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SA corporates’ offshore forays have destroyed over R300bn in value

14 July 2020

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by Peter Armitage, CEO

SA-based companies are having a horrific time in 2020, with the impacts of a struggling economy and COVID-19 taking their toll. However, for many of these businesses it started a long time ago as corporate SA went on a global diversification spending spree over the past decade with mainly very poor, and often disastrous, outcomes.

It is impossible to quantify exactly, but we estimate that corporate SA has destroyed over R300bn of value over the past decade through these offshore forays, with the biggest culprits being Sasol, Woolworths and Brait.

SA has been stuck in a low-growth rut for many years and the years under ex-President Jacob Zuma’s presidency saw domestic corporates lose faith in the country and low demand growth did

not justify new investment in capacity. Listed SA company management is regarded very highly in the global context and many of the management teams in question had delivered excellent results and returns at home. This combination of factors, together with the low cost of financing offshore, saw many local companies shift their strategies to offshore diversification and growth.

SA companies bought global businesses and, in some cases, started almost from scratch (e.g. Sasol, Investec, Discovery). So, why has the outcome been so different from the goal? We have identified, what we believe to be the major reasons for this:

  • SA companies tend to pay too much in their desperation to diversify.
  • SA companies often send their “B teams”, who are less experienced than the winning team back home, to manage these offshore investments.
  • Locals in these destination countries know more and that is the reason why there is a buying opportunity available. Surely if it was a great business, locals would have snapped it up?
  • South Africans were romanced by low interest rates compared to what they were used to in SA. However, if a business does not make money, it does not matter what the cost of funding is!
  • Local conditions and competitive environments are simply different.

Below, we highlight a number of JSE-listed companies that have had difficult journeys in their investment endeavours abroad:

Sasol

Sasol spent US$13bn on its US Lake Charles Chemicals Project (LCCP), after an initial budget of roughly half of that amount. This disaster has seen Sasol’s share price plummet and it is now desperately trying to sell off assets as its balance sheet has become unsustainable. We estimate that the Sasol share price would be over R400/share today if it had never entered the US. Instead, Sasol’s share price is currently trading at around R135.

Woolworths

Woolworths invested over R20bn in Australian clothing retailer David Jones and, at the time, the business had not grown for years. The company believed it could wave a magic wand Down Under, but the Australian retail foray has been a disaster and David Jones could face bankruptcy. The SA Woolworths business has performed exceptionally, but Australia has weighed it down and Woolworths’ share price has plummeted from over R100/share to the current c. R35/share.

Brait

Brait has been among the worst performers from a percentage-loss scenario. The acquisition of New Look in the UK turned out to be a failure and Brait’s share price has declined from over R160/share to around R3 currently. Subsequent feedback was that Brait’s due diligence of New Look prior to the acquisition was far from sufficient.

Famous Brands

Famous Brands was one of SA’s top business models, before it placed a huge bet on Gourmet Burger Kitchen in the UK. It spent over R2bn on the acquisition and it was worthless just over a year later, after spiralling into massive losses. Famous Brands peaked at over R160/share and is now trading at less than R40/share.

Mediclinic

Mediclinic’s Spire investment has not performed, and it paid over the odds for its Swiss hospital business that has battled to grow. Soon after investing in Dubai, the government enacted new damaging legislation. These events have left Mediclinic overgeared and the share price is now under R60, after peaking at above R200/share.

Truworths

Truworths and The Foschini Group have battled with their respective UK acquisitions, with billions of rand in value being destroyed.

Rebosis

Rebosis Property Fund invested over R1bn in New Frontier Property, a UK mall business. A few years later it sold its 49.4% stake for R700 (!) and this has contributed to Rebosis’ debt-driven downward spiral.

Investec

Investec invested and subsequently withdrew from Israel, the US and Australia. Its UK business is still sub-scale and generating poor returns but is showing positive signs. In the meantime, the SA and asset management business have thrived, but this has been overshadowed by offshore losses.

Standard Bank

Standard Bank moved aggressively into other EMs including Russia and South America and withdrew several years later, returning its focus to Africa.

Discovery

Discovery invested over R1bn in an aggressive US expansion plan and subsequently withdrew and changed the model to the current Vitality partner model.

Old Mutual

Old Mutual battled with its European strategy, lost tremendous shareholder value, and subsequently unbundled into an African and UK operation (Quilter). Sanlam, by comparison, largely stuck to Africa and has been a far better share.

Steinhoff

We were not sure whether to include Steinhoff in this article, as it has its unique attributes in that its actions were fraudulent, on top of including many bad acquisitions. We have not included its R250bn-plus loss of value in our R300bn estimate above.

Nigeria

We also include Nigeria here, where many SA companies (including Tiger Brands, Altron and Nampak) have entered and left with their respective tails between their legs. Cash has often been tied up in countries such as Angola as well.

In the interest of fairness, the author of this article presided over the Anchor Group’s acquisition of a UK-based EM hedge fund, which subsequently closed. While not material in the context of the above, over R200mn of value was lost.

So, that is the sad story of SA disappointments offshore and there has been far more instances not documented above. To be fair, there have also been great success stories with the biggest of these being Naspers’ investment in China’s Tencent. The value creation here has been over R1trn (we note that the calculation is subjective due to the pesky 50% share price discount to NAV!), but SA investors are fortunate that this has overshadowed the collective losses from all of the other SA businesses. Other success stories include MTN, Sibanye, Mondi, Spar, NepiRockcastle, Bidvest/Bidcorp and Super Group.

There are great lessons to be learnt and many of the businesses above still have great SA franchises and cash-generative models.

We are hopeful that SA can improve its attractiveness as an investment destination so that domestic companies can confidently deploy their capital locally at rates of return in-line with traditional returns. Even lower returns, that still beat the cost of capital, must surely in many instances be more attractive than the clearly massive risks in deploying capital offshore.

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