If its first deal is anything to go by, South African company Hosken Consolidated Investments (HCI) is going to have a successful time of it in Australia.
HCI, a decades-old investment company listed on the Johannesburg Stock Exchange, has just finalised a slick and cost effective backdoor takeover of Oceania Capital Partners (OCP), an ASX-listed private equity company formerly known as Allco Equity Partners.
OCP has been in wind down for about two years now. Of its three investments, two were sold last year and it was left with a 52.6% stake in debt collections company Baycorp and about $191m of cash.
HCI established operations in Australia mid 2011. If it liked the look of Baycorp, it could have bought it from OCP. To do so, though, it would have had to pay at least book value, most likely a premium. Instead, HCI bought a 20% stake in OCP and used OCP’s own cash to buy the rest of the shareholders out at a discount to NTA.
The buyback, completed this week, left HCI with 72% of OCP’s share capital. That gives them control, a 38% economic interest in Baycorp, a 72% interest in OCP’s remaining cash (an estimated $26m) and $187m of tax losses, mostly income losses we understand. If they can be offset against future income, they would be particularly attractive for HCI given the parent company has no use for franking credits.
Baycorp was in OCP’s books at a value equivalent to $100m for the whole company and the independent expert’s report valued it at between $105m and $135m. So for a $34.5m investment, HCI has effectively acquired $19m of cash, at least $38m of Baycorp value and a mountain of tax losses.
They haven’t stitched anyone up. Long suffering OCP shareholders were desperate to get out and came to an open agreement with HCI about how to carve the spoils up, subsequently voted through by almost all OCP shareholders. It’s just one very clever deal.
OCP will remain listed on the ASX and will resume investment activities with HCI in the driver’s seat. Don’t expect it to trade anywhere near NTA, probably ever, given the absence of liquidity and the presence of a 72% shareholder who may not have your interests at heart. But it’s currently trading at a 40% discount to NTA (we estimate NTA of $3.10 per share post buyback) and, if they keep doing deals like this, that NTA will grow over time. For patient, long-term investors, there are plenty of worse places for your money.