Barloworld’s buyout bid: It gets sneakier

Barlow’s R120 bid is fair and reasonable says its (paid-for) independent adviser Rothschild. But the industrial titan has a standby approach up its sleeve if the scheme fails.
3 mins read

It seems the CEO-led consortium aiming to buy out Barloworld shareholders is confident enough of sufficient support for the R120 a share offer to ignore demands by a major investor that it hike the price to R130.  

Instead of upping its bid, the consortium has devised a plan to chill the reluctant shareholder into acceptance. And that plan is the standby offer. 

The just-released circular includes the news that if the Scheme of Arrangement offer is not accepted by sufficient numbers of shareholders, then a standby general offer will be made. Richard Cheesman of Urquhart Partners says this essentially means that if less than75% of the relevant shareholders approve the R120 scheme offer, it will be scrapped and a standby offer will be made. In terms of the standby offer the consortium will buy up as many shares as it is offered. 

Presumably, the consortium is hoping that the prospect of remaining invested in a company in which it is the only minority shareholder will encourage key opponent Silchester to go along with the deal. 

UK-based Silchester International Investors, which owns just shy of 18% of Barloworld, said in December that R120 wasn’t “compelling”, and it wouldn’t sell for less than R130. Cheesman says Silchester’s stake is likely sufficiently large to block the scheme offer.  

Silchester hasn’t commented on the contents of the circular and did not immediately respond to queries from Currency. 

Unrealised potential

R130 doesn’t seem like a huge ask for a blue-chip company with some valuable franchises in its portfolio. Mind you, it has been going through a fairly torrid time in recent years with management seemingly unable to realise the group’s profit potential.

Still, the offer values the company at just over 4.3 times its historical earnings before interest, tax, depreciation and amortisation, which is on the derisory side when you consider Barloworld’s historic performance. And, as Cheesman notes, there is potential to realise much of the purchase price by selling off non-core assets. 

But it does seem historical performances don’t count for much in the cut-and-thrust of equity markets. In February 2015 the shares were trading at R78. By February 2018 they spiked at R156 before moving all the way back to R47 during Covid. Understandably, given its exposure to Russia, that country’s invasion of Ukraine in 2022 didn’t help investor sentiment. 

So, most investors who bought the shares over that past 10 years are probably thrilled by the prospect of getting out at R120. 

However, Silchester hasn’t given up hope. In his rebuke of the offer in December, director Tim Linehan wrote: “Despite these difficulties, Silchester believes that Barloworld with new management, a reasonable board of directors and proper capital allocation, is well placed to succeed in the coming years.” 

Which brings us to the “fair and reasonable” report contained in the just-released circular. 

Rothschild & Co, one of the world’s largest independent financial advisory groups, reckons that Barloworld is worth between R105.30 and R119.43 a share, which is conveniently just below the R120 a share being offered, “based on the results of the procedures performed, the valuation work and qualitative considerations”.  

The financial advisory group, which was paid R12m for its independent valuation, does acknowledge that its value range is subject to a number of limitations. These include “the assumption that all trading, operational and supplier licenses will continue into the foreseeable future”. 

Perhaps a more critical limitation is the matter of timing. Rothschild’s valuation assumes there will be no delays in the schedule outlined in the circular. The key dates are the implementation date on June 23 and the termination of Barloworld’s listing on June 24. 

These dates not only assume the scheme offer will be accepted, but that the transaction will be given the green light rapidly by the competition authorities – in South Africa, Angola, Namibia and Botswana. And that process hasn’t even started. 

A spokesperson for Barloworld tells Currency that “the parties expect to be in a position to submit the necessary applications over the coming weeks”. 

Public interest concerns

There may not be any obvious competition issues at stake but the deal certainly comes with public interest concerns. As one competition lawyer tells Currency, “new owners inevitably mean new attitudes, the authorities will want to interrogate those attitudes, especially when it comes to labour”. 

Even allowing for the absence of delay-inducing former minister Ebrahim Patel, it’s difficult to imagine that this transaction will emerge from the competition authorities by anything close to mid-year. Unless there are some major political forces at play. 

This means shareholders could be stuck for an extended period without payment for their shares. During that time every dividend declared will be deducted from the R120. 

Cheesman, who isn’t taking much comfort from Rothschild’s fair and reasonable, also reckons it may have been on the conservative side in its valuation of Barloworld’s Russian assets, particularly given US President Donald Trump’s perspective on a prolonged Ukraine war. 

One major area in which the circular will certainly disappoint commentators, rather than shareholders, is the non-disclosure of fees. Barloworld reckons such disclosure is not necessary. “The circular contains all disclosure required in accordance with the Companies Act and the Takeover Regulations and has been duly approved by the Takeover Regulation Panel and the JSE, as primary and secondary regulators, respectively,” says the spokesperson. 

Finally, there’s the issue of the appalling corporate governance; deserving of its own, separate, article. 

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Ann Crotty

Winner of just about every financial journalism prize going, Ann has kept the business sector on its toes for years. Uncompromisingly independent, if there’s a shady executive pay plan out there or shenanigans a company is trying to keep hidden, Ann will find it.

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