Cape Town - Investec Securities said the proposed merger between Remgro and Venfin "makes a lot of sense for the Rupert family". But the stockbrokerage remained "wholly unconvinced about the merits for non-Rupert family Remgro shareholders".
In a "flash" note to clients Investec pointed out that the Rupert family - which controls both Remgro and Venfin - owns a far greater percentage of Venfin than Remgro. Investec asked: "Is this a deal-failure admission on Remgro's part perhaps, and a thought that Venfin represents a case of 'better the devil you know'?"
There has been debate of late - including in Fin24's weekly magazine, Finweek - around Remgro's strategy in current market conditions. While bargain priced assets do abound, the general consensus was that Remgro would probably err on the side of caution in terms of seeking out new deals.
Naturally Remgro's decision to tilt at its corporate cousin Venfin would prompt questions around whether there were not better assets available locally and abroad.
Investec strongly infers that the Remgro/Venfin merger proposals suit the Rupert family.
Investec estimated that the Rupert family's shareholding in Venfin was roughly three times its shareholding interest in Remgro.
"In theory, therefore, the family would benefit by having a bigger value attributed to Venfin in that they would receive a greater portion of Remgros for the Venfins they own."
From a non-family Remgro shareholder perspective, Investec said "we see very little in the deal to excite us".
The stockbroker argued that the Venfin assets being added are very small in Remgro's life with nine assets (excluding Venfin's stake in Dimension Data) collectively accounting for 2.1% of net asset value.
Venfin has nimble touch
Investec calculated that Venfin's net asset value - again stripping out the 'excluded' stake in Didata - was around R4.33bn.
The stockbroker said this implied that Remgro was acquiring Venfin's (mostly unlisted) assets at between a 3.5% and 7.6% discount based on the company's audited figures to end December 2008.
Investec did concede, though, that Venfin's asset valuations have probably "come off in the last five months".
Investec saw a wider discount and a greater likelihood of cash outflows as two potential negatives for Remgro.
The stockbroker pointed out that with greater valuation risk on the Venfin unlisted investments the market could respond by building in a greater margin of safety with a widened discount to Remgro's net asset value.
As regards cash outflows, Investec said a number of Venfin's investments could be considered to be in the start-up or near start-up category. "These do require cash injections from time to time to support growth."
Investec said after the Venfin deal around 32% of Remgro's investment portfolio would comprise unlisted investments.
These would include current Remgro holdings in Unilever, TSB Sugar, Total SA, Air Products, Kagiso Trust Investments and PG Industries as well as Venfin's larger investments in etv, Tracker and Seacom.
Investec did, though, cite a number of positives for Remgro from the Venfin merger; most notably the introduction of a bigger "blue sky" element, cost savings in the reduction of duplicated functions between the companies and the elimination of conflicts of interest.
Investec also noted that Venfin, headed by Jannie Durand (who Finweek has already identified as a possible successor to long-serving Remgro CEO Thys Visser), had been nimbler than Remgro in sourcing new investments over the last five years.
"The merging of the investment teams could, hopefully, result in a little more energy being imparted to the Remgro side of the business to consummate deals."
- Fin24.com