EASTERN Cape-based poultry group Sovereign Food Investments won't be sharing its nest - at least for now.
Last week it looked like potential suitor Country Bird Holdings (CBH) walked away in frustration from merger talks with Sovereign after months of negotiations. A few months ago, Afgri's poultry arm also saw its advances on Sovereign snuffed out.
I think most market observers expected negotiations with CBH to take a turn for the worse after Sovereign opted to cull its debt by embarking on a R144m rights offer, to be underwritten by institutional investors Prudential and Old Mutual.
I imagine negotiations may have got stuck on pricing - which might be markedly different when looking at Sovereign before and after the rights issue.
For me, the fact that CBH - which has already built a 23% stake in Sovereign - was not nominated as an underwriter pretty much said it all.
The initial reaction from the market to developments was not terribly encouraging, with Sovereign shares coming under some pressure this week.
Presumably, a number of investors shared my enthusiasm for a tie-up between two well-managed, medium-sized poultry companies.
Frankly, I think the big birds like Astral Foods and Rainbow need a formidable competitor - something that could be good for consumers as well.
Naturally, Sovereign's decision to fly solo must say something about directors' confidence for the trading periods ahead.
I mean, it's obvious that any company enticing major institutional shareholders to step forward as underwriters would need a very convincing growth story.
Indeed, Sovereign (and I won't go into gory details here) has increased both its breeding and abattoir capacity - which is basically why the company accumulated such a large dollop of debt.
Newly expanded and ungeared Sovereign should, in times of reasonable demand and manageable input costs, be able to crack earnings of 200 cents per share.
In other words, with the share close to the rights offer pitch price of 850c/share, Sovereign represents some excellent value at current levels.
Of course, the worry for Sovereign at this delicate juncture is what would happen to the rights issue if the share drifted below the 850c level. I doubt that too many shareholders - aside from Prudential and Old Mutual - would be subscribing for their rights, even though the exercise received 99% support at a recent company meeting.
As such, I would probably prefer to be holding shares in CBH. CBH, in my opinion, can afford the luxury of sitting back and waiting.
If Sovereign, emancipated from its debt burden, really takes off CBH will enjoy the benefits of a good investment.
One possibility of such a scenario is that CBH perhaps contemplates selling off its Sovereign investment at a major profit, mobilising the windfall to smack down its own debt.
Personally, I don't think CBH want to bail out of Sovereign, even at a substantial short-term profit. CBH may as well collect the dividends (why do you think Prudential and Old Mutual are so keen to underwrite?), and see where the feathers fall.
Without wanting to put the mockers on Sovereign, one has to consider what could happen if the company - for one reason or another - flounders after the rights issue.
I have no doubt CBH would look to continue accumulating further shares in the open market and also revisit the reasons why a merger of the two entities is so compelling.
In the meantime, I reckon there will be some anxious eyes on daily price of Sovereign's illiquid shares.
I'm fascinated as hell to know if CBH would still follow their rights for around 4.2 million hard-to-come-by Sovereign shares if the price dipped below 800c on the JSE in the weeks ahead.
Been there, Dawn that
Quite a few punters took me to task for a short comment I made a couple of weeks ago on the recent board changes at specialist lending business African Dawn (Afdawn).
I contended that the appointment of a handful of heavyweight executives (including former registrar of banks Christo Wiese) might have come too late for Afdawn.
I also commented that the recent slide in Afdawn's share price induced a dreadful feeling of déjà vu - recalling some of the boom-bust contenders in the financial services sector in the late 1990s.
I'm afraid to say the ominous collapse in Afdawn's share price this week to under 50c rings a much starker reminder - a flashback to the price plunges seen in disgraced market darlings like Macmed, LeisureNet and Saambou.
I hope for the sake of a number of my regular correspondents, who continue to back Afdawn's basic business model, that I am just being alarmist.
Newbury rides again
I was most surprised to see car industry veteran John Newbury appointed to the board of struggling transport conglomerate Super Group.
While Newbury - the former boss of Automakers (Nissan SA) - probably knows the local motor industry better than most, his tenure as chair of automotive components maker Dorbyl hardly earned him the admiration of value-seeking shareholders.
Dorbyl persisted with its dour operations for far too long - despite calls from a good number of shareholders to cease loss-making operations and start realising the underlying asset values.
Hopefully Newbury won't be hearing similar calls from frustrated shareholders in Super Group, which is in the throes of a massive rescue plan.
- Fin24.com