The companies – including recently formed Reinet, which retains a meaningful stake in the highly defensive tobacco sector – have been considered stores of reliable value rather than a flash opportunity for above-average growth. Indeed, deal flows have been meticulously measured and a fortress of cash been (prudently, it seems, in the wake of the global financial crisis) maintained throughout all three companies.
It may, of course, be very significant that Johann Rupert, who chairs all three Rupert family-controlled companies, anticipated the financial crisis long before such events rattled the doors of the leading banks in the United States and Europe. “Staid” and “defensive” have become very fashionable over the past 18 months… and Rupert’s cult status (he’s been dubbed “Rupert the bear” by the international press) among global investors has been much enhanced.
While prevailing circumstances might dictate that the Rupert-controlled companies remain in defensive mode for longer than most, there are very definite signs Reinet, Remgro and Richemont are looking more energetic. That’s good, because the recent restructuring of Richemont and Remgro did suggest caution rather than daring. Richemont and Remgro unbundled their respective holdings in British American Tobacco (BAT) and formed a new offshore-based investment offshoot in the form of Reinet Investments (which retained a small strategic holding in BAT).
Richemont also shed its small technology interests, which were bundled into Reinet; while Remgro clinched a significant “better the devil you know” transaction when it acquired its corporate cousin VenFin (a tech-aligned investment specialist initially part of the old Rembrandt Group until the late Nineties).
Of course, the unbundling of BAT was a watershed transaction for the Rupert family. Tobacco – since the days of Voorbrand – has glowed at the centre of the Rembrandt Group (and later Richemont and Remgro). Without the reassuring cash flows from BAT it was imperative for Richemont and Remgro – especially in the wake of the global financial crisis – to prove their defensive qualities.
That done, the market is eager to see two robust companies making the most of opportunities created by the painful financial crunch.
While Richemont is really restricted to investments in top luxury brands, there are signs the group – which has taken on an ultra-conservative hue – is looking at broadening its operational focus to incorporate a broader fashion retailing element.
However, the case for investment companies Remgro and Reinet looks even more compelling.
Remgro is big and unfocused – and now leans heavily on its older industrial and financial services investments. Naturally, there are persistent calls to unlock value, sharpen its strategic focus – even dismantle and distribute the underlying portfolio.
Reinet is anchored by the remnants of the BAT shareholding originally housed in Richemont and Remgro. Some regard the BAT holding, which accounts for around 85% of Reinet’s value, as “currency” rather than a strategic investment.
Remgro and Reinet can both rely on reliable cash flows/dividends from investments that – currently – dominate the investment portfolio.
Do we then presume there may be a feeder strategy – possibly, as one analyst suggested recently, mimicking Warren Buffett’s Berkshire Hathaway model – taking shape at both Remgro and Reinet. Such a strategy would involve the consolidation of investments in well-established and dominant investments plus mobilising cash flows from those “reliable” investments to accumulate and build up more adventurous ventures as well as seek out new opportunities.
Deal flow is what will keep the market(s) excited – especially if Remgro or Reinet can uncover another Vodacom (which generated strong cash flow and created enormous value for VenFin before the stake was sold to Vodafone).
Remgro certainly brought on numerous fledgling investments as well as numerous new media and technology opportunities when it pulled VenFin on board. Reinet, after a quiet start, is also starting to pick up momentum in building a specialised investment portfolio.
The tale of tow tech transactions
IT’S NOT EASY TO question the Rupert family’s ability to pick trends – especially in the TMT sector – when massive returns have been banked in investments such as Vodacom (which was sold to Vodafone a few years ago). As much as there are hits (such as e.tv and Tracker), there have also been a few misses in its tech portfolio (Intervid being the most prominent).
Last week, when Remgro reported its year to end-March results, the “hit and miss” nature of TMT investment was clear to see. Two of Remgro’s most promising recent tech investments couldn’t have showed more contrasting fortunes.
A rather unsightly blemish on Remgro’s results was the admission its investment in wireless technology specialist Xiocom had been sold for a nominal sum. That was hardly a meaningless flirt. Remgro had invested US$36m (R270m) of a committed investment of $50m into Xiocom. An after-tax loss of $13,5m was incurred on the sale, while Xiocom “contributed” a headline loss of R79m to Remgro’s headline earnings.
Remgro CIO Jannie Durand said Xiocom was sold because its performance was reaching the milestones Remgro expected. “It’s a sad end. But Xiocom’s technology wasn’t enough to give it a distinct advantage. We saw the benefits of putting in more capital were outweighed by the risks. I just saw a bottomless pit…”
By contrast, Remgro does seem to be enjoying its investment in undersea cable business Seacom. Remgro values its 25% stake in Seacom at R1,12bn – based on a discounted cash flow model (with a discount rate of 10%). That gives Seacom an enterprise value of almost R4,5bn. Unfortunately, Seacom’s operational performance – it provides high-capacity international fibre optic bandwith for southern and eastern Africa – couldn’t be gleamed from Remgro’s results. Due to differing financial year ends, Seacom wasn’t included in Remgro’s results.
The value of Remgro’s Seacom stake – which has already yielded a maiden dividend – has increased by more than four-fold in two years. The stake was valued at just R264m at end-June 2008 and R1bn at end-June 2009. At the last tally Remgro (then via VenFin) had invested $75m (roughly R560m) into Seacom.
RUPERT THE BEARISH
WHILE not tagged as an acquisitive counter, Richemont has over the years quietly collected a number of additional luxury brands – especially on the watch-making side (the last being Roger Dubois in late 2008). The top end of the luxury brand spectrum is tight and probably lends itself more to smaller, selective acquisitions.
Of course, with a sprawling range – incorporating brands such as Cartier, Piaget, Panerai, Van Cleef & Arpels, Baume & Mercier, Vacheron & Constantin, IWC and Jaeger-LeCoultre – there’s not much more Richemont could covet.
But covet it can… Richemont could easily afford to fund a big deal. The company finished its year to end-March with €1,9bn net cash (equivalent to around R18bn).
While Richemont executives – during a recent presentation to investment analysts – stressed cash was a fortress in current hard times there are indications the group could be on the lookout for strategic opportunities. Significantly, most capital expenditure at Richemont has been used to expand its retail arm (a segment that has shown some resilience in the downturn). And that’s where the focus might fall if new opportunities are to be sought out.
While there’s been no direct reference to acquisitions by Richemont, deputy CEO Richard Lepeu and chairman/CEO Johann Rupert have hinted the group is eyeing growth opportunities in new markets. It seems growth opportunities could see Richemont looking beyond its core jewellery Maisons and specialist watch-making. The direction the group appears to be heading – at least with the acquisition of outright control of online fashion retailer Net-a-Porter – seems to follow the Rupert family’s penchant for technology.
At face value Net-a-Porter – more click and loiter than brick and mortar – looks anything but the typical Rupert-family investment. Currently, Net-a-Porter – which generated turnover of £120m in the year to end-January 2010 – can’t be considered a renowned brand globally and it’s very doubtful there’s meaningful cash flow at this juncture. Management – led by Natalie Massenet – is clearly highly rated by Richemont, noting that Net-a-Porter will be run as an independent entity.
Not surprisingly, there have been questions about whether Richemont may have overpaid to secure an economic interest of more than 93% in the business. The Richemont buy-in valued Net-a-Porter at around £350m (almost R4bn).
Naturally, the market may not share Richemont executives’ enthusiasm for Net-a-Porter. Indeed, enthusiasm for the Ruperts’ tech ventures currently may be somewhat muted. Remgro (and presumably Reinet Investments as well) recently took a R270m bath on a much-vaunted tech venture called Xiocom Wireless – an investment initially housed in Richemont’s tech cluster. In light of developments at Xiocom it’s imperative Net-a-Porter delivers – as Richemont executives have suggested – a profitable performance in the financial year ahead.
Over the longer term Net-a-Porter – provided its promising top line can be brought fairly quickly to good account at bottom line – could be just the tonic to pep up Richemont’s rather insipid fashion cluster (Chloe, Dunhill and Lancel). With Richemont focusing much attention on bolstering its retail presence, Net-a-Porter – already labelled a ‘mini-Google’ for its ability to capture valuable data – could become a very strategic cog. It may be now selling mainly high-end fashion, but surely the opportunity to market other luxury brands through Net-a-Porter must hold vast potential?
If indeed the fashion retailing side is getting some attention at Richemont, could there be substance to the rumours the company may be flirting with debt-laden Italian fashion house Prada? While talk of a Prada tie-up has been played down, it seems almost inevitable additional (and significant) elements must be added to Riche-mont’s underperforming “fashion” segment (which in the year to end-March turned in an operating loss of €36m from turnover of €584m).
It shouldn’t be too long before we’ll see just how fashionable the Ruperts can be.
RUPERT THE BRAVE
THE breakdown OF intrinsic value in the year to end-March for Remgro might be quite telling in terms of where that value-laden investment group might be headed. Aside from a R4,7bn cash pile (held mostly in US dollars and euro), Remgro is solidly anchored by a sprawling industrial portfolio (worth almost R30bn) and significant financial services interests in RMBH/FirstRand (worth nearly R20bn).
Holdings in the newly created Technology and Media divisions are by comparison minuscule, valued at R3bn and R1,5bn respectively. Those are the divisions Remgro CIO Jannie Durand – who Finweek believes is being primed to take over from long-serving CEO Thys Visser – reckons will become more meaningful in the future.
There are indeed some attractive assets under its broader TMT (Technology, Media, Telecoms) interests: strategic stakes in undersea cable specialist Seacom, free-to-air television broadcaster e.tv, sports brand specialist MARC (formerly SAIL), the CIV Group (which incorporates the promising Dark Fibre Africa) and vehicle recovery company Tracker.
Many of those holdings were originally housed in the old VenFin group, which Remgro acquired in a paper swap last year. There are sceptics who firmly believe VenFin held little promise after the sale of its 15% stake in cellular services group Vodacom. With VenFin’s strategic stake in Dimension Data left out of the portfolio of interests acquired by Remgro, there have also been questions about whether the tech assets will ever make a meaningful impact at bottom line and on intrinsic value.
Naturally, a good portion of Remgro’s healthy cash flows and dividends from its industrial and financial cluster will be earmarked for reinforcing existing TMT interests, as well as acquiring new opportunities. The truth is Remgro has every chance of cracking a big deal in the TMT sector.
But the market will be watching the cash burn carefully at existing TMT interests after Remgro burnt its fingers on Xiocom, a wireless technology specialist. After investing almost R270m and incurring some heavy losses, Remgro called it quits – a development that might rattle confidence about its ability to pick winning “tech trends” (See box).
But there can be a fair amount of heart taken from the fact Remgro certainly isn’t only chasing tech. Chairman Johann Rupert clearly recognises the core of the Remgro’s robust industrial portfolio – a good deal of which was assembled during his father Anton’s tenure – is irreplaceable. In that regard it’s encouraging to see Remgro determinedly adding to portfolio holdings – most notably, liquor producer Distell. Naturally, the biggest tot for Remgro will be convincing SABMiller (or even PSG-controlled Zeder) to part with its strategic holding in Distell.
With exposure of newer industrial holdings (glass group PGSI and Kagiso Infrastructure Empowerment Fund) you might wonder whether Remgro could look to consolidating certain of its interests by way of buying out minority shareholders in companies where it holds outright control. Here investments such as cash-generative Medi-Clinic and Rainbow Chicken spring to mind.
In Finweek’s opinion, Remgro’s attraction in years to come may well be as a vehicle that offers the only entry point for investors to top-quality unlisted companies. The fewer listed interests the better, and in that opinion it’s encouraging to see the value of unlisted industrial interests – mainly Unilever, TSB Sugar, Total SA, Air Products and Kagiso Trust Investments – tops R11bn. If the stakes in the media and technology companies are included, then we’re looking at unlisted investments worth a not insubstantial R15bn.
Of course, some observers may be excited about news that Remgro is to unbundle its strategic stake in diamond miner Trans Hex. But that’s surely a unique event, driven by a risk/reward scenario that may not sit well with Remgro.
If developments at Trans Hex do herald a general portfolio clean-up then the fate of Remgro’s large – but passive – holdings in Impala Platinum and Nampak come into question.
Significantly, Remgro’s share price discount to its intrinsic value – which was as wide as 30% last year – has narrowed to under 20% of late: a sign the market might be anticipating developments.
RUPERT THE BOLD
AT various AGMs in late 2008 and early 2009, Johann Rupert – who is executive chairman, fund manager and controlling shareholder of Reinet Investments – became known as probably the most authoritative, articulate and entertaining commentator of the unfolding sub-prime credit crisis. Rupert clearly not only had an excellent grasp of the unsavoury issues but also understood that amid the gnashing of teeth would lie golden fillings.
Perhaps that’s why the first deal officially clinched by Reinet was to buy out the investment banking arm of the collapsed Lehman Brothers.
While some eyebrows were raised at the transaction (Lehman has since been renamed Trilantic Capital Partners), the fact that around 85% of Reinet’s intrinsic value was still held in British American Tobacco (BAT) provided ample comfort.
While the Lehman transaction heightened expectations for inspirational deal flow, Reinet went into a lull. A number of commentators (including some at Finweek) couldn’t help wondering whether Reinet wasn’t missing out on some fire sale opportunities.
And with Rupert set to earn a fat fee for managing Reinet’s assets – and a performance fee tagged to the share price (which in turn is tagged to BAT’s share price) – there were some agitated murmurings about the lack of action at Reinet.
To top it all, Rupert re-took the position of CEO at Richemont (while also retaining his position as executive chairman) – making it reasonable to presume Reinet’s main man might be preoccupied with loftier matters.
Then last month – as if to say: “You want a deal? I’ll give you a deal!” – Rupert caught the market completely off guard with two “leftfield” transactions in the United States. Although relatively small in the greater scheme of things, the commitment of €150m (R1,4bn) to new investments in the US signalled that Rupert was willing to let Reinet take risks.
The investment in a start-up investment vehicle called Vanterra Flex Investments (which appears to have a broad mandate) wasn’t that startling. But spending €74m on mortgages written on real estate in Florida, plus in North and South Carolina – areas pretty much swamped by the sub-prime crisis – was out there… way out there.
Some comfort must be taken in that if anyone was on top of the sub-prime crisis it was Rupert. But Reinet – like most Rupert-family companies – wasn’t terribly long on detail about the US deals.
What was disclosed was that the mortgage deal was nothing more than acquiring debts from local lenders at substantial discounts to nominal value. However, the truth is that its US investments (including the old Lehman Brothers business) still don’t provide too much of a distraction from the BAT holding, which is worth almost R20bn.
But they do signal “aggressive intent” – which suggests Rupert has emancipated Reinet from the conservative culture that pervades other Rupert-family controlled companies. Reinet has already departed from a Rupert tradition in skipping its dividend for the year to end-March 2010, despite hints a payout would be considered.
Perhaps the passing of its dividend must be seen in light of Reinet’s fair-sized capital commitments to its US investments – including Trilantic. And we should bear in mind Rupert needs to bulk up Reinet – which, with a market capitalisation of R22bn, isn’t even half the size of corporate cousin Remgro.
The underlying message, of course, is that Reinet shouldn’t be bought as a discounted proxy for BAT. If you want a dividend, then it’s probably better to buy BAT directly. But if you want Rupert with a dash of well-calculated risk, then Reinet’s your baby.
Hasenfuss holds shares in Reinet Investments, Richemont and Remgro.