Spin-offs don’t always spark the imagination of investors. I’m thinking of the market’s dull response to recent spin-offs such as Sandown Capital (Peregrine), Novus (Naspers), Ayo Technology Solutions and Premier Fishing & Brands (African Equity Empowerment Investments), and Sea Harvest (Brimstone). Even Stadio, the tertiary education spin-off of private schools business Curro, has been marked down.
History shows, though, that spin-offs tend to surprise on the upside over the longer term. Just look at Astral Foods, which the market initially had no appetite for when it was spun out by Tiger Brands. Alternative energy group Montauk also enjoyed an inauspicious market debut when it was pushed out by investment giant Hosken Consolidated Investments in 2015, but it now trades at more than 25 times its low-point price.
MiX Telematics was put through the ringer when it was unbundled from Control Instruments in 2007. I seem to remember its share price dribbling down to 25c and spending a fair amount of time trading at 40c-60c. The share — driven by consistent earnings, impressive product innovation and well-managed global expansion — is now more than 600c.
Even Quantum Foods, an unwanted commodity in the Pioneer Foods basket, has started to find its feet.
While an unbundling or spin-off is typically presented to shareholders as a value-unlocking exercise, there is often suspicion that a company is getting rid of smaller, noncore operations or assets where directors are less than enamoured with prospects. But sometimes the executive management team of the spun-out component feels motivated to carve a lucrative niche away from the parent company (which may have been loath to provide funding or support for strategic thrusts).
Sandown Capital, Premier, Sea Harvest, Ayo and Novus may well be seen in a completely different light five years from now. In the meantime, let’s see if we have any more spin-offs. I can think of a few: AdvTech’s recruitment and training hub, Remgro’s holding in Dark Fibre Africa, AVI fishing business I&J and Altron’s Netstar.
Acorn becomes an oak
The proposed merger between agribusiness investor Acorn and agriservices conglomerate Overberg Agri looks to be a smart move. The strong suggestion of a JSE listing for the enlarged entity also means there is an opportunity (if needed) for a capital-raising exercise.
Agribusiness mergers tend to create good value for shareholders. Pioneer Foods was created in the late 1990s by the merger of Sasko and Bokomo, while profit-churning farming community retailer Kaap Agri was formed by the merger of WPK and Boland Agri.
There is an attractive synergy between Overberg’s core operations (irrigation, mechanisation and fruit packaging) and Acorn’s biggest investments in the fruit and dried-fruit sectors. A key question is whether Overberg’s small retail presence might be put up for sale, given how aggressively rival Kaap Agri is expanding.
Then there’s the R600m worth of Pioneer Food shares Overberg holds. I also note with interest that Acorn is the biggest single shareholder in agribusiness BKB. I wonder how resistant BKB would be to throwing in its lot with the merged entity.
The risk of it
Protea Asset Management LLC and Conduit Capital — entities associated with US-based investor Sean Riskowitz — now command an imperious 64.5% of Taste Holdings, following the fast-food specialist’s latest rights issue. That is a major bet on Taste profitably rolling out Starbucks in SA, and capitalising on the recent makeover of its pizza interests under the Domino’s brand. With Taste’s Starbucks rollout still gaining traction, it is doubtful there will be huge profit servings in the short term