Two major South African companies sold in less than a month
Two of South Africa’s major JSE-listed companies have become takeover targets in less than a month.
This highlights how low share prices are making local businesses increasingly attractive to foreign investors and their existing controlling shareholders.
This is according to Piet Viljoen of Merchant West Investments. Viljoen is one of South Africa’s most prominent and respected deep-value investors, with over three decades of experience in the asset management industry.
In an interview with BizNews, he said the proposed buyouts of Santam by its majority shareholder, Sanlam, and Omnia by India’s Solar Industries, reflected a broader trend of South African companies being acquired or delisted because their assets were undervalued.
He added that the same trend was playing out among smaller and medium-sized listed businesses, with private equity investors also taking advantage of depressed share prices.
“It’s a trend that continues, and it’s happening because assets are underpriced,” he said.
Sanlam has controlled Santam for about 62 years, but is now moving to acquire the remaining shares in the insurance company.
Viljoen said the transaction made sense because Sanlam could acquire a high-quality business at a relatively attractive valuation.
He estimated that Santam was trading at a price-to-earnings ratio of around 12 or 13, while Sanlam planned to use its existing cash rather than issue new shares to finance the transaction.
“I don’t think you get many opportunities to pay such a low price for such a high-quality business, which Santam is,” Viljoen said.
He described the proposed acquisition as an opportunistic move that took advantage of the subdued mood in the market.
While he believes the offer is reasonable in the current environment, he said it undervalues Santam over a longer investment horizon. “On a 10-year view, I think it’s undervaluing the business,” he said.
However, he added that institutional investors often focus on monthly, quarterly, and annual performance rather than holding investments for a decade.
“Given the current market environment, you’re unlikely to get that price soon,” he said, and argued that shareholders may therefore have to consider accepting the offer despite its longer-term limitations.
Difficult to predict when a sustained recovery in the local market would begin
Viljoen had a similar view of Solar Industries’ proposed acquisition of Omnia, the South African chemicals and explosives group.
He described the offer as acceptable in the current circumstances, but said it was not particularly attractive for investors willing to hold the business over a much longer period.
“Again, it’s not an expensive price, but if you take a 10-year view, I would not accept that price,” he said.
He argued that the difficulty for South African investors was not necessarily a shortage of good businesses, but a lack of confidence in the local economy and its political leadership.
This has created opportunities for offshore investors to acquire established companies at prices they consider attractive, while local investors increasingly direct their money towards international markets.
Viljoen said investment bankers were also likely to be marketing South African businesses to foreign buyers because local valuations were so low.
“The South African companies are attractive acquisition targets for offshore companies because of the cheap, attractive pricing,” he said.
This trend is reducing the number of companies available to investors on the JSE, with businesses increasingly being taken private or absorbed into larger groups.
Viljoen believes the market is currently “bumping along the bottom”, rather than approaching a definitive low.
However, he added that periods of widespread delistings could create opportunities for long-term investors because acquiring shareholders often have a better understanding of a business’s value and are willing to buy when prices are depressed.
“When companies are going private, they’re being bought off the market by the insiders who know the business well. They know they’re buying the business at a reasonable or cheap price.”
Viljoen added that South Africa still has well-managed companies, strong entrepreneurs and businesses capable of generating attractive returns despite the difficult economic environment.
He pointed to companies such as Capitec and Shoprite as examples of businesses that had developed into major successes.
He expects the delisting trend to continue until valuations improve and investor confidence returns, although he said it was difficult to predict when a sustained recovery in the local market would begin.
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