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JIMMY MOYAHA: As Terrence Hove from Exness just mentioned, there have been a series of buyouts, acquisitions, deals that have come through since the pandemic – even just before the pandemic. These have made South African businesses very attractive to foreign investors.
Joining me to take a look at this is the CEO of Anchor Capital, Peter Armitage. Good evening, Peter. Thanks so much for taking the time. Obviously we’re not going to have enough time to get through all of the conversations, but there are some standout ones that have happened of late.
The Imperial Logistics one with DP World comes to mind as a first; and there is the MultiChoice one just this week with Canal+. But we also have had conversations [around] Distell, Heineken, Massmart and the Walmart Group. These conversations have been ongoing for a number of years. What’s so attractive about South Africa?
PETER ARMITAGE: I think it’s all about price. As long as there’s a good quality business, there’s always a price to it. I think what you’ve seen on the South African markets is that prices of businesses have kind of trended down to six or seven PE [price-earnings] multiples. And in global terms, if you can borrow money at 4% or 5% – remember, a 10 PE multiple is a 10% yield – you’re making money straight away.
I think it’s actually a case of South Africa not being that attractive. I think on the market people haven’t been excited about its growth prospects, so they haven’t been willing to pay up for shares in companies. This has made them attractively priced and has attracted people.
You must remember in the US PE multiples sit at 25 to 30. You can buy businesses in South Africa – the average buyout price has probably been about an eight or nine PE multiple.
JIMMY MOYAHA: So Peter, when we look at some of the South African businesses, obviously there are really good ones that are very easy to snap up – or that have been snapped up of late. Which are you seeing that are looking more and more attractive the longer you look at them?
PETER ARMITAGE: Well, I think those are largely the companies that sit in that kind of small- to mid-cap space, so South African industrial companies which are kind of ignored by the foreign fund managers because they’re not big enough, and it wouldn’t make a dent in their portfolio to own a big stake in them.
So we look at companies like Santova, a logistics business, Super Group, Invicta; these are really good, quality businesses, that have been around for decades and are trading at valuations where the companies themselves are partly doing the job.
A lot of these companies are buying back their own shares because buying back your own share with the cash that you generate is effectively making an acquisition of a business that you know is at a very good price.
What we do see in South Africa is a lot of delistings. If you go back over the course of the last five or six years – in fact, our business was listed and we delisted – the cost of money got quite high. With prime at 11.75% it’s expensive to borrow money to buy back out.
And I think a risk to the JSE is if interest rates come down again during the course of 2024, and money gets cheaper, you can in fact see more delistings happen as money gets cheaper again.
JIMMY MOYAHA: Obviously the delistings, a lot of that, are also driven by the amount of compliance and cost associated with remaining listed, as opposed to just continuing to run your shop really well and not having to worry about those additional requirements.
Peter, I want to look at some of the interesting acquisitions that we’ve seen or some of the interesting conversations. They might not necessarily be acquisitions of entire companies, but in the case of Mastercard and MTN’s Mobile Money business, the MoMo business, Mastercard is showing great interest in one particular asset within a bigger company.
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We’re also going to see that happen from offshore investors saying: ‘You know what? We might not be able to take everything off the table, but we do like this particular asset – or we do like this, it lines up with something else in our portfolio, and we want to get involved in that.’
PETER ARMITAGE: Yes, I think in the case of Mastercard/MTN, it’s more a case of buying into a business where they’ve got a strategic play and they can provide services.
So it’s a lot more than just an acquisition where they’re paying some money and getting some equity in a business. It’s kind of buying into a business relationship, so kind of a ticket to the game. That’s much more. That kind of scenario is going to be company- and industry-specific.
I think of the bigger companies internationally, Mastercard’s not particularly interested in owning the whole of MTN and in getting into the African telecom space, but they’d like to have a ticket to the game to play in the fintech and transactional side – which is obviously where they play. So I don’t think that’s really a pervasive trend; that’s very much industry-specific.
And industry-specific, again, is the MultiChoice one where Canal+ is saying it’s absolutely dirt cheap from their perspective to be able to buy MultiChoice at R105/share. It was only about six months ago a lot of analysts out there were valuing MultiChoice at R150-plus per share.
JIMMY MOYAHA: I take your point on that MultiChoice one, especially if we have to compare it with the likes of their international competitors in the form of Disney+ and Netflix. If you think about MultiChoice’s relaunch of Showmax 2.0, that obviously has a big African footprint, and they want to expand that.
Peter, how much more attractive are South African businesses that are able to prove their resilience to macro factors? I think about things like load shedding and Transnet’s logistics and all of that; those factors are unique to South Africa, but they also start to create a very weird kind of risk premium for anyone looking to come into a South African company to say, ‘You now have to contend with all of these things’.
And if you think about a company like Growthpoint as an example [in the] listed property space, they’ve gone the whole green route to try and get off Eskom reliance. Are companies that are macro-resilient to South African conditions even more attractive to international investors?
PETER ARMITAGE: I think when people look at emerging markets, they expect to see infrastructure and things that possibly aren’t working as well as developed markets.
So if one takes a five-year view, load shedding in South Africa will get solved. And, as you say, companies that have shown the resilience to be able to survive and get through the kind of difficulties you’ve got in South Africa, it’s kind of in the base.
These are things that have happened and which companies have had to cope with. They are not things that are still coming. But this has resulted in the negativity around South Africa. The low GDP growth has been a big part of why share prices have declined and are pretty cheap.
Perversely, that’s what’s making South Africa attractive to foreign investors where they can kind of see some light on the horizon and are happy to buy into the companies, believing that some of these things are short term in nature.
JIMMY MOYAHA: Hopefully, the five-year time horizon that we have in mind for load shedding does actually come to light, because we’ve been dealing with it for 16 years up to this point.
But we’ll have to leave it at that. Peter, thanks so much for those insights. That was Peter Armitage, CEO of Anchor Capital, sharing his thoughts and insights around the South African Inc story and what continues to make South African companies attractive to foreign investors.