Stephen Levenberg: CEO, Mvela Group

MONEYWEB, Alec Hogg, 05 September 2006

Mvela Group has got to be on your list.

MONEYWEB: Right now someone who has seen quite a lot of value creation in the year to June is Stephen Levenberg, who is the chief executive of the Mvelaphanda Group. Stephen, nice to have you on the programme. I don’t think we are going to be fencing tonight. We were fencing last time on potentially what you are going to be doing with this big cash pile of yours – R1.6bn it’s now sitting at. But there are no thoughts of giving that back to shareholders?

STEPHEN LEVENBERG: Thank you for your undertaking not to fence tonight, Alec. There is no thought at this stage of giving that back. Bear in mind we got the proceeds only about a week ago. There are a number of things to look at. We sort of waved the flag, so things are coming to us and we really believe that with this transaction done now, and these very solid and satisfactory results, we are better poised than any time in the group’s history to now really go ahead and add value to transactions and things shareholders are really expecting. In a sense it took longer than was thought. The merger was implemented in December 2004 so, if you like, it’s taken us 18 months to where we get the structure right, shed the non-core assets, get the cash in, sift through some of these smaller investments and really get the operations going. We’ve already done all that, as the result reflects, and we are well positioned now for the future.

MONEYWEB: You talk about the merger – that is the group that you’ve built, Rebserve, and at the time that you were building it many people were saying here comes the next Brian Joffe. Did you find that a fair comparison? Obviously you started a long time after Brian, but is that exactly what you were trying to do? Put together a conglomerate then and now?

STEPHEN LEVENBERG: I think there were similarities in the earlier days, Alec, and then the paths diverged at a later point. Certainly what Bidvest did was very successful, Bidcor as it then was, and that gave some pointers. But in the very early years we started off a lower base in the old Rebhold, which became Rebserve, and grew more exponentially than that. But we’ve really gone a very different path. So I wouldn’t say the companies are comparable in any way today.

MONEYWEB: So it’s not going to be the path of a conglomerate with wholly owned subsidiaries, but certainly your portfolio, the way it looks at the moment, is one where you do take investments but then you also have some operating companies. It’s almost a bit like what Warren Buffett does at Berkshire Hathaway.

STEPHEN LEVENBERG: Correct, Alec. Whereas the Bidvest story and Imperial might have 100% of heir assets focused purely on operations, we are almost a hybrid of the two, where the idea is to harness the cash flow which the operations generate – that was the original thought behind the merger, to harness that cash flow towards seizing the empowerment opportunities. We did not expect the relatively fortuitous event of disposing of an asset like Mvela Resources and getting a substantial pile of cash as well. In the event, we are very well positioned because we have the pile of cash for large capital transactions, and we have the cash flow as well. And, if you look at the component of the assets, we mention that we exceed R6bn in assets now. In value terms the investments are about twp-thirds of that, about R4bn, and the operations, the old Rebserve you referred to, account for about R2bn of that value. And logically those investments would, if anything, constitute an ever-growing portion of the value, and the operations would decrease in importance. And that’s where our BEE credentials come in, because the primary objective is to acquire BEE-related stakes, preferably on a leverage basis, in top-quality companies as investments, with the existing first-class management team in place. Assets like Absa and Life Healthcare are perfect examples of that, which are our two main investments.

MONEYWEB: So you are not looking, then, to start having wholly owned subsidiaries, or buying more wholly owned subsidiaries? This R1.6bn cash pile would be leveraged or geared up to make those kind of investments that you talk about, rather than owning whole businesses?

STEPHEN LEVENBERG: Alec, our preference is to do that because there we believe greater value could be added. If you look at Life Healthcare, for example, we invested R100m of our own cash and the valuation which we publish now in our intrinsic net asset value is about R1.1bn before provision for capital gains tax. So in just over a year that value has increased from R100m to R1bn-plus.

MONEYWEB: That’s astonishing. How’s that been achieved?

STEPHEN LEVENBERG: That is a spectacular example that that is achievable. How it was achieved was the business itself was bought for about R3.5bn by way of a public tender or auction, so we didn’t get any BEE-type discounts. R1bn of equity was required. We started off by acquiring 25% of that, needing R250m for our equity, and we leveraged that up with the IDC in a special-purpose vehicle, whereby we only put in R100m and dilute it slightly. So we got gearing upon gearing, and our R100m bought us, in the vent we have an 18% stake in Life Healthcare and the R100m bought us that, and that was out total exposure – R100m. And in the meantime the earnings of that company have gone up substantially, probably 60% or 70% in line with the market over two years. The rating’s gone up, the JSE has gone up, and the management team performed exceptionally well.

MONEYWEB: Is there a risk to this? In other words, if you were to do a similar kind of leveraged investment in a company that didn’t succeed or, in fact, worse still, went bust?

STEPHEN LEVENBERG: We contract typically out of that risk, Alec. For example, in Life Healthcare we put our R100m down, and the gearing was ring-fenced in other words, there was no recourse on that gearing back to our balance sheet at all. We insisted on that. So our maximum exposure at any time in that transaction was R100m. If it had become valueless, that would be the case. That is usually available in these BEE deals, or in these leveraged deals. So you get the benefit of the leverage, and there’s a higher risk and a higher return. But we would never bet the farm on the one transaction. So we approach each transaction on its merits, and where we apply leverage like that we limit our exposure normally to what we actually put in.

MONEYWEB: So you are taking advantage of the situation that exists in South Africa at the moment, where there is this move towards BEE, hopefully along the road creating a massive black-owned industrial group?

STEPHEN LEVENBERG: Correct. Although how I would argue it, it doesn’t depend solely on BEE. And with the progression of the group as we’ve described it now, it’s really a  company that stands scrutiny on its investment merits. It’s trading at a major discount to its NAV. I think as an understanding permeates the market, the market might well rectify that. And with those fundamental merits in place, it happens to be a company with impeccable BEE credentials. So it’s not am empowerment company looking for a discount or a handout. It’s a company that’s very strong on its own merits and has impeccable BEE credentials.

MONEYWEB: So it finds good businesses, leverages up the investment, and in that way makes sure that the money that you have works a lot harder than it would otherwise?

STEPHEN LEVENBERG: Correct. Typically it leverages it up. It doesn’t mean we wouldn’t do a deal without leverage. And just to get back to your earlier question, we would bolt on acquisitions in our operating businesses as well, but that’s our ideal model that’s been successful. The Absa investment as well, because it’s an option, also has an element of leverage as well.

MONEYWEB: Just to close off with, can you tell us any more now about the kind of sectors you are going to be targeting with this R1.5bn-plus in cash?

STEPHEN LEVENBERG: I thought you undertook not to pry …

MONEYWEB: I’m not fencing. I’m just asking a nice little question.

STEPHEN LEVENBERG: Nothing really, Alec, at all. We had a number of things we were looking at. We had to wait for the money to actually arrive, as I mentioned, and we expect new opportunities to arise as well. We are reasonably flexible, but we are out of resources anyway, and we are really in industrial and financial in the broad sense.

ARTHUR BUCHNER: Alec, one of the interesting things about the Mvela Group is that they not only have the share, they also have the Mvela Group convertible which they’ve issued. Now, for the investor out there that doesn’t understand a convertible, basically it’s a share that pays interest per annum, but it has a [indistinct] option attached to it. So if you are a risk-averse investor, you rely on 5% return per annum out of your investment, but you also want to gear yourself up to a stock that you believe is going to outperform, you have an underpin, which is R10 on the Mvela Group convertible – and if the stock had to outperform, you have a huge gearing on the upside. So no downside, except for your cost of funding, but you make 5% per annum. And another stock that has a convertible pref on that is Amplats. That convertible pref listed at R100 about two years ago. It’s now trading at R298. So the underpin was R100 and, with Amplats outperforming, it’s made a helluva lot of money for investors. The same with Mvela Group, and I think they are actually trading at a discount to intrinsic value – the convertible – at the moment, R10.50 or R10.60 I think. It’s another avenue into this food group.

MONEYWEB: Well, there you have some insights from Steven Levenberg and Arthur Buchner. And if you think that the bet is well-run business that can take advantage of the current environment in South Africa, then Mvela Group has got to be on your list.

Posted in Market commentary

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