In March this year wealth and asset manager Peregrine Holdings announced details of a deal that would see it bought out by private equity firm Capitalworks and de-listed from the JSE and A2X. A formal offer was tabled earlier this month.
Speaking after the release of the group’s annual results on Tuesday, CEO Robert Katz said that the ‘cost-benefit of remaining listed for a company of our size just isn’t there’.
‘One remains listed primarily for one reason– it’s supposed to be a form of access to finance,’ said Katz. ‘What we’ve actually found is that the cost of remaining listed versus the benefit is just not there.’
Most significantly, the group has, in the main, not issued new shares to fund acquisitions in over 11 years. Since this would be the amongst the primary usefulness of a public listing, the rationale has become hard to justify.
This is not, however, necessarily a failure of the market itself. It also reflects the complexities and challenges of identifying suitable opportunities for a financial services firm in South Africa.
‘We were finding acquisitions in the space that met our requirements extremely hard to come by,’ said Katz. ‘Imperial evidence largely proves that mergers and acquisitions almost always deplete shareholder value. So when you are making an acquisition, you have to be sure you are making the right acquisition.
‘And the financial services business is not ball bearing manufacturing,’ Katz added. ‘When you buy a financial services business, you are buying people. In this industry, you are talking about very successful people who are independent in their own right. If they are not brought over the line, they are not going to stay. They do not need to stay.’
Peregrine has also found itself frustrated by the generally weak sentiment towards smaller listed companies in South Africa.
‘The market coverage of small to mid caps also isn’t there,’ said Katz. ‘There is a dearth of coverage, and analysts tend to focus on bigger businesses. You get the index trackers just being followed more and more. It’s almost like a value trap at the bottom, so how do you realise value for your shareholders?’
Peregrine is the latest in a number of smaller listed companies that have been taken private in the last two years. That list includes Clover Industries, Verimark, Torre Industries and fellow financial services player Efficient Group.
Katz believes this is both a function of the depressed valuations of small and mid cap shares due to concerns about the local economy, and the costs that a listing imposes on smaller companies.
‘It’s not just the direct costs, either,’ said Katz. ‘There are also indirect costs because of the time you spend with the market, preparing market reports, meeting compliance requirements. I don’t resent it, but it’s just the way of being a listed company.
These costs are brought into sharper focus when the market doesn’t appear to recognise the value in the company.
‘What happens then is that you find your shares over a period of time are undervalued,’ said Katz. ‘The market can’t see the full value or appreciate the full value, and then you yourself become a target for acquisition.’
Peregrine Holdings, announced a 7% increase in ongoing segmental earnings, to R348m for the 12 months to the end of March.
‘Ongoing segmental headline earnings per share increased by 9% to 166.4 cents,’ said Katz. ‘Annuity earnings, comprising 94% of total ongoing segmental earnings, increased by 10% year on year, with performance fee related income increasing by 4% to R98m. Operating expenses increased by 5% to R1.24bn due largely to increased salary related costs and bonuses, the latter because of increased core operating revenue and performance fee income.’
Due to the offer under consideration, Peregrine did not declare a final dividend.