IBL-GML Amalgamation. Our View

Transcription

1 IBL-GML Amalgamation Our View

2 Rationale IBL s board recommended the amalgamation stating: Amalgamation will bring along a combination of strengths and strategies to enhance operational performance, capital growth and long term financial results, hence maximising shareholders value. The Amalgamated Company will become a more diversified group having a strong presence in numerous sectors of the Mauritian economy, and with ambitious growth prospects both regionally and internationally. Our Take We believe that the amalgamation is a logical step for GML Investissement Ltée (GMLI) who already controls Ireland Blyth Ltd (IBL) and which constitutes 56% of GMLI s group revenue. We expected GMLI to join the SEM at point in time, and we prefer it to be in an amalgamated format rather than yet another Investment Holding whose investees could be almost entirely accessed directly. Jun-16 2

3 Shareholding Like other large family owned conglomerates before it, the amalgamated IBL Ltd will have a separate class of shares which will carry voting rights thereby making it impregnable to highly dreaded hostile takeovers IBL Before IBL Ltd After Public 27% Public BMHL SWANL 5% 2% 3% Voting Rights 48% 14% 5% 7% BMHL 11% 74% SWANL 14% GML Sharehol ders Economic Rights 90% GML Shareholders Jun-16 3

4 Group Structure Post amalgamation, existing IBL shareholders will gain added exposure to financial services (Abax/AfrAsia), Biotechnologies (GML Life), Building Materials (UBP), Beverages (PBL), and Hospitality (LUX) which is likely to result in a more stable stream of dividends. IBL Before IBL Ltd After Hospitality Commerce Commerce Logistics Retail Logistics Agro Seafd & Marine IBL Eng. Innovation IBL Ltd Property Fin. Svcs Industry Fin. Svcs Eng. Jun-16 4

5 Key Events Timeline The initially curious appointment of Mr Duchesne made perfect sense once plans for a merger were disclosed Market did not make the connection between The Bee Equity Partners Ltd s (BEEP) share distribution and IBL s brewing merger Series = 100 on 31-May Shareholders have been 80 MSCI FM ALCAPEX-12 SEMDEX IBL -60 convened to a special 75 BEEP (Uses right y-axis) -100 meeting on Jun 14 th to vote on the matter Jun-16 5

6 Investigating Fairness for IBL minority shareholders 8-Jun-16 6

7 Executive Summary Having analysed the exchange ratios and valuations which we mostly disagree with carried out for the purpose of amalgamation, we nevertheless conclude that IBL minority shareholders are being offered quite a fair deal Although the minority shareholder is being indirectly stripped of his voting rights which from a big picture perspective does not change much for him given that GMLI already controlled IBL the boosted exchange ratio provides a generous compensation We recommend that IBL shareholders vote in favour of the proposed amalgamation at the special shareholder meeting which will be held on June 14 th Our Analysis In the slides that follow, we will offer our opinion on the determination of the exchange ratio We take first and foremost a market based approached because we believe the Mauritian Bourse despite its quirks or tardiness is generally efficient Jun-16 7

8 Market Liquidity The Independent Valuer (IV) swiftly dismissed the use of market prices to reflect a fair value given that the companies were not liquid For starters, the IV s liquidity measure ignores the fact that a large fraction of shares do not trade, e.g. GMLI s 35M IBL shares According to our freq. adj. mean daily value traded, LUX ranks 6 th. If we exclude ROCK and GAMMA who experienced sporadic but large trades in 2015, we find that LUX is the most liquid stock after the MCB-SBM- NMHL trinity! Volume Turnover Ratio [%] Value Turnover Ratio [%] Trade Freq. Adj. Liquidity Free- Free- Mean Rank Raw Raw Raw Raw Measures Float Adj. Float Adj. [Rs M] [#] as per Ind. Valuer AXYS AXYS SEM AXYS AXYS AXYS AXYS ALTEO IBL LUX MEI PBL BEEP UBP BLFE Market Market - Median Market - Mean TTTTTTTTTTTTTT RRRRRRRRRR vvvvvvvvvvvv = TTTTTTTTTTTTTTTT RRRRRRRRRR vvvvvvvvvv = VVoooooooooo ii SSSSSSSSSSS ii VVaaaaaaaa ii AAvvvv MMMMMM CCCCCC AAAAAA. DDDDDDDDDD TTTTTTTTTTTTTTTT ffffffff aaaaaa = DDDDDDDD TTTTTTTTTTTT ii VVVVVVuuuu ii TTTTTTTTTT SSSSSSSSSSSSSSSS 2 Jun-16 8

9 Market Efficiency & Liquidity We believe that market prices generally reflects a fair assessment of a company s value. The fact that: Market prices of Gaming/Betting companies corrected sharply following budgetary measures, SBM tumbled in the wake of the BAI Group s collapse but levelled off despite of re-statements, and LUX was flat YoY in 2015 while peer s plunged up to 35% all show that the market is nimble in adjusting to expected performances Further, investment holdings who offer diversified but indirect access to quoted/unquoted companies typically trade at substantial discounts to NAV reflecting the absence of control and the fact that the company s income is essentially dividend driven. Conglomerates have in recent years all espoused the term Investment Company to describe their business. Our Methods We expect a volume or value based turnover ratio (TOR) computation to yield similar results, which is what we saw when we computed liquidity using this metric. As a sanity check, we corroborated our calculations with those provided by the Stock Exchange, and except for BEEP due most likely to the substantial shift in share price following its div. in specie were identical. We then adjusted this Raw figure to account for shares that do not move, i.e. a Free-Float Adjusted TOR. Under this method, we discover that MEI is more liquid than LUX which we consider to be one of the most liquid listed stocks. As a comparison, MCB s TOR is ~13% and SBM s 23% which suggests that several of GMLI s quoted investees are quite liquid. Nevertheless, our preferred method to rank liquidity is using a combination of trade frequency and mean daily value traded. According to this method, we find that several GMLI investees individually constitute 1% or more of daily total market turnover (includes debt) in a market that contains >100 securities. Therefore dismissing market prices altogether due to illiquidity is in our opinion not a strong argument. Jun-16 9

10 Valuation Alternatives We believe market prices generally reflect fair values despite transient mismatches, and therefore used market prices wherever possible We applied a 30% bulk discount to the IV s valuation of unquoted companies ex-afrasia which we valued independently using peer ratios. Sep-15 Dec-15 IV Mar-16 Jun-16 GMLI FV [Rs M] 13,681 12,840 17,023 12,856 12,766 [Rs / Share] Quoted [Rs M] 12,439 11,598 15,102 11,614 11,524 ALTEO [Rs M] 2,993 2,707 4,188 2,346 2,271 LUX [Rs M] 3,362 3,200 3,418 3,133 3,066 UBP [Rs M] PHIN [Rs M] PBL [Rs M] BEEP [Rs M] BLFE [Rs M] IBL [Rs M] 3,992 3,688 4,634 4,175 4,279 AfrAsia [Rs M] 1,369 1,369 1,402 1,369 1,369 Unquoted [Rs M] 1,505 1,505 2,150 1,505 1,505 Abax [Rs M] , City Brokers [Rs M] GML Life [Rs M] Others [Rs M] Net Debt & Cap. Costs [Rs M] -1,632-1,632-1,632-1,632-1,632 Jun-16 10

11 Alternative GMLI Valuation Our Methods We choose to assume that market reflects a generally fair value of a company in spite of transient mispricing that may occur from time to time and therefore use Mark-to-Market prices where possible We believe that market prices after the announced merger would not be fair game as IBL s share price moved substantially in anticipation of the amalgamation We updated GMLI s stakes to reflect the BEEP dividend distribution We independently valued AfrAsia Bank using its listed peer s ratios The Independent Valuer (IV) valued GMLI s listed companies at a combined 30% premium to their market prices on Dec 31 st. Based on our view that the market is generally fair, we applied a 30% discount to GMLI s unquoted portfolio as valued by the IV. The IV applied 20% discounts to equity values to reflect lack of control, a 30% discount for minority shareholder with reduced voting power on the unquoted segment therefore did not feel unreasonable. Our Findings Based on market prices on Dec 31 st 2015, we find that pre-merger GMLI is worth Rs12.8bn v/s Rs17.0bn by IV with the quoted portion worth Rs11.6bn v/s Rs15.1bn by IV. Jun-16 11

12 IV s Valuations Our take ALTEO The IV evaluates ALTEO at ~Rs53 per share which after a 10% discount for Joint Control stands at ~Rs48 for GMLI which it corroborates with a NAV per Share Rs70 on Dec 31 st According to its interim results at same date, ALTEO s NAV per share stood at Rs53 not Rs70. At market, ALTEO s recurrent R4Q PER on Dec 31 st stood at a very high 68x v/s 63x for its peer group (sugars). Using the IV s valuation for GMLI, ALTEO s PER would have stood at an even more excessive ~106x. We therefore believe that the Market reflects a fairer value for ALTEO. At market, ALTEO s discount to NAV on Dec 31 st stood at 42% v/s 46% for its peer group further enforcing our view that the Market reasonably expresses a fair value. Investment companies have typically traded at steep discounts to NAV reflecting the fact that value is locked away; in the case of sugars, we believe this is the discount the market thinks is fair for locked up land banks. LUX The IV evaluates LUX at ~Rs63 per share for GMLI which it corroborates with an implied EV/EBITDA Multiple of 11x v/s 9x for NMHL and CHSL. We find it curious that SUN was not included in LUX s peer group. Further, we calculate the average EV/EBITDA multiple for NMHL and CHSL to be 11.3x given that NMHL s reported EBITDA included unusual items such as Results from Associates, Finance Revenue and Fair Value gains on properties. We estimate LUX s peer group s EV/EBITDA multiple to stand at 12.5x which suggests that LUX may have been under-valued by the IV as it justified the higher multiple citing higher growth prospects for LUX. With an EV/EBITDA multiple of 12x on Dec 31 st, LUX may have been a tad bit expensive given that the average EV/EBITDA multiple of international giants (IHG, Hilton, Accor, Marriot) currently stands at ~10x. Jun-16 12

13 IV s Valuations Our take PBL The IV evaluates PBL at ~Rs408 including a minority discount and includes PBL s newest acquisition, Edena, a Réunion-based water bottling company. The IV corroborates the PER of 19x citing African Peers 32x. Excluding Nigeria s Champion Breweries whose PER stood at 337x, we calculated the average PER of PBL s African Peers to be 23.5x on Dec 31 st using Bloomberg data. PBL runs a mature business whose expected annual organic growth is in the low single-digits and remains our top defensive pick. The combined PER and PBV of PBL s defensive peers (INNO & MOR) stood at 13x and 1.04x respectively on Dec 31 st. PBL rocketed mid-15 on the back of strong foreign investor demand for African Brewers rather than pure fundamentals. The IV s implied PER of 19x and PBV of almost 2x for PBL is higher than its peers, which is why we believe the market reflects a fairer value. UBP The IV evaluates UBP at ~Rs105 including minority which it corroborates with an EV/EBITDA multiple of 10.6x for African Peers against 9.8x for UBP. We calculated the average EV/EBITDA of UBP s African Peers, i.e. construction materials companies to be 11.6x on Dec 31 st using Bloomberg data. We believe that UBP has been depressed by the 5Yr-long contraction for the construction sector and its recent recovery reflects the market s anticipation of a pick up of activity doped by smart cities in the construction sector. We therefore believe the IV s valuation reflects a fairer value for UBP. AfrAsia The IV evaluates AfrAsia at Rs7.1bn for GMLI which it corroborates with an implied PBV of 1.4x v/s 1.3x for MCB and 1.0x for SBM. Using NAV as at Dec 31 st, MCB s Price to Book Ratio stood at 1.25x and SBM s at 0.83x. Banking sector PBV stands at 1.09x and PER at 8.6x which we used in our back of the envelope valuation of AfrAsia which yielded a value of Rs6.9bn and therefore appears to have been reasonably priced. Jun-16 13

14 IV s Valuations Our take BEEP The IV valued BEEP at Rs68 per share, i.e. at a 17% premium to book post dividend in specie. On the SEM, investment companies (INVH) have traded at half-book for years and continue to do so. The combined discount to NAV on Dec 31 st was 50% and currently stands at 54%. With a 77% discount to NAV on Dec 31 st and the current 71% discount, BEEP s share price could be higher, but we wish to point out that adjusted for the share distribution BEEP is currently trading at 2x higher than immediately before the announced distribution. We therefore strongly disagree with the IV s assessment that the 3x premium reflects illiquidity of the shares. The IV also noted that post dividend in specie, the share price dropped to Rs14.20 immediately after. Duh! BEEP s share price did not drop, it experienced a very common and normal mechanical price adjustment that every company undergoes on its Ex-Div. date! As a matter of fact, BEEP ex-div. Reference Price was Rs13.10, and thus at Rs14.20, it gained 8% and shortly thereafter peaked at an Adj. All- Time High of Rs23, i.e. 76% above its ex-div. Ref. Price. BLFE The IV valued GMLI s <10% stake in BLFE as Share Price + 20% Premium which is self-contradictory to the IV s argument that the market is not liquid and therefore cannot be used. BLFE ranks 50 th in our preferred liquidity ranking method making it GMLI s most illiquid listed investee! The rationale for a premium was not explained which we found odd given that the IV applied discounts for lack of control. BLFE s market price reflects its cost overruns and poor performance of its hotels which were valued by the IV but ignored here. Jun-16 14

15 Exchange Ratio Alternatives Based on our valuation, we find that the uplift offered to minority shareholders as compensation for loss of voting rights results in a generally fair deal Applying a slightly higher 5.1x ratio against the actual 4.83x does not make any significant difference for the minority shareholder s rights Fair Value Sep-15 Dec-15 IV Mar-16 Jun-16 GMLI Quoted [Rs Bn] GMLI IBL [Rs Bn] GMLI Unquoted [Rs Bn] Total [Rs Bn] per Share [Rs] Raw Exchange Sep-15 Dec-15 IV Mar-16 Jun-16 GMLI [Rs Bn] IBLL Minority [Rs Bn] Exchange Ratio [x] Mnrty Econ Rights [%] Mnrty Vtg Rights [%] Uplifted Exchange Sep-15 Dec-15 IV Mar-16 Jun-16 GMLI [Rs Bn] IBLL Minority [Rs Bn] Exchange Ratio [x] Mnrty Econ Rights [%] Mnrty Vtg Rights [%] Mnrty Econ = Minority Economic Mnrty Vtg = Minority Voting V Value; N No. of Shares XX rrrrrrrrrr = VV GGGGGGGG VV IIIIII MMMMMM NN IIIIII MMMMMM NN GGGGGGGG Jun-16 15

16 Alternative Exchange Ratio The exchange ratio is determined by computing the per share price of GMLI and dividing it from IBL s per share price On a Raw basis, i.e. without any compensation in the form of a premium for minorities, we compute the exchange ratio to be 4.16x against the independent valuer s 3.94x. The IV also did a Mark-to-Market cross-check which yielded 3.92x. The IV proposed an 8% uplift citing academic research proposing a premium between 2-10% and French authorities who apply a premium of 5%. In a similar merger not so long ago, the independent valuer for that transaction cited the same empirical research to justify that any premium should therefore not be higher than 5% The transaction advisor (TA) when asked to provide a fairness certificate recommend an additional 13% uplift to compensate for the fact that IBL generated 70% of GMLI s cash flow and discount for GMLI being a family owned business Following negotiations, the original 8% uplift which had been increased to 21% by the TA, was further increased to 23% such that 26% of IBL Ltd s listed shares would sit in public hands. The SEM s official list free-float criterion is 25%. On an uplifted basis, i.e. with a premium applied to IBL minority shareholders, we compute the exchange ratio to be 5.11x against the actual 4.83x. Our Synthesis On a raw basis, minorities would have 23% of economic rights and 7% of voting using our methods against 22% and 6.7% using the IV s method. On an uplifted basis, minorities would have 27% of economic rights and 8.5% of voting using our methods against 26% and 8.1% using the actual ratio. The uplift thus increases the minority shareholder s stake by 400bps which we could consider as a win-win for all parties involved. The end result using our methods or the IV s is therefore not materially different. Jun-16 16

17 Valuation Sanity Check The merged entity, IBL Ltd, rejoins the SEM with an introductory price of Rs25.65, i.e. equivalent to a Mkt Cap of Rs17.5bn PER [x] PBV [x] Sep-15 Dec-15 IV Mar-16 Jun-16 IBL MSCH MSCH ex-sugar IBL MSCH MSCH ex-sugar This implies that if SBM trades below 68cts, IBL Ltd will be the 2 nd largest local company by Mkt Cap Its PBV using Dec-15 NAV would thus stand at 1.09x and PER+1 using mgmt forecasts at 10.5x Our Assessment Prior to the announcement, IBL traded at a 32% premium to NAV, while its Multi-Sector peers traded at a 32% discount to NAV, and peers excluding Sugars traded at near parity with NAV. IBL Ltd s PBV of 1.09x, therefore does not constitute an exaggerated over-valuation, IBL s 66% premium to NAV as calculated by the IV is in our opinion excessive. Similarly, from an earnings perspective, IBL traded at 15x while its peers traded at >30x and excluding sugars, its peers traded with a recurrent R4Q PER of >20x. IBL s 19.5x PER as per IV valuation is thus in-line with market. Further IBL Ltd s PER+1 of 10.5x suggests the counter is undervalued if the attributable PAT target of 1.7bn is met in 2017 perhaps a stretch knowing that 2015 s att. PAT stood at Rs912M. Jun-16 17

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