Pyramids are not just the famous last resting-places of ancient Egyptian
rulers,they are also infamous control structures employed by many
JSE-listed companies - as out of fashion today as they are relics of a
by-gone age of apartheid capitalism.
The diversification ("die-worse-ification") craze of the 1980s that
encouraged the creation of conglomerates and diversity of earnings
coincided with the boom-time in the generation of holding companies,
investment trusts, and pyramids.
Never popular among investors there is a long history of holding companies
trading at an often deep discount to the operating entity. An important
reason for this is that the pyramid structure defends management from
hostile takeover bids and the glare of unpleasant public scrutiny in much
the same way as Egyptian pyramids were designed to be impervious tombs of
the Pharaohs.
The persistent blizzards of market forces are sweeping into oblivion many
of these structures. Is it merely coincidental or has the proposed new
Capital Gains Tax got something to do with the change? Could the current
wave of corporate restructuring be an anxious attempt to unlock the
discount(s)? The legislation encapsulating the new tax has yet to be
framed, but it seems clear that unbundling, currently tax-free, may well
not continue to be so.
Purists would have preferred the "control fiends" to break up the pyramids
as a result of market forces. An altruistic response to a deep soul
searching of the basic tenets of good corporate governance, shareholder
democracy, and, most importantly, the right of shareholders to throw out
poor management would have done much to bring a gloss back to South African
markets that have become a little tarnished recently.
Well gallantry may not hold sway, but the erosion of capital gains in the
form of taxation has certainly had an astonishing effect on the already
highly eroded landscape. The spectre of our taxman donning the mantle of
"tomb robbers" plundering the pyramids of the treasurers of antiquity is
unleashing a wave of wealth creation.
There is no need for investors to be sanctimonious: there is often a good
reason to invest in the holding company rather than in the operating entity
where a significant discount is to be had. It may need time and patience to
have the value unlocked, rewarding the investor.
By way of example (valuations as at 27 July 2000) Inhold traded at a 13
percent discount to its operating subsidiary Investec; KWV at a 10 percent
discount to its holdings in Distillers and Stellenbosch Farmers' Winery;
Boltons at a 27 percent discount to Bolwear and Cargo; Pick 'n Pay Holdings
(Pikwik) at a staggering 24 percent discount to Pick 'n Pay Stores; Pepgro
at a 13 percent discount to Pep; and RMH Holding at a 14 percent discount
to Firstrand.
In companies that have announced corporate actions in which the market
anticipates that change may be in the pipeline, the discounts have narrowed
to historically low levels. In the case of Liberty Holdings the discount is
a mere 5,6 percent, while Mobile is also trading at a 5,5 percent discount
to Trencor.
The immediate response of share prices is illustrated in this example.
Holding company Dalys Limited published a joint cautionary announcement
with Tempora and Ettington on 25 July 2000. The same day that the news
appeared the price of Dalys rose 13,8 percent; Tempora 16,6 percent; and
Ettington 30 percent.
It only goes to show that no matter what market conditions prevail there is
always a windfall for canny investors.