Mpact explains its stance on Caxton’s merger approach

RYK VAN NIEKERK: There is currently a big boardroom battle on the go between publishing and packaging group Caxton and the packaging and recycling group Mpact. Caxton currently owns 34% of Mpact and has signalled its intention to take the control of the company. Last week Caxton issued a statement in reaction to statements Bruce Strong, Mpact’s CEO, made during the company’s recent interim results presentation.

Strong suggested that Caxton’s recent decision to vote against Mpact’s remuneration resolutions at the recent AGM stems from an apparent ulterior motive, and that Caxton is only acting in its own interest.

I need to declare that Moneyweb is owned by AME, and AME is also owned by the owners of Caxton.

But on the line now is Bruce Strong. Bruce, thank you so much for joining me. Firstly, let’s talk about the relationship between Caxton and Mpact. How would you describe your relationship with Caxton prior to Caxton actually issuing the statement in reaction to your comments at the results presentation last week?

BRUCE STRONG: Ryk, thanks very much for having me, first of all. Perhaps I’ll start by going back a number of steps, just giving a brief outline as to how we are where we are now.

Mpact is the largest paper and plastics packaging and recycling business in Africa, actually. In 2021, just to give you a sense of the scale, the group generated revenue of over R12 billion, and about three-quarters comes from the paper business and a quartile……1:29 from the plastics business. Just for those listeners who might not know, we collect waste paper to make paper, to make packaging on the one hand. Our packaging products include corrugated boxes, paper bags for fruit export and home deliveries and so on, and other retail applications. Then we make plastic products like bins and crates, which are used also in retail, but also in the fruit sector. We make other plastic packaging that’s used for fruit and beverages, home care and personal care and so on and so forth. We close the loop, in effect.

So, because we are the biggest recycler we are the means to an end in terms of all the brand owners and producers who have to show extended producer responsibility.

We are able to bring that, so we close the loop for our integrated business model and really bring effect to the so-called circular economy, which I’d happily talk to you more about at some time in the future.

Over the years, as you may have seen in our recent results, our group has shown tremendous resilience. We are very clear about what we’re trying to do. We’ve got innovative packaging, we are driving the circular economy, and I can say with great conviction that we make a difference in the communities where we operate.

Our most recent results, for example, will show that in spite of the very challenging circumstances we operate in in South Africa, we are doing well. In addition to that we’ve got great prospects. You would’ve read about the number of investments that we have. We’ve got a comprehensive capital expenditure pipeline for new growth projects. And what’s exciting about many of these projects is they’re not directly linked to the prospects of consumer spending growth in South Africa. They’re diverse. We do a lot of fruit packaging, and that goes up and down and sometimes not in sync with the consumer-spending patterns in South Africa.

We are also benefiting from the trend towards home deliveries and convenience shopping, so we are one of the bigger producers of home delivery shopping bags in South Africa. Those didn’t even exist as a matter of interest five years ago on the scale that exists today. What we’ve been able to do in that sector, we make the bag, but don’t only make the bag, we reconfigured one of our paper mills that was rebuilt in 2017 to also make the paper that’s used to make the bag – and that paper is made completely out of recycled material that we collect through our recycling network, which includes collecting from recycled or wheelie bins – which we also make. We make wheelie bins that are used by municipalities, and many of those are made from recycled plastic.

So I hope you get the picture that this is a great business. We’ve got great prospects and we’ve been performing well. That’s been reflected also in our share price. We were under pressure, like most people, during the time of Covid. I must say we did a very successful share-buyback at a share price of approximately R13.70-odd, which we’re very grateful for.

A number of other shareholders I think have benefited from the significant growth we’ve seen in the value of the share price, having come out of that Covid period. I think it’s clear that Caxton increased their shareholding significantly from the end of 2020, around then, to early 2021. But they were shareholders in our business a number of years before that. I think they might have had a couple of percent. I don’t remember exactly. I’m quite sure they must have bought that initial share at quite a lot higher price than what it is today, or perhaps even at the same levels.

So it’s hardly surprising that shareholders, in particular, are interested in increasing their stakes in a company. I don’t think we should be surprised by that.

We also just have to go back a bit from where we are now in the context of their process. So……4:54 They obviously approached us. You’d have read in the Sens that we put out on June 30 last year that we had notified our shoulders that Caxton had applied to do a separate merger notification……%:04 filing with the [Competition] Commission. And that followed an approach to our board to do a joint-merger filing. They were asking that we joined them in a joint merger filing, that we work with them on that.

Our position has being stated quite clearly. Our board was unable to agree to that on the basis that there were no terms. We didn’t know what the nature of the offer was, the price, we didn’t know how it would be funded by shares, by cash, by a combination of shares and cash –  or anything of that nature. At that point nothing was mentioned.

Caxton know our company well, they know our business, they know our sector and they know all the historical issues that they’ve referenced recently. They’ve done those for some time since 2016, when [the issues] were first raised. So obviously our board didn’t agree, went for the separate merger notification. And I think you’re very familiar with the details of how we got to where we are now, where the commission rejected that. There was a review proceeding and we’re still waiting for the outcome on that.

So their current objection and the reasons that they put weren’t raised at the beginning of last year, when they first spoke about doing a joint merger filing. And so I think one needs to sort of see it for what it is. It’s a tactic, a tactic of trying to get the business in a certain way which makes it more affordable for them. That’s what it is. And so beyond that I think our position is pretty clear.

We put out a Sens on Wednesday responding to the various points that they’d made, and I think it’s pretty straightforward – what we’ve said there.

RYK VAN NIEKERK: Is that what you referred to when you said during the interim results presentation [that] you believe they have an ulterior motive?

BRUCE STRONG: Well, yes. When we did our results presentation the question came up about non-executive director fees. My point there was their objection. They have told us actually – Caxton have said this explicitly to us – their objection or their voting against the non-executive director fees had nothing to do with the director fees as such. It had to do with their views on disclosure of these things that they’ve spoken about in the media, [on] which we completely disagree with them. We deny actually the allegations of the ……7:03. So they were ulterior. Their motives weren’t related to the director fees at all. They were related to other matters, not the director fees. And that was my point, really.

RYK VAN NIEKERK: Did Caxton engage with you after you made those remarks but before they put out the Sens statement?

BRUCE STRONG: No, they didn’t, actually. The first that we heard of the offense that they’d taken to those comments was when we saw the statement on Friday afternoon.

RYK VAN NIEKERK: Caxton’s position is that it cannot make an offer before there is an outcome in the cartel case before the competition authorities, and this case involves Mpact and New Era, which is a competitor of Mpact. Caxton says it cannot make an offer before this case has been concluded, as the outcome may have a significant impact on Mpact’s valuation. The [Competition] Tribunal may, for example, fine Mpact up to 10% of its revenue, which will have a significant impact on your valuation. Do you think this is a valid concern?

BRUCE STRONG: No, I don’t. Ryk, as I mentioned earlier, Caxton started acquiring their shares perhaps after that 2016 date, and certainly they acquired a lot after they’d known very much what this is about. And, as I said earlier, in their early engagements last year with the board around the joint filing they never even raised that point. It wasn’t even mentioned once – that point that you’re mentioning now. It came up only later, subsequent to us sort of saying we wouldn’t agree to a joint filing; I can’t exactly remember when.

So I think it needs to be seen for what it is. It’s a tactic aimed at achieving an objective for them, and I’m not going to comment on that for the time being. But I suppose we need to see it for what it is.

RYK VAN NIEKERK: Caxton also makes an allegation that there is sensitive information which you have not disclosed to shareholders. What is your reaction to that?

BRUCE STRONG: Well, they are making a statement that we haven’t disclosed price-sensitive information, and we deny that categorically and strongly. It’s not true.

I just want to touch on that point that you made about sensitive information – or let’s call it ‘confidential information’. All companies have confidential information. All companies have confidential information that is not released necessarily to all people in the company, even, or wherever. That’s not abnormal. All proceedings in courts or many in the tribunal have elements which are confidential. That confidentiality is I think sacrosanct principle when it comes to dealing with matters like this. One needs to respect confidentiality in proceedings and in general – and we have continued to do that. It’s unfortunate what’s transpired here, and I suppose that it is what it is.

Confidential information is nothing new. Everybody’s dealing with it every day. To the extent that they say we are withholding pricing of information, claiming it as confidential, we deny that categorically.

RYK VAN NIEKERK: So there is confidential or sensitive information?

BRUCE STRONG: Well, strategic information is confidential and sensitive. I think everybody appreciates that. [Laughing] Caxton has a lot of confidential information that’s sensitive, but that doesn’t mean that it’s price-sensitive.

RYK VAN NIEKERK: Caxton also alleged that a competitor, New Era, is acting with Mpact to prevent the proposed merger or transaction. Is a competitor involved?

BRUCE STRONG: Let me just say that Mpact is not working with anybody, in opposing a merger, against Caxton. In fact there isn’t a merger currently being contemplated with Caxton. What is being contemplated is an application to the Competition Commission for prior approval of a merger that we don’t know the details of. And I think it’s pretty clear what our position is in that regard.

RYK VAN NIEKERK: So how do you regard the actions of Caxton? You did say that maybe they want to get a better price. It seems as if relations have broken down completely.

BRUCE STRONG: Ryk, let me just say that our board has been pretty consistent and straightforward in this matter. If Caxton were to bring an offer or put an offer on the table, the board has a fiduciary duty – which it would fully and diligently comply with – to constitute an independent board and consider that proposal in the terms that it has put forward. On considering that proposal they’ve got the obligation to evaluate that it’s fair and reasonable, and make a recommendation to shareholders. On that basis shareholders make a choice. The shareholders can choose, irrespective of what the board says.

So until such time I can say with great confidence that our board hasn’t made a call, even, on whether a merger is a good thing or a bad thing at this point, because [it hasn’t] had the opportunity to evaluate what merger we need to look at. So I think it’s pretty clear that [in] this matter – and one talks about hostile or not hostile – we can’t even talk about a hostile merger because there is no merger that’s been proposed at this point, and so it’s an adversarial process in us objecting to them filing a notification for a merger that currently doesn’t exist. That’s clear.

But if they were to put an offer on the table that we or the independent board, for that matter, felt was fair and reasonable, I can’t see any reason why the board wouldn’t say, ‘Okay, this could work,’ and you never know how we’d go about the filing then. They could consider a completely different view to the merger filing.

So we haven’t even been put in that position to be able to make that call – and I think that shouldn’t be misunderstood. The board hasn’t taken a position on whether the merger works or doesn’t work for Mpact. The board’s taken a position on not allowing or not agreeing to put the cart before the horse. And their putting the cart before the horse is trying to get approval from competition authorities without knowing what the merger is, or the terms of the merger, or what we actually are notifying on.

RYK VAN NIEKERK: But it’s clear that the relationship has turned hostile. How will that impact the process going forward?

BRUCE STRONG: The board I can say with actual conviction would be objective in evaluating an offer. They’re acting in the interest of shareholders. Frankly, the approach that Caxton has taken is rather unfortunate, but the board’s position is objective in the context of evaluating the various things in the interests of shareholders in the company; and they’ve done that diligently and they’ll continue to do that diligently. And if Caxton were to bring an offer that is to be considered, the board would fulfil its obligations.

I don’t think we should cloud that with the hostility that you’re mentioning, because the board is able to act objectively and in the best interests of the company and shareholders. And until such time as they’ve got something to work with, they can’t evaluate an offer that doesn’t exist. What they can evaluate is [it’s] not in the best interest of the company or the shareholders to put the cart before the horse in trying to get a merger notification through the Competition Commission without knowing any of the terms of the merger.

RYK VAN NIEKERK: Let’s talk about Golden Era again, which is one of Mpact’s major competitors. It is also a customer and the co-accused in the cartel case. They have also taken up a 10% stake in Mpact. Has Golden Era submitted documentation to the competition authorities in opposing the transaction?

BRUCE STRONG: Ryk, I said to you earlier I’m not going to discuss the contents of our filings that are not public. We are respecting the commission’s process in this regard, and the tribunal’s process. I hope you’ll understand that I’m not going to comment on anything further on that, on confidential information however it came about or whosoever’s confidential information it might be.

RYK VAN NIEKERK: What is the status of that cartel case? It’s been running since 2016. When do you foresee a final outcome of that case?

BRUCE STRONG: Well, it’s uncertain, but our announcement in our representations in our financial statements does reflect the position as we see it at the moment, and accurately reflects that.

RYK VAN NIEKERK: So how should Mpact shareholders view this hostile conflict or breakdown in the relationship between the two companies?

BRUCE STRONG: I think shareholders should be optimistic about the prospects of the company, which are very promising. And they’ve reflected that. We’ve engaged extensively with our shareholders in the recent past, having just come out of our results, and they’re very supportive and very excited about the prospects. I think that is reflected across the board, and they’d be expecting to see full value for those prospects.

I thank you very much for taking the time, Ryk. I really appreciate it.

RYK VAN NIEKERK: May I just ask you a last question? Do you think a merger between Caxton and Mpact would makes sense?

BRUCE STRONG: We haven’t even got to the point of evaluating that, because we don’t know what the terms of that merger would be. So I think, as I’ve said extensively already, if Caxton were to bring an offer and do what is normally the case in these situations, our board would be able to evaluate that. So the board hasn’t taken a view one way or the other at this stage. They’re unable to until the terms of the merger are known to them. So in a vacuum it’s very difficult to make a judgement on that. And so it’s not my place to make that judgment, because that is a decision of the board and its subcommittees.

RYK VAN NIEKERK: Bruce, thank you so much for your time today.

BRUCE STRONG: Thanks very much, Ryk. Have a nice day.

RYK VAN NIEKERK: That was Bruce Strong, the CEO of Mpact.

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