PROSPECTIVE investors in Remgro and Richemont must tread cautiously and remember that the BAT shares they will receive will be in a second-class so-called inward listing on the JSE.
This could mean that the JSE BAT shares will always trade at a discount of as much as 5% to the share price in London, where the group's primary listing is. An inward listing is when a foreign company lists on the JSE.
The regulations regarding inward listings are hopefully the last remnants of the detestable exchange control that was introduced in 1960. Some would say that exchange control caused more harm to the country's economy than the National Party's policy of inward economic development.
Unfortunately there's very little the man in the street can do about exchange control. Finance Minister Trevor Manuel, who is in charge of exchange control, is apparently enamoured of it. He's still hiding behind a now decades-old IMF statement in favour of a systematic scaling down of exchange control.
SA Reserve Bank Governor Tito Mboweni, who is in charge of enforcing exchange control, long ago asked for its complete dismantling because it's expensive and not effective.
But enough of that. The listing of BAT's shares on the JSE is subject to the restrictions of an inward listing. This doesn't affect individuals and even companies very much, but institutional investors, from Sanlam to the defiant PIC, will in future have to reconsider their investment in BAT.
Local investment institutions may buy as many Richemont shares as they like in rands, even though 100% of Richemont's assets are overseas.
But the BAT shares they will receive will be in an inward listing and have to form part of the 20% of their capital that institutions are allowed to take out of the country. The institutions may suddenly find in October, when BAT is unbundled, that their overseas assets now exceed the 20% limit. Something will have to be sold.
Reinet
The men who hold the power at exchange control - there are only about 150 of them left - kindly decided to give institutional investors two years' grace to sell their BAT shares or other foreign assets in order to come back in line with the 20% restriction.
Perhaps our new president won't be so occupied with international events and lift exchange control completely over the next two years.
Reinet, the investment company, or call it a private equity fund, which was also formed as a result of the unbundling of BAT, has an ordinary listing on the JSE.
New shareholders in BAT could use their shares to apply for more Reinet shares, but at a discount of between 5% and 10%. That's a nuisance and just shows once again the price investors and the economy have to pay for exchange control. The Rupert family will also earn a management fee of 1% on the total assets of Reinet, as well as a 10% bonus on the increase in the value of the assets.
That's substantial, measured by SA standards, but quite acceptable for a private equity fund. Check out the investment team before you buy more Reinet shares, preferably with the return from the remaining Remgro shares that should be sold after the unbundling of BAT.
Not part of Top 40
Remember too that although BAT will probably be the largest listing on the JSE after October, as an inward listing it can't be included in the Top 40.
The Top 40 will therefore still be dominated by mining shares, while BAT will be a standalone international company that can be freely traded by individuals on the JSE. Thanks to BAT's excellent hedging qualities, it will be a good alternative to the Satrix 40, which is in any case probably a better investment product than the best that the country's asset managers can offer.
Sector rotation between Satrix 40 and BAT could eventually become a very nice playing field for the more active private investor. For example, if gold and platinum prices start to fall and the rand weakens you should already have been out of Satrix 40 and into BAT. And vice versa if the prices of the precious metals rise again.
Don't be too worried about the risks of investing in a single share - something that the clever, young wealth managers are so keen to expound on. Over the past 10 years, BAT's shares far outperformed the FTSE 100, and it may perhaps be less risky to invest in the single share than the big pot that includes all the listed shares on the JSE.
*The writer holds shares in Remgro.
- Fin24.com