Delisting or just a clean-up?

2011-06-30 00:00

Was it a cautionary notice or positive feedback at the AGM in Stellenbosch last Friday that jump-started the share price of PSG Group [JSE:PSG]-controlled investment company Paladin Capital [JSE:PLD]? Aside from the cautionary there are a couple of reasons the market may have got a little excited about Paladin. The first would be confirmation at the AGM that the underlying investments – on a sum-of-the-parts (SOTP) valuation – are worth more than 360c/share against a share price of around 280c. The second would be Paladin executive director Piet Mouton painting a very encouraging picture for its two biggest investments: private education group Curro Holdings (which enjoyed a very successful listing recently) and empowerment investment group Thembeka Capital (described as a “no risk single stock future”).

Regarding the cautionary, the impression Finweek got at the AGM was the notice related to a possible funding exercise for Paladin (which may have some rather large future obligations as regards its anchor shareholding in the fast-expanding Curro).

But not long after the meeting, colleague Marc Ashton heard from Johannesburg-based sources that some of the smart money set might be betting on PSG buying out minority shareholders in Paladin and delisting it. Perhaps a delisting option may not be that far-fetched – and not only because Paladin is still trading at a sizeable discount to its SOTP value.

At the AGM Mouton hinted Paladin might well look at altering its investment strategy, noting that four investments – 76% held Curro (R850m), 49% held Thembeka (R586m), 22% of engineering group PreCrete-Nozala (R200m) and its 11% stake in junior miner Petmin (R180m) – make up more than 85% of the R2,1bn portfolio. In fact, Curro and Thembeka make up over 65% of the strong portfolio.

Mouton reckoned Paladin could look to reducing the number of holdings in its 12-strong portfolio, concentrating on its existing larger investments and looking at deals that would materially impact earnings and underlying value. Of the smaller investments it seems unlikely building stakes in listed counters such as Top-Fix, Erbacon and IQuad is neither practical nor profitable. Unlisted ventures such as African Unity Insurance, Protea Foundry and GRW Holdings are relatively small and even with strong growth won’t register much more than a small blip on the portfolio value radar.

Mouton conceded even if some of the smaller investments doubled in size there wouldn’t be a major value proposition for shareholders. “We’ll probably look at fewer investments and concentrate on opportunities we can actively manage.” He added Paladin would seek opportunities that allowed it to secure larger stakes in companies. “We don’t want to be blocked.”

That sounded like a veiled reference to what transpired at corporate cousin Zeder, where attempts to push KWV into the Pioneer fold were blocked by minority shareholders earlier this year.

Mouton didn’t indicate how many underlying investments would be the optimum number for Paladin – although he mentioned security services and Africa opportunities are areas for future investment. However, if Paladin disposed of its “rats and mice” (which may take time in current market conditions) and stuck to a handful of big investments there might be a risk of the market preferring to buy directly into the underlying investments. Would that not mean the discount to underlying SOTP value widening markedly?

Curro is already listed, but Thembeka – which trades on an over-the-counter basis – probably won’t be considering a listing for the foreseeable future.

Mouton explained Thembeka needs to be owned by black groups and individuals. “Following a listing we’ll lose control of the share ownership at Thembeka – hence the company will lose its black empowerment status.” Thembeka is currently worth around R1bn and has ambitions to grow into a R10bn empowerment contender. Significantly, it has the capital (both physical and intellectual) to chase down attractive empowerment deals.

But whether Thembeka (see TheSPECtacle, page 36) is driving sentiment for Paladin is debatable. Right now we’d say Curro is whipping up the froth for Paladin. Perhaps the bottom line is that unless Paladin – originally tagged as PSG’s preferred investment vehicle – can offer a compelling strategy to secure big chunky deals going forward, maybe there’s some merit in suggestions that a more narrowly focused Paladin be bundled back into PSG.