Venfin's mystery package

IN ROUGHLY a fortnight unlisted investment company Venfin will spin out its 25% interest in technology giant Dimension Data (Didata) to its shareholders in the form of new unlisted holding company Venfin DD Holdings (DD Holdco).

From what I understand there are various issues - most likely tax implications - that preclude Venfin, which itself is set to be merged into corporate cousin Remgro, from simply unbundling its stake in Didata to shareholders.

Let's be frank: the formation of DD Holdco is not an exhilarating corporate development, and I reckon any initial intrigue will be limited to the discount that the unlisted shares, which will trade on an over-the-counter (OTC) platform, put on the market value of Didata shares.

At the end of December Venfin - as pointed out in Finweek earlier in 2009 - declined to provide for an impairment on the value of its Didata investment. Despite carrying a market value of R2.3bn at the time, Venfin opted to value the Didata stake at almost R3.5bn. Venfin clearly thinks Didata's potential and value are not properly recognised by the market.

In the last few months Didata's share price has appreciated steadily on the back of an improved operating performance, so much so that the market value of Venfin's 25% stake is now worth over R3.1bn.

That would infer a market-based value of about 1 200c/share for DD Holdco. The million-dollar question is by how much DD Holdco will discount this valuation.

One-horse vehicle

Will we see a narrow 10% discount, or will the discount extend nearer to the 15% level?

On average Venfin has traded at a discount of about 20% to its underlying assets - even stretching to 30% at some point(s). But DD Holdco is different from Venfin in that it only holds one single investment - an investment where the market value can be easily calculated.

That said, I suspect then that DD Holdco won't trade at a huge discount to its Didata holding, and that any "discount gaps" will quickly be closed by value-seeking punters wanting to snap up Didata on the cheap.

But buying an indirect holding in Didata on the cheap, however, will only be enticing if punters know that DD Holdco is a temporary arrangement.

By that I mean that there is a realisation that an unlisted holding company with a single listed investment does not exactly have a long-term future.

Clearly DD Holdco was created specifically to house Venfin's Didata stake, and there has been no indication that this vehicle will be expanded or adapted to take on other investments.

The truth is that swapping Remgro shares for Venfin shares - in which more than half the intrinsic value comprised (an under-valued) Didata - simply did not make good investment sense.

So how could DD Holdco play itself out, hopefully in a way that creates some value for the old Venfin shareholders?

Listed cash shell on the way?

Naturally an entity could bid for DD Holdco's stake in Didata, but such an advance would presumably have to be undertaken at a price considerably more than Didata's current share price. The Rupert family - which will control DD Holdco - have always been patient long-term investors. The Ruperts will not let DD Holdco dispose of its main asset for a song.

Without an attractive bid - unlikely under current market conditions - shareholders may fret that DD Holdco turns from temporary and transitional to prolonged, ponderous and pointless.

If there are issues preventing a cost-effective unbundling of Didata's shares in DD Holdco's current form what could well transpire - according to some mumblings that I've heard - is that DD Holdco looks to acquiring a listed cash shell.

DD Holdco's Didata asset could then be reversed into the shell (what about Remgro-controlled Dorbyl as a convenient vehicle?).

This will be a temporary arrangement, obviously with the JSE's consent, to allow a cost-effective unbundling out of the Didata shares to shareholders.

- Fin24.com

*Hasenfuss holds shares in Remgro and Venfin.