ONE could get quite nostalgic about proposals to merge the Rupert family-controlled investment vehicles Remgro (worth some R33bn) and Venfin (worth R6.5bn) because, essentially, we'd have the old Rembrandt Group back together again.
Older readers may remember that Rembrandt - started 60 years ago with ordinary folks' capital by the late Anton Rupert - was split into Remgro and Venfin in 2000.
Remgro housed the "old economy" industrial assets (tobacco, liquor, food, banking, etc), while Venfin was left with more adventurous "tech" investments (most notably a 15% stake in Vodacom).
Venfin took leave from the JSE in 2004 after selling its stake in Vodacom to Vodafone, and has since traded as an unlisted company on an over-the-counter (OTC) share platform.
Finweek and Fin24 have long speculated about a possible tie-up between Remgro and Venfin. I doubt too many market commentators would disagree that it makes no sense for the Rupert family to retain two separate investment entities.
As recently as August 2008, I admitted my fixation with the idea that a smoke-free Remgro - in terms of corporate action - should be looking no further than its old corporate cousin Venfin.
Plainly, the Remgro/Venfin merger is a deal that simply had to happen, once Remgro had unbundled its stake in British American Tobacco (BAT). Imara SP Reid analyst Steve Meintjies thinks a combined Remgro/Venfin entity "can now go for something bigger if it wants".
I would agree. Ironically that "something bigger" may be even found in the area of technology, where Venfin has managed consistent deal flows in recent years.
Without BAT in its portfolio, Remgro - although still weighing in as a heavyweight - has lost much of its punch. Some commentators (like my colleague Vic de Klerk) even reckoned a "smokeless Remgro" was plain boring.
In truth, Venfin does not add huge bulk to Remgro. The fact is that the whole of Venfin is actually smaller than Remgro's current holding in private hospitals group Medi-Clinic.
But Venfin does add greatly to Remgro's portfolio diversity, adding a slew of unlisted investments that would not normally be available to mainstream investors.
If the merger goes ahead the new-ook entity will carry a value of between R45bn to R48bn - adding exciting investments like E-tv, Tracker, Vision China Media, Seacom and Sail to Remgro's meat-and-potatoes offering like Medi-Clinic, Distell, Unilever, FirstRand/RMB and Rainbow Chickens.
There is, in my mind, even a possible strategic overlap in Venfin and Remgro's current holdings. The new investment entity could even have a substantial "media segment" - and I say this guardedly, because last time my media musings appeared to irk Mr Rupert.
Remgro holds an indirect stake in radio broadcast group Kagiso Media (via Kagiso Trust Investments) as well as a small holding in printing & publishing group Caxton. Venfin, on the other hand, holds a major stake in E-tv, One Digital Media (digital screens) and Vision China Media (a promising advertising network in China) as well as Fynbos Media and sports brand investor SAIL (both of which have a significant media component).
Speculation aside, at current levels I doubt too many Remgro investors are going to protest the tilt at Venfin.
Ratio is fair
For Venfin investors, the option to swap unlisted shares for new stocks in Remgro probably makes sense, especially since Venfin has historically traded at a fairly big discount to its net asset value (NAV) on the OTC market.
The initial response from professional investors is that the swap ratio based on June 5 values (one Remgro for every 6.25 Venfin shares) is fair, valuing Venfin at around 2 300c/share.
While most punters will mull the value proposition, the truth is that Venfin may also have become superfluous in the Rupert investment empire - which now also includes Reinet Investments. This much was evident in 2008 when Remgro and Reinet took up stakes in technology group Xiacom, even though the investment looked far better suited to Venfin.
If there is to be any resistance to the merger from Venfin shareholders, it may be that lumping the tech-laden portfolio into Remgro dilutes (or should we say "buries") a handful of exciting investments. These "exciting" investments would include Vision China Media, E-tv, vehicle recovery group Tracker and (especially) the undersea cable services group Seacom (in which Venfin holds a 25% stake).
While the 32% stake in E-tv represents about 20% of Venfin's NAV, the same holding would probably represent 2% or 3% of the enlarged Remgro.
Interestingly, Venfin's biggest holding - its 25.5% stake in technology giant Dimension Data - is left out of the merger equation. The proposal is that Venfin's roughly R3bn stake in Didata will be put in a new holding company.
In essence, Didata, which has appreciated by about 25% since the end of 2008, accounts for roughly 1 100c of the 2 300c/share inferred value for Venfin.
Now, having shares in a holding company that holds just one single listed investment - even one as promising as Didata - seems daft.
I would assume then that the holding company for the Didata shareholding is merely a temporary arrangement.
I know that Venfin in the six months to end-December 2008 did not impair the book value of its Didata investment, despite a more than R1bn difference between the book value of R3.5bn and the then market value of R2.3bn. The recent Didata rally appears to justify this decision.
Clearly, Venfin reckons Didata is worth a whole lot more than the prevailing market price, and consequently reckons it would be unfair to swap this stake into Remgro at levels that did not truly reflect the value of the business.
Quite frankly, adding Didata to Remgro would hardly be inspiring. At the moment Remgro's portfolio comprises about 70% of listed companies, so the last thing it needs is another large listed holding.
Maybe it's reasonable to expect that Venfin's Didata shares will be unbundled to shareholders in the new holding company in the not too distant future.
The author holds shares in Remgro and Venfin.
- Fin24.com