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A splendid scheme

In march Finweek speculated Grand Parade Investments [JSE:GPL] (GPI) might walk away with cash (rather than assets) in its deliberations with gaming giant Sun International. We also argued – to the disbelief of some of our readers – that there might be a temptation to consider “re-jigging GPI as a straightforward empowerment investment vehicle with a diversified portfolio of assets”.

While there are some observers who still maintain GPI should have horse-traded aggressively with Sun International to secure a bigger holding in SunWest (the owner of the GrandWest casino in Cape Town) or another casino, our inkling about a cash settlement was spot on. Both Sun International and GPI seem satisfied with the outcome, which at one stage (when GPI chairman Hassen Adams was booted off the Sun International board) looked set to become a bruising slug-fest.

There were even suggestions Sun International would have to make an offer to GPI minorities in order to clean up a frustrating co-ownership of assets and defer a challenge to a lucrative casino management contract.

Briefly, GPI gives up part of its shares (and voting rights) in SunWest and the Worcester casino, as well as its 30,5% holding in Real Africa Holdings (RAH) – which holds minority stakes in four of Sun International’s bigger casinos – in exchange for a settlement of R778m. Also included in the amount is R67m that GPI receives for cancelling management contracts on various casinos.

Giving up part of a cash-spinning asset such as SunWest couldn’t have been easy, but GPI can take comfort in the fact that deliberations saw the management contract fee due to Sun International reduced markedly.

It’s also worth noting GPI will no longer be subject to any empowerment lock-ins with regard to SunWest, which means all its shareholders can now trade freely.

That’s significant. It means GPI is now able to issue new shares for acquisitions without fretting about diluting black ownership to below a specified level. That change could be important, because it’s abundantly clear GPI is going to broaden its spheres of interest.

In fact, GPI chairman Hassen Adams – who deserves much credit for an inspired buy of RAH shares a few years ago – says serious consideration would be given to transform the company into a broad-based empowerment vehicle. Adams notes GPI has already registered a new company – GrandCapital – which will be the vehicle to carry the company’s future deal-making initiatives.

To be honest, the JSE has too few broad-based empowerment vehicles big enough to carry the economic hopes and aspirations of communities.

While there may be a few detractors who don’t like the risks involved in shifting away from the comfort of cash-spinning casinos, we reckon GPI seems a highly suitable candidate for growing into a meaningful empowerment contender of the ilk of Brimstone or Hosken Consolidated Investments.

First, GPI has a war chest that will allow it to chase sizeable deals in a variety of economic sectors. Its balance sheet (especially the remaining gaming assets) will certainly allow for fund-raising in the equity or debt markets. GPI’s timing might well be impeccable. With markets looking increasingly nervous there’s every chance GPI might be cash flush at a time when valuations have shifted to more attractive levels.

Second, gaming investments (most notably the retained 25% stake in SunWest) will provide a solid cash flow underpin, which will allow GPI to maintain its status as a “payer of regular dividends”.

If anything gels sentiment around a company’s status as a sustainable empowerment player it’s the payment of regular dividends (just ask Brimstone). In that regard, GPI shareholders will be looking forward to a special dividend of 50c/share.

We also mustn’t forget GPI has its own gaming thrust in the form of exposure to the Limited Payout Machine (LPM). Adams remains upbeat about prospects for its LPM division – which has bolstered its presence in Gauteng. He says GPI will build off the LPM division in seeking “technology-based” gaming revenue streams. “We’re definitely going to get involved in online gaming and sports betting – areas where capital expenditure is limited because you don’t need bricks and mortar. And our LPM business model can easily be replicated overseas…”

So far the market has responded with some enthusiasm to the outcome of GPI’s deliberations with Sun International – although the prospect of a special dividend has probably been a major factor in stimulating sentiment. As the dust settles on the deal, the market will probably give more thought to the new-look GPI.

One of the critical questions is about deal-making. Adams – who now becomes executive chairman – is one of those tougher businessmen on the JSE and he’s shown flashes of deal-making brilliance (the RAH deal, for example) over the years.

But Adams can’t work alone. GPI will probably need to bolster its deal-making capabilities – perhaps by bringing on investment banking experience. In that regard Finweek wonders how big a role GPI’s corporate adviser Leaf Capital – headed by former BoE executive Paul Leaf-Wright – will play at GPI?

One big advantage for GPI is its attractive asset base. That may make it attractive to established investment companies (perhaps even one of the smaller listed counters, such as Trematon or Sabvest) keen to bulk up its operations by merging into GPI.

Sun also shines

DAVID COUTTS-TROTTER – like an expert card player – doesn’t give much away. But Finweek reckons there’s considerable relief at Sun’s Sandton HQ that an amicable arrangement has been struck with feisty empowerment partner Grand parade Investments (GPI).

Coutts-Trotter says he was pleasantly surprised by how smooth the negotiations went – somewhat of a contrast to GPI chairman Hassen Adams, who suggested “it took a lot of punching and sparring to get to this point”.

Whatever the case, both parties seem genuinely happy with the outcome. Sun takes its holding in RAH (which holds minority stakes in the GrandWest, Sibaya, the Boardwalk and Carnival City casinos) to 97,02%. The settlement to GPI infers a 408c/share price for RAH – a price that may well see some token resistance from the few remaining RAH shareholders.

Sun takes its stake in SunWest to almost 70% by paying R250m for another 4,94% of SunWest. Another R15m was forked out for an additional 21% of the small (and relatively new) Worcester casino.

If Sun manages to take 100% of RAH then the effective stakes in SunWest and Worcester will increase further. Overall, it’s a fair whack of cash for Sun International to be coughing up – especially since it’s already quite heavily geared and stands to lose its exclusive licence agreement in the lucrative Cape metropole area.

There’s not much that can be done about a second casino licence for Cape Town (which surely will go to one of the Tsogo Sun casinos). But at least debt considerations can be placated knowing Sun will in future benefit from a more fulsome contribution from its casinos, with significant minority interests taken out of the equation.

What isn’t entirely clear from the Sens announcements is how the casino management companies will work going forward, if we presume GPI has stepped away from Western Cape manco. If those management fees are no longer going to be shared with GPI then there’s some potential for Sun to fatten margins. 
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