M&A update: Oceana cold storage sale and Aveng sale of Trident Steel

FIFI PETERS: Earlier today Massmart, the retailer that owns Game and Makro…, announced that it is struggling to find a buyer for its Game stores in East and West Africa. Massmart said that it has been looking for a buyer for quite some time now – almost a year – with no luck. As such, it was considering closing the stores down, which would not only come as a loss to its own bottom line potentially, but also a loss to workers there who might not have a job any more.

But to talk about the recent deals on the table, the ones that are working and the ones that are not, I am joined by Andrew Bahlmann, the chief executive of Deal Leaders International. Andrew, thanks so much for your time. How closely do you look at Massmart, and what do you make of the fact that they are struggling to let go of Game in East and West Africa?

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ANDREW BAHLMANN: Evening, Fifi. Look, it’s one of those situations where I think the Game business model has been wrong for quite some time. Not only do you have the business model that’s a challenge, but you also have, in their case, the markets that they’re trying to sell in. All of the uncertainty during times like this will put pressure on potential buyers. [There is] the business risk itself, but also obviously the territory risk as well. I don’t have real line of sight of the balance sheets and the like. It’s a tough situation to be in, but often one maybe has to look at a bit of a restructure or changes and enhancements to demonstrate to a buyer that this is fixable and can be a good business, versus just kind of [offering] it voetstoots and hoping someone’s going to pick it up.

FIFI PETERS: I do hope for the workers over in East and West Africa that maybe something can be found by way of a solution, and that they do have jobs. Dion Wired used to be under the Massmart portfolio, but those doors closed back in 2020 at the onset of the pandemic.

Another deal is [happening] in the fish business. Oceana announced … yesterday…– that they had found a buyer for their cold-storage food business, at a price tag of R760 million, which I saw was a bit of a discount to the actual enterprise value of the entity. We saw a big drop in the share price, and I’m wondering if it had anything to do with the business being sold on the cheap. But what do you make of this deal?

ANDREW BAHLMANN: …It’s interesting to see why they did offload it at a discount. Cold storage typically is quite an exciting and solid industry, particularly if you look at the infrastructure that that exists in South Africa. Obviously the operating costs will be under pressure because of what’s happening with power. Was it a fire sale, with everything that’s been going on with the group? It’s a difficult one, because [it’s] a solid asset, and one would hopefully be able to leverage those solid assets more effectively if you follow the right process to find the right buyers, because the share dips and a balance sheet like that can’t take more knocks, and I suppose that’s always the correcting element from the market when the share dips [when you are] selling something at a discount in a very, very difficult environment.

FIFI PETERS: And they have an informal ambassador in the form of Tito Mboweni, who’s doing the most in terms of making pilchards like Lucky Star pilchards cool. He hasn’t convinced me.

Another one, Aveng, finally got rid of the steel business. I see it’s a mystery buyer. I mean, why the mystery around whom they offloading this on?

ANDREW BAHLMANN: It’s quite interesting because I look at that, as well as the Oceana deal – I was just looking at the Sens announcements. Yes, it’s quite interesting because both are consortiums. Lack of transparency always bugs me. I’m thinking, well, [there is] someone [to whom] you’re offloading it. We need to see exactly who it is.

It’s interesting that they’re forcing consortiums to go down this route. I’ve always found trying to do those types of deals a challenge, because there are just kind of too many chiefs in the mix – and who is doing what, as well. There’s no transparency on how these deals are actually getting funded. It’s one thing doing the deal and getting, in the Trident example, a decent price it seems, but then what is going to happen to the business after that because, if [you’re] going to pump a whole lot of debt into it, how sustainable is the business going to be going forward? And what does that runway look like?

So yes, it’s always a concern. It’s almost something like the bits and pieces we had through the SAA debacle about who’s doing what, who’s buying, who are these people, what is their pedigree, who is funding it? All of those elements. So quite a few more layers to peel away. But a good day. The first step of the deal looks positive, so let’s hope they can make it work, and it works well for Trident Steel.

FIFI PETERS: I see that Aveng is talking about listing in Singapore, or Australia as well maybe further down the track. I know not lot of people follow this company any more since it fell from its glory as a major construction company, which it’s not any more. It’s not really in construction, it’s sort of indirectly in construction. I’m not too sure there.

But what do you make of its prospects going forward, and of this listing in Singapore and Australia potentially, if it happens? Is that it finally turning the corner?

ANDREW BAHLMANN: Look, it’s a tough one because why does one look at listing, it’s capital raise? I suppose one has to better understand their business model and kind of what the next chapter looks like. It is quite interesting because [they are] offloading their core assets – and then they mentioned on this one paying down debt. It is quite interesting. Timing of listing is key. I don’t know what the trends are in those markets on listing, but we are seeing a negative trend in this environment. You’d think, coming out the other side, one would almost want to consolidate for a while, get the business model right, because you are cutting away a whole lot of potentially decent businesses, to focus on core. What’s quite ironic is their core now is not what they built the business on. One has to kind of understand that. But yes, I would think if it’s for a capital raise. If they’ve cleaned up their balance sheet, then maybe [there are] cheaper, more effective ways to do it than listing. But who knows?

FIFI PETERS: Who does know? I want to know what you think about these mining companies right now. I don’t know if it is the start of a trend, or maybe just something unique to Anglo American – just this venturing or forming of renewable energy companies that will ultimately supply its mines and all that, by teaming up with a renewable energy player as it were. What do you make of those transactions and that major announcement from Anglo American that we had yesterday? Do you think that’s the start of a trend to come?

ANDREW BAHLMANN: I think so. Look, I think it’s a great call. Like anything, you can talk about challenges or you can do something about them. I think more and more, particularly in industries that can potentially afford it, the opportunity cost of not doing it is too great to [not]create new opportunity. Yes, I think it’s a great strategy. I think we will see more of it in multiple industries and hopefully it’s kind of a double-edged win – if there’s such a thing, because they get sustainable power. Once you get into that stage, the mines alleviate pressure on the existing grid, and hopefully we can create momentum that starts sorting it all out. Yes, I think it’s positive and that’s one area where there’s a lot of opportunity for growth, a lot of opportunity for M&A, and it’s going to move the needle obviously in our infrastructure as a whole. So yeah, I think it’s a very, very good call.

FIFI PETERS: Yes. And maybe even help Eskom keep the lights on, given that mining companies are the largest consumers.

This is not an M&A exactly, but it is an investment coming through. And I’m talking about what Google announced earlier today. You may not have seen it, but they’re looking to set up a cloud-service business here on the continent, as part of their major investment plan for Africa. It’s quite interesting, because it’s like all the cloud players here. Google is probably the last major one to set up shop. We do have Amazon Web Services that are here, Microsoft is also here with its cloud business, yesterday we had BCX on the show, talking about their partnership with Alibaba Cloud to bring that offering. So it’s happening in the cloud, it would seem, Andrew.

ANDREW BAHLMANN: Yes, it does [seem so]. It’s quite interesting because it’s definitely a trend and I’ve often thought about it. It’s like, why here? If you’re going to do a cloud base, you could pretty much do it anywhere. I’ve always seen it as a positive trend, one on the kind of BPO side. But on this side they’re doing it for a reason. I think it’s a strategic play. I think it starts giving them new potential customer bases on the African continent. Another thing that’s also, I think, a huge draw card is a very low cost base. We’ve got good skills relative to other developing economies. The infrastructure is not as bad, I think, as a lot of us make it out to be. So if you can generate dollar revenue with a rand cost base, it’s a very, very good call. And look, it’s also competitive. If your competitors are doing it often, you need to follow. But I think there’s a lot of untapped opportunity.

Another thing we’ve seen as well as time zone. So depending on the solutions that are planned cloud-based and how you service them, if you are in the right time zone, kind of in the middle, you get a lot more flexibility and efficiency in how you service globally versus if you are based only in the US or the Far East.

FIFI PETERS: Interesting stuff, Andrew. We’ll leave it there. Thanks so much for your time. Andrew Bowman is the chief executive of Deal Leaders International. They watch all the hot deals and not-so-hot deals quite closely and help us better understand the dynamics behind them.

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