this didn’t happen. There are some who still trade at a 30% discount to NAV, some even higher. In addition, their shares are typically thinly traded and held by a fairly narrow pool on investors,” Isaacs notes.

Reach Africa’s private equity community by publishing a Showcase Article on Africa Private Equity News. Contact us at editor@africaprivateequitynews.com for our rate card and more information.