Publications
Partners
FRIDAY's late afternoon cautionary that liquor group KWV Holdings could be incorporated into Pioneer Foods took me by surprise.
I had previously argued that it made much more sense for Pioneer – with two massive fines hanging over its head – to sell its Ceres Beverages subsidiary to KWV. To my mind, selling off non-core subsidiaries rather than popping for a rights issue to reinforce a fine-damaged balance sheet made much more sense.
What is clear from developments is that the hand of PSG-controlled Zeder, the major shareholder in both Pioneer and KWV, is clearly pulling the strings. My sources reckon Thys du Toit, former CEO of Coronation Fund Managers and now a sizeable shareholder in PSG as well as chairperson of KWV, is also a prime mover in the rumoured transaction.
I suppose another big clue was the reinstatement last week of Zeder CEO Antonie Jacobs to the recently constituted Pioneer board. Jacobs was also re-elected to the KWV board at the annual general meeting (AGM) in Paarl this week.
I am a big fan of Zeder's agribusiness investment strategies, and think it did a wonderful job in starting to unlock value from the old KWV Limited structure (now split into KWV Holdings and Capevin Holdings).
But I wonder if Zeder is not going "too hard and too fast" here.
If I were a KWV shareholder – and for the record, I'm not – the prospect of being bundled into the sprawling and somewhat tainted Pioneer empire at this juncture might not be viewed as the most prudent (or exciting) corporate manoeuvre.
I'm probably going to sound very old school here, but I believe KWV's promising wine and brandy brands still require intense focus. I would worry that KWV's brand focus might get distracted if the company formed part of a diversified consumer brands empire.
One of my wine industry sources was rather blunt in his response to the news: "Why the hell do they want to put a wine business into a conglomerate that specialises in bread and cornflakes?"
Perhaps some businesses simply don't belong together. And the wine (and liquor) businesses in particular do have a distinctive culture – one that might not be completely understood by the big corporate suits.
Put another way, you are hardly likely to see Remgro pushing to include Distell in Unilever... Having said that, I've always liked the idea of Distell and KWV merging to form a South African super brand house - but that’s another story entirely.
Obviously there will be some advantages outside the regular cost saving considerations. KVW would have access to Pioneer's distribution chain and marketing muscle (the latter being a point that even the most hardcore of wine people will acknowledge could provide some advantage to KWV).
There are also obvious operational synergies with Ceres in terms of bottling and product development (here I'm thinking fast growing RTDs and perhaps even a KWV/Pepsi concoction to rival Klippies 'n Cola).
Perhaps there's even an inkling that Pioneer could enhance KWV's brand development – a notion that certainly won't appeal to liquor industry purists.
My view, though, is that such a deal would suit Pioneer much more than it would suit KWV. Outside its core bread and cereals business, Pioneer has only been reasonably successful in terms of brand building, with many product categories ranked as a distant second or third in market share stakes.
In fact, KWV – if anything – will add a relatively small hard tack component to relatively small soft drink/fruit juice niche. It's hardly a cocktail to shake up the beverages market.
The big issue for me is that there is still plenty value to be unlocked at KWV. The unlisted share, while robust of late, still trades at a massive discount to its 1 800 cents per share net asset value (NAV).
One only needs to scan the presentation made at KWV's AGM last week to grasp just how much potential upside there still is in this business ("triple our market value within five years" as well as improved cash flows, trading margins and market shares).
'Impeccable timing' by Pioneer
My gut feel is that CEO Thys Loubser and his team are just getting to grips with KWV's real potential after their initial efforts to right size, restructure and simplify operations.
I'm not sure the current executive team would be keen to work within the confines of a larger corporate - but of course, I could be dead wrong.
Still, the point is that their efforts might not reap the envisaged rewards if KWV is buried within Pioneer's ample corporate flanks – especially if Pioneer is hobbled with large fines stemming from well-documented competition transgressions.
The liquor market locally and abroad has been hungover for the last few years, which has smothered enthusiasm for KWV. But in better days and with a weaker rand, I have no doubt KWV will kick through more than decent numbers at bottom line and be able to pay out a large tot in dividends.
So that brings me to the critical question around the mooted Pioneer deal. What price will Pioneer pay for KWV? Will it pitch an offer at a discount to the last stated NAV? Will the deal be settled by a share swap; or a share swap with a cash offer component?
The arrangement – whatever the price - suits Zeder, which gets to consolidate (and potentially extend control over) its two biggest portfolio holdings. But I have a funny feeling – unless the offer is very compelling – there might be quite a few resistant and sceptical minority shareholders.
I spoke to Chris Logan of Opportune Investments, who has been following KWV closely since Loubser commenced his successful transformation of KWV, over the weekend.
Logan reckons Pioneer has timed its approach impeccably, as KWV has just put plans in place to grow aggressively. He reckons this argument is substantiated by KWV's recently released chairperson's report - wherein Du Toit ended his report by stating "the journey has just begun".
Logan argues Pioneer is also targeting what is arguably the cheapest branded liquor company in the world. He points out KWV's earnings are expected to more than treble to 300c/share by 2014 (return on equity is targeted at 15%).
Logan adds that KWV is also only trading at 60% of a very conservatively stated NAV. Peers trade at very substantial premiums.
Logan's central concern, however, is whether it is ideal to put together a very broad-based food and non-alcoholic beverage producer with a narrowly-focused branded liquor company.
Undoubtably, if a deal occurs one would expect major synergy from Pioneer's extensive distribution facilities and large overhead cost savings. It's no secret that while KWV has been improving productivity, it currently lacks scale.
"Furthermore, even if a Pioneer/KWV transaction is found to make sense it's quite possible that it may make a lot more sense for KWV to tie up with a specialist branded liquor company. Or for KWV to remain independent and materially enhance value via the simple but logical step of a JSE listing."
One thing is for certain and that is that Pioneer's approach certainly puts KWV back on the radar.
- Fin24
I had previously argued that it made much more sense for Pioneer – with two massive fines hanging over its head – to sell its Ceres Beverages subsidiary to KWV. To my mind, selling off non-core subsidiaries rather than popping for a rights issue to reinforce a fine-damaged balance sheet made much more sense.
What is clear from developments is that the hand of PSG-controlled Zeder, the major shareholder in both Pioneer and KWV, is clearly pulling the strings. My sources reckon Thys du Toit, former CEO of Coronation Fund Managers and now a sizeable shareholder in PSG as well as chairperson of KWV, is also a prime mover in the rumoured transaction.
I suppose another big clue was the reinstatement last week of Zeder CEO Antonie Jacobs to the recently constituted Pioneer board. Jacobs was also re-elected to the KWV board at the annual general meeting (AGM) in Paarl this week.
I am a big fan of Zeder's agribusiness investment strategies, and think it did a wonderful job in starting to unlock value from the old KWV Limited structure (now split into KWV Holdings and Capevin Holdings).
But I wonder if Zeder is not going "too hard and too fast" here.
If I were a KWV shareholder – and for the record, I'm not – the prospect of being bundled into the sprawling and somewhat tainted Pioneer empire at this juncture might not be viewed as the most prudent (or exciting) corporate manoeuvre.
I'm probably going to sound very old school here, but I believe KWV's promising wine and brandy brands still require intense focus. I would worry that KWV's brand focus might get distracted if the company formed part of a diversified consumer brands empire.
One of my wine industry sources was rather blunt in his response to the news: "Why the hell do they want to put a wine business into a conglomerate that specialises in bread and cornflakes?"
Perhaps some businesses simply don't belong together. And the wine (and liquor) businesses in particular do have a distinctive culture – one that might not be completely understood by the big corporate suits.
Put another way, you are hardly likely to see Remgro pushing to include Distell in Unilever... Having said that, I've always liked the idea of Distell and KWV merging to form a South African super brand house - but that’s another story entirely.
Obviously there will be some advantages outside the regular cost saving considerations. KVW would have access to Pioneer's distribution chain and marketing muscle (the latter being a point that even the most hardcore of wine people will acknowledge could provide some advantage to KWV).
There are also obvious operational synergies with Ceres in terms of bottling and product development (here I'm thinking fast growing RTDs and perhaps even a KWV/Pepsi concoction to rival Klippies 'n Cola).
Perhaps there's even an inkling that Pioneer could enhance KWV's brand development – a notion that certainly won't appeal to liquor industry purists.
My view, though, is that such a deal would suit Pioneer much more than it would suit KWV. Outside its core bread and cereals business, Pioneer has only been reasonably successful in terms of brand building, with many product categories ranked as a distant second or third in market share stakes.
In fact, KWV – if anything – will add a relatively small hard tack component to relatively small soft drink/fruit juice niche. It's hardly a cocktail to shake up the beverages market.
The big issue for me is that there is still plenty value to be unlocked at KWV. The unlisted share, while robust of late, still trades at a massive discount to its 1 800 cents per share net asset value (NAV).
One only needs to scan the presentation made at KWV's AGM last week to grasp just how much potential upside there still is in this business ("triple our market value within five years" as well as improved cash flows, trading margins and market shares).
'Impeccable timing' by Pioneer
My gut feel is that CEO Thys Loubser and his team are just getting to grips with KWV's real potential after their initial efforts to right size, restructure and simplify operations.
I'm not sure the current executive team would be keen to work within the confines of a larger corporate - but of course, I could be dead wrong.
Still, the point is that their efforts might not reap the envisaged rewards if KWV is buried within Pioneer's ample corporate flanks – especially if Pioneer is hobbled with large fines stemming from well-documented competition transgressions.
The liquor market locally and abroad has been hungover for the last few years, which has smothered enthusiasm for KWV. But in better days and with a weaker rand, I have no doubt KWV will kick through more than decent numbers at bottom line and be able to pay out a large tot in dividends.
So that brings me to the critical question around the mooted Pioneer deal. What price will Pioneer pay for KWV? Will it pitch an offer at a discount to the last stated NAV? Will the deal be settled by a share swap; or a share swap with a cash offer component?
The arrangement – whatever the price - suits Zeder, which gets to consolidate (and potentially extend control over) its two biggest portfolio holdings. But I have a funny feeling – unless the offer is very compelling – there might be quite a few resistant and sceptical minority shareholders.
I spoke to Chris Logan of Opportune Investments, who has been following KWV closely since Loubser commenced his successful transformation of KWV, over the weekend.
Logan reckons Pioneer has timed its approach impeccably, as KWV has just put plans in place to grow aggressively. He reckons this argument is substantiated by KWV's recently released chairperson's report - wherein Du Toit ended his report by stating "the journey has just begun".
Logan argues Pioneer is also targeting what is arguably the cheapest branded liquor company in the world. He points out KWV's earnings are expected to more than treble to 300c/share by 2014 (return on equity is targeted at 15%).
Logan adds that KWV is also only trading at 60% of a very conservatively stated NAV. Peers trade at very substantial premiums.
Logan's central concern, however, is whether it is ideal to put together a very broad-based food and non-alcoholic beverage producer with a narrowly-focused branded liquor company.
Undoubtably, if a deal occurs one would expect major synergy from Pioneer's extensive distribution facilities and large overhead cost savings. It's no secret that while KWV has been improving productivity, it currently lacks scale.
"Furthermore, even if a Pioneer/KWV transaction is found to make sense it's quite possible that it may make a lot more sense for KWV to tie up with a specialist branded liquor company. Or for KWV to remain independent and materially enhance value via the simple but logical step of a JSE listing."
One thing is for certain and that is that Pioneer's approach certainly puts KWV back on the radar.
- Fin24
