Too big to work

Podcast: Too big to work?

In JSE Direct, Latest by Simon Brown

Too big to work

Too big to work

Simon Shares

  • More highs locally and global for markets. And of course that makes everybody worried and certain we’re about to crash. Well we will most definitely crash, just nobody (and I mean nobody) knows when. So as always ignore the doomsayers.
  • Tencent buys a 10% stake in Snap, a clever deal as it gets them into the US market. It also means we now all own some Snap via any Top40 ETF we have with Naspers (JSE code: NPN) in it.
  • Purple Group (JSE code: PPE) results were rough. Ignoring a write down of Real People, GT24/7 made a sliver of profit, Emperor is losing AUM hand over fist while EasyEquities continues loses. With almost 60k users the burn rate for EasyEquities is about R3m a month with revenue of some R800k a month. That’s a large gap that needs a lot more customers to close. They do however have the money from Sanlam that tides them over for the next 3 years while they try turn the low cost idea into profits.
  • Steinhoff (JSE code SNH) is back in the bad news on reports that it hid US1billion worth of related party deals. This company has a lot of smoke around for an innocent company.
  • Sasfin (JSE code: SFN) has a price-to-book (PB) of around 1x and that is always a buy signal for the stock. Ungeared and hold until PB is 1.4x or higher, about 12-18 months typically. You’ll get NAV uplift, dividends and the price gain above NAV.
  • I have sold my Tongaat (JSE code: TON) shares. The latest update showed that even with returning rain we’re not seeing the profits from sugar, so my thesis was right (rain) but with no profit to show for it I bailed.
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I hold ungeared positions.

Too big to work (AKA big deals suck)

Brait (JSE code: BAT) has valued their UK New Look business at zero. They paid R37billion just under two years ago. Woolies* (JSE code: WHL) and Famous Brands* (JSE code: FBR) both struggling with big deals and now Firstrand (JSE code: FSR) spending some R20billion buying Aldermore.

How many big deal really work? Sure they work eventually, but at what cost and never as management promised.

I suspect it has two key problem. Firstly they buyer typically over pays in their eagerness to get the assets, this is especially true when the target is listed and the premium has to be agreed on by shareholders and is hence usually 20%-30% or more. Secondly merging two business is never easy. Some easy wins such as centralised costs like HR can be lowered, but actually extracting value a lot harder. The third of course is the ego of management. Who wants to be boss of some regional business when you can be a global titan over seeing a vast network of losses?

My memory says very few ever work very well. Have you got some examples of large deals working? SABMiller worked, BHPBilliton* (JSE code: BIL) worked. Any others?

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  • Peter
    • I see that some of the Satrix products are offered as either ETFs or unit trusts. What would compel me to purchase via a unit trust rather than an ETF for something basically the same?


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