It’s a great problem to have too much cash, but one of the curious aspects of the excess money woes of Combined Motor Holdings (CMH) was the reluctance of shareholders to fully take up a share repurchase offer it launched last year. Ultimately, the undersubscribed offer returned R192m to investors, less than half the potential R400m the owner of, among others, First Car Rental and a string of motor dealerships was offering. Now it plans to use another chunk of change to buy back properties owned by CMH directors, including Bruce Barritt, outgoing CFO Stuart Jackson and outgoing CEO Jebb McIntosh, for R745m. The FM spoke to McIntosh and incoming CEO Charles Webber about the scheme.
Why would this be a good deal for CMH as much as for the directors selling the properties?
JM: There are a couple of reasons; we sell the properties and under the accounting rules now you have to front-load the leases, so for the first five years a big majority of that lease is expensed. So consequently, if you brought that on board to the balance sheet, the first five years our profits would be severely restricted.
CW: What Jebb means is that if the executive directors involved sold the properties to anyone other than the group, we as a group would have to sign new leases with new landlords, which would result in the above.
By purchasing the properties ourselves we don’t have to sign long-term leases as we would own the properties of our key operational sites and be in control of our own destiny without being at the mercy of an external landlord.
Did it become more obvious that you should do this deal given that only half the capital you allocated to the share repurchases was taken up?
CW: After last year’s commentary about the “lazy balance sheet” we looked as a board at the different options. The first was the share buyback, and it was undersubscribed, as you know. The next question was how we could use the cash in a better way to, number one, appease the shareholders and, number two, have the greatest benefit for the group.
Were you surprised that in the buyback shareholders didn’t take up as much as they could have?
JM: We were disappointed. And shareholders we spoke to who didn’t take it up privately said they thought there was more value in the share — more value than the buyback price.
Shareholders can get testy about “lazy” balance sheets, but are they actually wrong about this?
CW: Well, a lazy balance sheet stood us in great stead over Covid ... when other people had to make other plans. There are pros and cons. It also allows you, if there’s an acquisition opportunity, to at least have that flexibility.
Could you have dug in and said: we’ll keep the cash, thanks?
CW: We could have.
But you didn’t.
JM: Look, I think the cash has built up over the years and we believe you need a reserve, but perhaps not one as big as we’ve got. So this gives us an opportunity to use approximately half of that money upfront. And then the balance will be taking over the lease, though the board still has the opportunity to fast-track that repayment in future.
CW: One of our key strategies has been our cash flow protection and generation, so our goal is to get these properties paid for as quickly as possible and get back to a lazy balance sheet (laughs).
Jebb, are you tidying house given that you’re handing over as CEO?
JM: From my personal point of view, and Stuart’s as well, it is an opportunity to sort out our personal situation, and this is the best way for the company. Otherwise we’d have to go for a 10-year lease, which would affect the profitability of the business.
Your most recent results were really strong: revenue for the year ended February was almost a fifth higher, HEPS rose 33% and the dividend was 29% up. Has it helped to be brand agnostic and embrace the wave of Chinese vehicles?
CW: We’ve actually been cautious on some of the entrants into the market, but we’ve also been optimistic. The world is a changing place, the cars from the East are offering consumers a lot more than they used to, the quality has improved, the perception has improved and the opportunity is there. We have invested in certain brands we believe will be successful in South Africa, but we certainly haven’t taken everything that’s been put across our desk. There’s a myriad brands being offered and you’ve got to look at the long-term future and support you’re going to get for those brands.
JM: And this goes back to the properties; because we’re multibranded, and for that you have to make small alterations to the buildings and so forth. It’s a helluva lot easier if you own the buildings than having to deal with a landlord.
