BEE merger draws praise

2010-12-11 10:13

The proposed merger between black-controlled investment holding firms ­Kagiso Trust Investments (KTI) and ­Tiso Group has been lauded by analysts who believe the combined entity has a chance of increasing its market share, paving the way for growth.

Sandile Hlophe, managing director for restructuring advisory at KPMG, said: “At some point, any company that ­intends to increase its market share and grow its revenues, profits and employment, has to do a business combination or a merger of some form.

“This deal shows that BEE companies have come of age and I expect to see a couple of similar mergers in the future.”

This week, KTI and Tiso announced that their shareholders had agreed to combine the two companies to create “a merger of equals” with gross assets worth more than R12 billion.

Kgomotso Matseke, KTI’s managing director, said the proposed transaction would help the combined entity, known as Kagiso Tiso Holdings, to access cheaper funding which would enable it to pursue larger deals.

Matseke said: “Because we will have a larger balance sheet, we will be able to tackle bigger deals and get funding at more favourable terms.”

The black-controlled company is ­expected to be able to hold its own against large investment holding ­companies and private equity firms when chasing transactions.

KTI and Tiso have almost wrapped up negotiations and have moved into the implementation phase of the merger, which they hope to conclude before the end of the second quarter of next year.

The deal is still subject to regulatory approval.

A merger committee has been established to oversee the implementation of the tie-up, which is not expected to lead to any retrenchments of the companies’ 45 employees.

The committee has the task of deciding who of the two MDs will lead the merged entity. The MD of Tiso is David ­Adomakoh and he will compete with ­Matseke for the top job.

“The two parties have an idea of how to handle this, but the merger committee will make the final decision. The idea is for both management teams to be ­accommodated in the new entity, but in various roles,” said Matseke.

Phil Reynolds, who is part of the ­Nedbank Capital team that is advising KTI and Tiso on the merger, said the companies had been talking about tying the knot for years.

“At the same time, the companies have been competing with each ­other in the market and have invested ­together in some of the assets. Culturally they are similar and they share the same investment philosophy,” said Reynolds, who is head of investment banking origination at Nedbank.

One of the issues that the merger ­committee is busy sorting out is who owns how much of the new company. Public benefit organisations, Kagiso Trust and Tiso Foundation, could be ­given about 40% of the new company, making them the single biggest ­shareholders. The dividends received by the organisations are used to fund the education of needy students. The rest of the shareholding will be split between institutional investors and management.

Tiso brings in tow institutional ­investors such as Standard Bank, ­Investec, Rand Merchant Bank and ­Liberty Group, which hold 27% of its ­issued share capital.

KTI has Remgro as an institutional ­investor, which also has to get a stake in the new black-controlled entity.

The merged company will be much more diversified and will give its ­investors coverage of key sectors. KTI has exposure to the industrial, media, ­financial, ICT and mining sectors; while Tiso is mainly exposed to mining, ­construction, and property sectors.

Matseke said once the merger had been bedded down, management would ­refine current investment strategies.

“Currently, we like cash-flow generative businesses and we also like to invest in companies that have management with a proven track record,” he said.

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