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HIC, HIC…HCI

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SHAREHOLDERS in unlisted liquor icon KWV Holdings would surely have needed a triple tot of five-year-old brandy when comprehending the dramatic twists and turns that have transpired over the past few weeks. No sooner had an R820m takeover offer by consumer brands giant Pioneer Foods been withdrawn than KWV was faced with more potential upheaval as aggressive empowerment group Hosken Consolidated Investments (HCI) loomed as the 93-year-old liquor company’s largest shareholder.
The HCI angle isn’t altogether surprising. Finweek and Fin24 had late last year speculated about the possibility of HCI gate-crashing the KWV party. But the entrance of HCI came in a most unexpected manner. Initially, it was believed HCI could buy into KWV by taking out the existing empowerment grouping collected under the Withmore banner.
What actually transpired was that PSG-owned Zeder Investments and Rootstock Investments (owned by well-known asset manager Thys du Toit) ushered HCI into the hallowed halls of KWV. Zeder and Du Toit have both been under unrelenting attack from certain segments of the KWV shareholding body. Both could be forgiven for selling out to get shot of the controversy. But they’re two of SA’s top investors with long, proven track records – not entities readily panicked by constant cackling.
Over time things may change, but there’s no way anyone – at this delicate juncture – could argue Zeder or Rootstock are palming off a gem. As an operational entity KWV has been largely underwhelming.
Still, there’s no question both Zeder (which owns influential shareholdings in both Pioneer and KWV) and Du Toit (who sits on the KWV and Pioneer boards and is a shareholder in PSG) were conflicted.
Finweek reckons both parties when looking back will admit as much (see separate report: “What PSG should have done”). But the question that really needs to be asked is whether Zeder and Du Toit – conflicted or not – really believed the Pioneer transaction was the best way forward for KWV?
Criticism of the roles (and there’s been a startling amount of reporting about this in the Afrikaans press) centres on allegations that Zeder – which holds a number of agri-business investments – would benefit more from a Pioneer takeover of KWV than ordinary shareholders in the liquor business.
That’s a most obvious concern, as Zeder – via Kaap Agri – is the biggest shareholder in Pioneer. As such, Zeder – as a major participant in Pioneer – would benefit from any long term upside the food giant could squeeze from KWV as a part of its Ceres Beverages division (which owns Pepsi, Lipton, Liqui-Fruit, Hooch, etc).
And then there was the contentious issue of KWV’s underlying value.
There’s an argument that the value of KWV’s so-called “heritage” assets is almost irrelevant (except in a liquidation scenario) and that the business needs to be valued on income streams alone (something my experienced colleague Vic de Klerk strenuously argues). By that measure a 1 000c/share offer would probably have been considered downright generous for a business with KWV’s earnings power.
The Pioneer offer – which in all likelihood would have been set lower due to KWV’s dismal interim performance – was pitched at 1 200c/share.
The argument, of course, was that Pioneer’s offer never matched the sum of KWV’s parts. While KWV’s last audited accounts showed a NAV of more than 1800c/share, a good number of shareholders believe its “real” underlying value to be in the region of 2200c/share to 2400c/share. Some even reckon that number could be as high as 2600c/share.
Much has been made of certain of its assets: flagship properties (Laborie, La Concorde, various vineyards not in commercial use, brandy stocks and an extensive art collection – including an Irma Stern supposedly worth more than R30m). Indeed, the values accorded to a number of KWV’s assets are highly conservative. For example, the stunning Laborie property is valued at a smidgen of its market value.
But – in strict accounting terms – there’s nothing untoward or indeed devious about those valuations. Companies aren’t expected to place market values on non-productive assets. Naturally, the intimation that such assets were being “hidden” in KWV’s balance sheet has raised nasty accusations that Zeder – the de facto controlling shareholder in Pioneer – was intent on pulling an asset strip. But it would be difficult to hang an asset stripper tag on Zeder now it’s sold its KWV stake to HCI at 1180c/share. And it’s not as if Zeder hadn’t indicated it was fairly keen to sell out of KWV at a fair price.
Late last year PSG and Zeder chairman Jannie Mouton told Finweek Zeder was a seller of KWV. Although he could easily have been talking for the record at that point, Mouton was adamant if any entity came with an offer similar or better than the one Pioneer had on the table then Zeder would in all likelihood accept it.
Mouton also encouraged the parties bandying about an 1800c/share NAV for KWV – including former KWV chairman Danie de Wet (a vocal critic of the then Pioneer deal) – to make an offer at that price for Zeder’s shareholding.
Mouton has lately also been fairly scathing about KWV. He recalls his first meeting at KWV in 2007. “I pointed out KWV’s return on equity (RoE) was less than 4%. I got a lecture that I didn’t know the industry. Later I realised RoE at KWV stands for ‘Return on Ego’ – because money is wasted on luxury functions, overseas travel, press announcements, public relations divisions, life-size paintings of former chairmen.
“The then chairman Danie de Wet drew an annual salary of R560 000. Thys du Toit received only R150 000. The MD of KWV earns more than his counterpart at Distell. I was shocked…”
Could it be that Zeder simply realised the short to medium term potential upside in KWV was corked?
Mouton was in attendance at a KWV function last year when guest speaker Johann Rupert – chairman of Remgro (which controls liquor giant Distell) and wine industry investor – issued a friendly warning. In welcoming Mouton (and PSG) to the “wine club” Rupert warned that while the wine sector carried much prestige there were also huge demands on management for often very little reward.
Rupert said wine businesses sometimes required up to 20% of management time even though those assets may only contribute 2% to 3% of operating profits.
With KWV, at least over the short term, there was very little prospect of Zeder – despite receiving a dividend in the past financial year – getting a massive kick at bottom line. A recent trading update certainly dashed hopes KWV could generate earnings of as much as 300c/share over the medium term, a performance that would underpin management’s target of building a R1,5bn business by 2014.
To be brutally honest, Zeder – which via PSG acquired an 11% stake in the old KWV Ltd from Christo Wiese for R138m in 2006 and pitched for a rights issue in the new KWV Holdings at around 600c/share last year – has already made the easy money in the difficult wine sector.
Of course, the manner in which Zeder has bailed out is still bound to raise questions. Initial responses to the collapsed Pioneer bid were that Zeder (and PSG) would work tirelessly behind the scenes to gain control of KWV. That would entail Zeder bulking up its stake in KWV and forcing through a transaction with Pioneer perhaps a few years down the line.
Now that Zeder has let HCI into KWV the first conspiratorial grumbles about that arrangement have become audible – mostly centred on a theory that the HCI transaction is a vengeful parting shot by the “hurt” parties in the Pioneer deal.
One shareholder reckoned the Zeder/HCI handover could mean KWV minorities went from the frying pan into the fire. He articulated the matter as follows: “It’s like having a neighbour who wants to build a horrible edifice overlooking all the neighbouring properties. The neighbours resist and the property owner fails to get planning permission for his renovations. The angry property owner then decides to teach his neighbours a lesson and sells his property to a person who everybody is a little wary of…”
Whether KWV shareholders have anything to fear from HCI remains to be seen.
Opportune Investment’s Chris Logan, one of the most outspoken KWV shareholders, welcomes the emergence of HCI as a shareholder at the liquor company. We hear Logan was instrumental in wooing HCI to KWV – having apparently written to HCI’s prime mover, Johnny Copelyn, late last year.
Logan says: “I’ve been very impressed what HCI’s managed to do at Seardel (the clothing and textile company it rescued). I’m sure it will do the right thing operationally and in terms of optimum asset usage at KWV.”
But Logan adds HCI will be under a great degree of scrutiny at KWV and will have to be transparent in its endeavours. “KWV minority shareholders won’t just fall over because it’s HCI. They’ll need to deal with the heritage of this iconic organisation.”
Finweek’s unsure a clash of cultures can be headed off. HCI – headed by former trade unionists Copelyn and Marcel Golding – will lend (and let’s put this as politely as we can) a certain adventurous and aggressive spirit to KWV’s somewhat stiff and traditional culture. Unlike KWV’s previous anchor shareholder, HCI is a business built on heaps of debt and the directors’ deal-making chutzpah. So perhaps it’s a huge advantage HCI is perceived as an investment company not afraid of “getting to grips with its investments”.
Anyone familiar with dairy group Clover (before it listed) would be aware HCI won’t quietly stand-back if it’s unhappy with developments (or lack of developments) at its investments. In the case of Clover, HCI – using its annual report to voice its outrage – openly detailed its dissatisfaction with Clover’s management about instituting a fund-raising plan to secure future growth opportunities.
HCI also wasted no time in cutting through decades of management excesses at Seardel – including shutting down large lines of unprofitable manufacturing capacity, shifting the head office to a factory site and kicking out most of the old guard. HCI is still pursuing legal action against certain Seardel directors – including the estate of the founder, the late Aaron Searll.
In fact, KWV bears more than a passing resemblance to Seardel. Both are operationally speaking on the ropes, but both are asset rich and hold well-known brands. The Seardel experience, although currently painful, may well have taught HCI a trick or two about turnarounds.
There can be no doubt HCI plays a hard game – perhaps even harder than the opportunistic PSG/Zeder combination. Over the past few years HCI has built up a massive casino presence by sheer dogged determination in pursuing assets – an exercise that certainly made the company a few enemies along the way.
Then again, you can’t accuse HCI of ever neglecting its investments. The group, at great cost, has expanded and modernised the fleet at the Golden Arrow Bus Company – one of the old economy assets HCI bought a few years ago currently making sound profits.
Naturally, the question at this point is whether HCI will – as it did with its casino assets – look at buying out minorities piece by piece. Its first port of call would certainly be KWV’s existing empowerment partners, Withmore. Finweek understands HCI’s initial tilts at Withmore’s stake were unsuccessful and may have strained the relationships. But it would be very surprising to see HCI content to sit on a 34,9% stake in the business – because, if anything, outright control would preclude persistent questioning of perhaps radical efforts to secure sustained viability for KWV.
There’s a lingering feeling that KWV – despite the best efforts over the past four years to simplify the business by CEO Thys Loubser – still carries too many outdated corporate habits that are explained away as part of its cultural heritage.
The KWV business without a doubt needs extensive brand broadening beyond wine and brandy – which could even see HCI re-examining (certainly in another form) an arrangement with Ready-to-Drink specialist Halewood (which has already submitted a cash-less merger proposal to take 60% control of KWV).
If KWV is to be shaken and stirred to release profitable flavours then there’s no better mixer than HCI… (See separate report: “What HCI should do.”)
PSG/Zeder
What they should have done
KWV CHAIRMAN Thys du Toit remains adamant the proposed Pioneer Foods takeover of KWV Holdings was still the best deal for the liquor company to pursue. On paper there’s a lot to merit the transaction. Other than the obvious synergies in marketing and distribution, Du Toit says Pioneer’s beverages business (Ceres) is mainly South African-based, while KWV’s is mainly export.
What’s more, says Du Toit, Ceres needs extra production facilities and building space, of which KWV has an abundance. Ceres also has a RTD brand – Hooch – in production, which could accelerate KWV’s RTD ambitions.
“For me, putting KWV into Pioneer would have allowed KWV to grow its brands. It reminded me of the deal that put Land Rovers under the control of Tata.” But Du Toit concedes – with hindsight –he’d have approached the deal differently in order to preclude the criticism about potential conflicts of interest.
“I should have resigned my directorship at Pioneer. The proposal from Pioneer came so unexpectedly that, at the time, I never really thought about my respective positions.”
With hindsight, Finweek reckons Zeder (and its inventive parent company, PSG) could easily have packaged the Pioneer/KWV transaction attractively enough for minority shareholders to support the deal. That’s presuming – and this, in our opinion, is no certainty – Zeder wasn’t intent on bailing out the struggling KWV.
You have to consider the reaction to a proposal entailing Pioneer offering a cash settlement of 1200c/share as well as an option to take shares in Ceres Beverages, which would then be readied for a separate listing on the JSE. That way Pioneer would have retained control of an enlarged (some might say “tanked-up”) Ceres but would also have given KWV shareholders an opportunity to participate in the upside of the new business.
The hitch with such an option, we suppose, is that Pioneer might have been reluctant to dilute its stake in Ceres. In that regard we must remember Pioneer has pulled off a minor miracle in turning the R2,4bn/year Ceres business into a serious money-spinner after acquiring it as a loss-making entity from SABMiller and – believe it or not – KWV.  
ZEDER
Is it really business as usual?
NOT SO LONG AGO Zeder – a rather interesting agri-business investor created by PSG – was very much one of the market’s small cap darlings. But over recent months Zeder has come in for a pummelling from certain segments of the media that’s surely besmirched its reputation.
Initially, one of Zeder’s major hitches was convincing farmer shareholders to sell or swap their stakes in various agri-businesses. People in rural communities were somewhat apprehensive of the Stellenbosch suits. It took a great deal of effort by Zeder CEO Antonie Jacobs to build trust in rural communities.
After what’s transpired between Pioneer and KWV – ironically, Zeder’s two flagship investments – we have to ask whether the specialist investment vehicle still has a rationale for its continued existence. Zeder and PSG chairman Jannie Mouton recently alluded to numerous opportunities in the agri-business sector, but some market commentators believe it might be best for Zeder to lie low for a while.
There have even been suggestions Zeder – which trades at a substantial discount to the underlying value of its portfolio – should be rebundled into PSG. Under PSG, Zeder’s portfolio – which also includes holdings in well-known agri-businesses such as Capespan – could be quietly liquidated, with the stake in Pioneer retained as a strategic investment.
The problem for Zeder is that its business model is premised on deal-making in order to extract (enormous) value from its underlying investments. It is, at this delicate juncture, still a work-in-progress.
Finweek has already speculated Zeder might be keen to up its stake in Pioneer Foods by making an offer to buy out Kaap Agri minorities. Fruit exporter Capespan is another opportunity for Zeder to build an influential stake.
The Kaap Agri deal would make sense over the short term, especially with Zeder’s balance sheet reinforced with the proceeds from the sale of its stake in KWV. But it probably wouldn’t be diplomatic to pursue the Pioneer/Kaap Agri transaction now…
But it’s most unlikely things will stay quiet at Zeder for too long. If anything – and knowing Mouton’s opportunistic spirit – developments at KWV may well have focused minds on adapting new tactics at Zeder.
HCI
What HCI needs to do
AT THE OUTSET it must be realised that KWV Holdings – despite its iconic status in South Africa’s corporate environment – is a small company. For HCI the deal represents buying into a company not too much bigger than Seardel, the clothing and textile company it rescued with a R250m rights issue around three years ago. KWV will rank as one of HCI’s smaller investments – not nearly as important as HCI’s casino interests (held under Tsogo/Gold Reef Resorts) or media (mainly e.tv).
What might worry HCI is that since the valuable minority interest in JSE-listed Distell was split off and bundled into unlisted CapeVin Holdings (see separate report: “Kingmakers in CapeVin”), KWV has looked worryingly like a sub-scale business. Certainly the company, in HCI’s eyes, may not be a suitable candidate for listing on the JSE – which is exactly what a good number of minority shareholders are increasingly keen on.
Turnover still looks well short of the R1bn mark and KWV still carries a high level of costs, which erodes profits to unacceptable levels. The market capitalisation of KWV is barely R800m, which means it’s roughly the same size as storage specialist Metrofile and Tote specialist Phumelela. Spur Corporation, human resourcing group Adcorp and newly listed Clover Industries are roughly twice as big as KWV in terms of market capitalisation.
The truth is that KWV currently has two major weaknesses: it’s being ravaged by the strong(er) rand as it plies mainly the weak export market in Europe, the Far East and North America; and it earns much of its keep in an overtraded wine market.
Perhaps we can add another weakness: staff morale. CEO Thys Loubser says it’s business as usual but concedes staff morale has taken a knock by developments. “People are confused… all we can do is try and be as transparent with staff as possible.”
Apart from stabilising morale, KWV’s challenges are two-fold: break convincingly into the South African market and broaden its product range with brands that sell big volumes. Loubser says: “We have to lessen our dependence on the rand and on the grape.”
It’s perhaps significant that last year KWV appointed four brand specialists who – in terms of the power structure at KWV – rank just under the CEO and financial director.
The ploy seems obvious – especially considering one of the appointed four was intimately involved in the launch of Coca-Cola’s Vitamin Water range. So we can take for granted KWV is working on a RTD (ready-to-drink range) – an aspect of the liquor business where Distell has made very profitable inroads recently.
But developing a RTD (and possibly a cider) range could take up to four years to launch.
HCI, as the new anchor shareholder, will need to decide whether KWV’s brand expansion is an in-house slow brew or whether the company would benefit from acquisitions or joint ventures.
Shareholders might get hopeful that the persuasive HCI chaps can pull off a ‘gorilla’ transaction – perhaps a link with Brandhouse (which distributes Heineken, Windhoek and Amstel) or a major international liquor player keen on extending its influence in SA.
But there’s a ready-made consideration in the form of Halewood International – which pitched a cheeky bid for KWV – could come in. Finweek understands Halewood has proposed a non-cash merger with KWV. The proposal is that Halewood would secure a 60% stake in the enlarged business, which purportedly would still carry the KWV name.
With HCI emerging as the biggest shareholder in KWV there’s not a snowball’s chance that Halewood’s proposals – in current form – will pass muster. However, Halewood – which appears to have grown exponentially over the past five years on the back of its flagship RTD brand, Red Square – may well offer KWV the critical mass it needs to crack the RTD market.
On paper the incorporation of Halewood – which owns several other niche beer and spirits brands – into KWV would create a business that would compete in all liquor categories.
Aside from inducing a new (excuse the pun) fresh operational spirit into KWV, Halewood would also add the much-needed local balance KWV has been craving – providing an effective hedge for the strong rand. Whether Halewood, which has a British-based parent, would be keen to play the role of junior partner in such a venture is debatable.
But we should perhaps not discount the chances that HCI could package a convincing enough deal. In our opinion a dream deal for HCI would entail splitting KWV’s operational assets from its so-called heritage assets. That would entail separating its wine and brandy operations and brands from its heritage assets – properties, vineyards and paintings. Conducting corporate manoeuvres with a simplified corporate structure might well hasten the deal-making required to bulk up KWV’s brands.
But one intriguing thought does linger: HCI has – as Finweek sees it – a good relationship with Johann Rupert’s Remgro. HCI and Remgro were minority partners in Vodacom, and HCI eventually sold its stake in Vodacom to Remgro (VenFin at that stage) in order to fund its media exploits.
HCI and Remgro are also the major equity partners in e.tv, the highly profitable free-to-air television channel. Certainly, the shareholder arrangement at e.tv has looked very cosy – and Remgro backed the channel (and HCI) through some very tough formative years.
We have long held that the ultimate deal for KWV would be to be incorporated into Distell, which is a superbly managed multi-brand liquor business. While most would point to competition issues (especially in the brandy segment) in the local liquor market, it surely would ensure there was some latitude for the creation of a South African liquor giant?
ZEDER/capevin
Still kingmaker at CapeVin?
ZEDER MAY HAVE poured away its shareholding in KWV Holdings but the company still holds a substantial stake in CapeVin Holdings, which means a significant tot in perennially profitable liquor group Distell. Zeder holds a 39,2% stake in CapeVin Holdings. CapeVin has a 51% interest in CapeVin Investments, which in turn has a 50% interest in RCV Investments, which has a 58,4% holding in Distell. Ultimately, Zeder has an 8% stake in Distell.
While Zeder executives were loath at this stage to comment about the future of the company’s stake in CapeVin, indications are the attractive dividend flows from Distell will maintain the “have and hold strategy”.
That’s not what Finweek – which regards Zeder as holding a “kingmaker” stake in CapeVin – really wanted to hear. Far more intriguing would be Zeder selling its CapeVin stake at a handsome price to Remgro, which is currently the biggest single shareholder (via RCV Investments) in Distell. The other major shareholder – with a slightly smaller stake than Remgro – is beer giant SABMiller.
Clearly Remgro, which lately has been picking up smallish parcels of CapeVin Holdings and listed CapeVin Investments shares, would want to consolidate its dominant position in Distell. For one thing, it latches on to some reliable dividend flow and for another it may yet convince SABMiller to come to the bargaining table with its Distell stake (which is but a drop in the greater scheme of things for the beer giant).
While Zeder seems happy to keep sipping from Distell, there may be pressure from minority shareholders in CapeVin Holdings (ie, ex-KWV shareholders who received CapeVin shares when KWV Ltd was split) to dismantle what’s in reality an archaic pyramid control structure.
Interestingly, Opportune Investments’ Chris Logan – who loomed large as a force of resistance in the Pioneer offer for KWV – could well play a role here. Logan relishes tilting at pyramids and was instrumental in breaking down such control structures at Liberty Holdings and Trencor/Mobile.
Logan is currently tilting at Pick n Pay/Pikwik and may very well soon be charging at CapeVin.

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