What motivates unbundlings?

What motivates unbundlings?

Two South African investment holding companies have recently announced their intentions to unbundle some of their investments. The first is Remgro Limited (“Remgro”), which has recently distributed its shares in RMB Holdings Limited (“RMBH”) and the shares that it will receive in FirstRand Limited (“FirstRand”) to its shareholders. The second is PSG Group Limited (“PSG”), which has announced that it is considering unbundling its shares in Capitec Bank Holdings Limited (“Capitec”).

Self-examination:
Most well managed companies do a sense check on their business at regular intervals. This entails, inter alia, ensuring that their most valuable resource, the time and effort of the people in the business, is spent developing those businesses that will get the company from where it is to where it wants to be. This is because many businesses from time to time reach an inflexion point where the whole is no longer as valuable as the sum of its parts.

There are usually multiple causes of the discount to the value of the whole. It is often when businesses find themselves not being properly understood by the market due to their complexity. Investors also do not like a duplication of large head office costs resulting from the holding company’s desire to oversee their underlying investments, especially when the value being added by head-office oversight is questionable. This duplication of expensive resources can cost shareholders a lot of money. Furthermore, modern, competitive, global and rapidly changing markets demand energy, entrepreneurship, innovation, focus and agility for businesses to continue driving growth. Sometimes the structures of large, diversified groups of companies do not facilitate or promote these qualities. An unbundling can be an effective way to achieve this. Independence, flexibility and autonomy in the unbundled business can enhance quick and decisive decision-making.

Changing economic realities:
One must not lose sight of the fact that economic realities of the time do affect corporate formations. Prior to 1994 the South African equity market was for decades dominated by a handful of large, diversified conglomerates that were involved in most sectors of the economy. Mining houses such as Anglo American, life companies such as Old Mutual and Sanlam, retailers like Pick ‘n Pay and Pepkor, cigarette companies such as Remgro and liquor companies such as South African Breweries had investment portfolios well beyond what their apparent central focus was. Much of this had been driven by the fact that prior to 1994 it had been extremely difficult for these companies to deploy their capital beyond the borders of South Africa.

This situation was for a time supported by the predominant view in the investment market that ‘bigger is better’. Conglomerates still exist in South Africa, but today the investment sentiment has largely moved in favour of focused investment companies with clear strategies and structures. Big is still good provided it is within defined sectors and excessive diversification is often viewed as a disadvantage.

No longer core:
In the process of self-examination management are sometimes confronted with business units, subsidiaries or investments that no longer form part of the company’s core focus. Other times the impact of these businesses on the financial performance of the company or the regulatory environment in which it operates necessitates a parting of ways. This can be achieved in a number of different courses of action, one of which is the distribution of the shares in the relevant business or businesses to the company’s shareholders. This distribution or ‘unbundling’ is usually preceded by the listing of the shares that are to be distributed on an appropriate exchange if they are not already so listed.

Common threads:
The reasons given for these unbundlings have in the past varied from case to case. However, some common threads have developed in South Africa over the past decade. We have examined the reasons given by the following companies in reaching this conclusion:

  1. Remgro with regards to its unbundling of RMBH, FirstRand in 2020 as well as Trans Hex Group Limited (“Trans Hex”) back in 2010;
  2. PSG with regards to its current unbundling of its remaining shares in Capitec and well as its first unbundling of Capitec in 2003;
  3. Naspers Limited (“Naspers”) with its distributions of shares in Novus Holdings Limited (“Novus”) in 2017, Multichoice Group Limited (“Multichoice”) in 2019, and Prosus N.V. (“Prosus”) in 2019;
  4. Old Mutual PLC’s (“Old Mutual”) unbundling of Nedbank Limited in 2018;
  5. Tradehold Limited (“Tradehold”) with its unbundling of Mettle Investments Limited (“Mettle”) in 2018; and
  6. Pioneer Foods Group Limited (“Pioneer”) with its unbundling of Quantum Foods Holdings Limited (“Quantum”) in 2014.

Different interest groups:
The reasons or advantages given by the management of the unbundling companies in the above transactions can be separated into those serving 3 different interest groups, namely (a) the management of the unbundling company; (b) the shareholders of the unbundling company; and (c) management of the company whose shares are being unbundled. However, one does sometimes wonder if the management of the company that is being unbundled have a persuasive say in the matter or the reasons given.

  1. The unbundling company:
    • Simplification of the group structure and increase its focus (Old Mutual, Tradehold and Naspers vis-à-vis Multichoice and Prosus), thereby facilitating an improved understanding of the group by investors.
    • Compliance with regulatory authority requirements (Naspers vis-à-vis Novus) or to avoid increased regulatory supervision (PSG vis-a-vis Capitec in 2020).
  2. The shareholders of the unbundling company:
    • Reduce the discount to which its shares trade to the net asset value or the sum-of-the-parts valuation of the group (Old Mutual, Tradehold, Remgro vis-à-vis RMBH and FNB and Naspers vis-à-vis Prosus and Multichoice).
    • Provide shareholders with direct access to the unbundled company so that they can decide whether or not they wish to retain their shareholding therein (Remgro vis-à-vis RMBH, FNB and Trans Hex and PSG vis-à-vis Capitec in 2003).
  3. The unbundled company:
    • Develop its own shareholder base (Mettle and Quantum).
    • Allow management to pursue its own strategies, sometimes with different partners, unconstrained by the strategy or dictates of its holding company (Mettle, Quantum and Multichoice).
    • Access to a broader pool of capital providers (Mettle and Quantum).
    • Enable management to develop its own management style (Quantum).
    • Create an additional means to retain and attract management talent (Mettle and Quantum).
    • Creation of a different tool with which to do acquisitions, namely shares (Mettle).

In summary:
The above reasoning seems to suggest that apart from unbundlings being an attempt to enhance the value for shareholders of the unbundling company, the company being unbundled is the recipient of most of the benefits of the unbundling. Whether or not these unbundlings have in fact created value for the shareholders of the unbundling companies and those of the unbundled companies is beyond the ambit of this article and should be the focus of a subsequent analysis.

William Marais
Mettle Corporate and Specialised Finance 
T: + 27 21 929 4884 
C: + 27 82 807 3349 
wmarais@mettle.net  
https://mettle.net/businesses/corporate-and-specialised-finance