Trade of the Month: Distell vs Capevin
bdlive.co.za - Aug 15th 2016, 15:02
THE reasons for the continued existence of low-key holding company Capevin are rather murky, but at least the value proposition is easy to divine.
The company’s sole investment is a 26.78% stake in Distell, a consistently profitable liquor conglomerate which owns best-selling brands such as Savanna, Hunters, Fleur du Cap, Klipdrift, Richelieu, Amarula, Nederburg, Tassenberg, Graca and Chateau Libertas (among many others).
The shareholding is held via Capevin’s 50% interest in Remgro-Capevin Investments.
Aside from being a conduit to Distell’s value, Capevin passes on dividends received as efficiently as possible. The company attracts hardly any costs, the biggest being a small administrative fee (roughly R500,000 for the six months to end December 2015) to Remgro Management Services.
But the truth is that Capevin is a legacy holding company which stems from a complicated control structure which at one stage involved listed KWV Investments and the old KWV Group. The control has been simplified somewhat, but Capevin still represents an archaic structure that really has no place on the modern JSE.
The "official" reason for retaining the holding company structure is to protect trademark agreements at Distell that could be at risk if the shareholding were to change. The trademarks are not specified, but one is thought to be Gilbey’s Gin.
Still, these agreements cannot realistically represent a massive portion of Distell’s sales. What’s more, the benefit for Distell of losing the cumbersome control structure would surely outweigh the loss of sales in brands that might no longer be core to the business. It would be easier to raise capital to take advantage of global opportunities, and the frustratingly tightly held share would become more liquid.
How (and when) Capevin will be collapsed is not clear at this stage, but such a move should unlock value for shareholders, whatever happens.
Even if it is not triggered in the short term, the holding company remains a share that can be confidently bought for the longer term, provided investors have confidence in Distell’s ability to maintain stout market share in SA as well as grow sales in Africa and selected international markets.
The significant minority stake — on a see-through basis — was worth around R9.4bn at the time of going to press. This compares to a market capitalisation of R7.78bn for Capevin and implies a straightforward discount of about 17% on the value of the Distell stake.
Distell put in a spirited performance in the six months to end December 2015, when revenue jumped 11% to R12.2bn on a sales volume increase of less than 8%. Headline earnings increased 18% to 532.5c/share.
The performance reflects new operating efficiencies and marketing strategies ushered in by CEO Richard Rushton (ex-SABMiller) as well as a substantially weaker rand (which helped the company’s export and international earnings).
There might be some debate over whether Distell deserves to be accorded a 20 times earnings multiple, especially since the business is not a high-growth story (operationally speaking). But it has been a most consistent performer over more than a decade and a half.
The X-factor at Distell comes with corporate action. And there have been two significant offshore deals: the acquisition of cognac producer Bisquet and scotch maker Scottish Leader.
What might spur further global acquisitions is the proposed sale by SABMiller — soon to be incorporated into AB InBev — of its influential 28.86% stake in Distell. The obvious buyer would be Remgro, which reportedly has pre-emptive rights on SABMiller’s shares.
With Remgro as the outright controlling shareholder, there can be two possible outcomes. One would be a bid to buy out minorities in Distell (including Capevin) and a delisting of the company.
Or Remgro could retain the Distell listing and push plans to build a global liquor business by making selected acquisitions (though earnings multiples in the liquor sector are quite stiff).
Remgro has, in the past, enjoyed incredible success not only in building brands but also in "globalising" local investments — take Rothmans International (now part of British American Tobacco) and Mediclinic International (with operations in Switzerland, the Middle East, and the UK) for example.
Our gut feel is that Distell — under Remgro’s influence — will continue to fortify its global and African operations. It could be an exciting time ahead for Distell, and we recommend buying into a potentially intoxicating corporate cocktail via the better-priced Capevin.From DFM Publishers (Pty) Ltd
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