Big Deals in 2009: Only for the brave
Only for the bravest put their signature to billion rand deals last year. Whereas deals worth R26,1bn were done during the giddy days of 2007, last year the value of all deals fell to R7bn – a respectable enough figure in a choking market the largest deal last year was the R1,9bn purchase of Rand Uranium by Pamodzi Resources Fund (PRF),in conjunctions with the first Reserve but says (PRF)’s Gerard Kemp it wasn’t easy to nail down “we started putting the deal together in 2008 ,and then the crisis happened.
So we had a few moments of uncertainty. Fortunately, we were buying uranium and gold and gold asserts and this market didn’t collapse like other resources" he says luckily for Pamodzi it had already raised the fund so it had access to cash. However Kemp says doing a large deal like was still tricky in 2009. There were many questions how would the gold uranium market react [to the global collapse]? How many projects would be cancelled such as nuclear power stations which will affect demand for Uranium? But he says First Uranium has “more than met” expectations. Though it has produced more gold than expected, plans to build the uranium plant are progressing well.
Perhaps the most savvy private equity transaction last year was the ‚¬159m repurchase of the high-yield bond raised to partially finance the purchase of Alexander Forbes by a Pension Fund, Ethos and Actis.
To fund deals, private equity firms (or their targets) issue high-yield bonds in Europe, which were placed with investors like the big banks and hedge funds.
But the credit crunch spawned a liquidity squeeze and heightened concerns over whether companies would survive the recession. Jittery institutional investors were desperate to sell these bonds, so prices plunged to the extent that some bonds were even trading as low as 25c for every $1 – a deal for those with cash.
In the case of Alexander Forbes, its bond was largely held by a large US based hedge fund. So the consortium approached the hedge fund and offered to buy back the euro bond and convert the liability into rand.
Not only was the purchase made at a substantial discount to par, but the consortium scored because they could also unwind the (expensive) currency hedge that Forbes had in place, to protect against depreciation in the rand against the euro. The consortium’s hedge was in the money because the rand had weakened against the euro since the hedge was put in place. “Essentially, we now have less third party debt in Forbes,” says Actis’s John Van Wyk, “so from a financial risk perspective, we have derisked Forbes considerably."
Ethos partner Bill Ashmore says that bay buying the bond back at a substantial discount, the consortium has ensured that the returns they will get from the Forbes investment will have a meaningful “kicker”. “This isn’t a new strategy, but it’s become more crucial for private equity when it comes to delivering returns.”
In the third-largest deal last year, a consortium including RMB Corvest bought INM Outdoor for R1,1bn – and the company has since been rebranded as Continental Outdoor Media.
RMB Corvest also announced one of the largest deals last year – the purchase of Autozone from Super Group – likely to be concluded this year. But, says RMB Corvest’s Mike Donaldson, it was anything but easy, illustrating how firms had a “big wake-up call”. “We’re still finalising the Autozone deal.”
Whereas funders before were willing to provide up to four or five times a company’s Ebitda in debt, this halved to about two or 2,5 times Ebitda. Lereko Metier CEO Paul Botha says the Lereko Metier Growth Fund did a number of “add-on” acquisitions for its food distribution company Liberty Star Consumer Holdings, as well as South Point Management Services, a company involved in rejuvenating Johannesburg’s inner city. “With South Point we increased the portfolio from 10 buildings to 43, which illustrates how we focused on investments that were small and fitted into our existing portfolio,” he says. Metier raised it R3,5bn fund in 2007 – at the time the largest amount raised purely from domestic sources. Of this, it has already spent more than 60%.
However, Metier’s portfolio includes a few JSE-listed companies that haven’t had the easiest of times – including Vox Telecom and Sabie – based York Timber. “Essentially, York had too much gearing on their books, but that has been fixed,” says Botha. Vox Telecom took a beating in 2008 as a victim of fraud perpetrated by futures brokerage Dealstream, but its share price has since stabilised to some extent. “Our portfolio is now trading over 20% above (its) cost – so we-vet come out of this relatively well,” he says. Elsewhere in Africa, Actis invested US$244m in Egypt’s largest private sector bank, the Commercial International Bank, (CIB). This was the largest single cheque ever written for equity by Actis. “As you go north, you tend to use leverage less and less. But in some ways, you can afford to do all-equity deals further up Africa because the growth is so much higher,” says Actis’s Van Wyk.
Just before the bubble popped, Actis signed the largest deal in SA in 2008 – the R5,2bn purchase of electrical engineering firm Alstom. “This was a fantastic deal for us because there is a big backlog in electricity spending,” he says. But there appears to be consensus that a far greater number of deals will take place this year. However, Van Wyk is coy about exactly where they’ll come from. “We’ve got a few plans in Egypt, a few in SA, and what will help us is that the appetite for the banks to leverage deals has come back nicely,” he says.