More twists and turns than
the Sani Pass
Murray & Roberts saga has yet to play out.
For a company with a market cap of R7.8 billion, which puts it firmly into the realm of a small-to-mid cap stock, the Murray & Roberts saga has certainly captured the attention of investors, fence sitters and other spectators.
South Africa is a tough place to do business, but rarely does a bid to acquire another company become as convoluted, and as hostile, as Aton GMBH’s bid for control of M&R is becoming. This bid has yet to play out and may lead to a change in control, management and business strategy.
At the same time, M&R is pressing ahead with its bid to acquire the deeply distressed construction firm Aveng. In the latest twist, at a general meeting on June 19, shareholders narrowly voted in favour of a proposal that M&R pursue further talks with the company.
Majority shareholder Aton, which has increased its shareholding to 44% over the last 18 months, and is vehemently opposed to the proposed deal with Aveng, was restrained by the Competition Tribunal to voting no more than 50% less one vote of the votes cast at the general meeting.
Aton notes that the Takeover Regulation Panel still needs to independently determine whether M&R can proceed with its potential transaction with Aveng.
Murray & Roberts was contracted to Hitachi Power Africa for delivery and installation of the Medupi and Kusile boiler packages.
“We understand that acquiring Aveng is a high-risk transaction,” says M&R CEO, Henry Laas. “That is why we want to do further due diligence – we don’t know what is in the past that could come and haunt us. And we will not go into a transaction that will not unlock value for shareholders.”
Management’s priorities over the last seven years – Laas was appointed CEO in July 2011 – were first to put the company back on a path to profitable and sustainable growth; and second to formulate and implement a new vision for the company. The second part of the strategy culminated in 2017 with the sale of the local construction business and M&R's repositioning as an engineering and construction firm operating in the natural resources market sectors of metals & minerals, oil & gas, and power & water. As a result, it moved its listing on the JSE from Construction & Materials to Diversified Industrials.
Henry Laas: Management is determined to grow shareholder value.
While management has achieved a great deal in this process, selling off non-core assets and making strategic acquisitions; and restoring the balance sheet to a position of strength, this has not been reflected in group financials, or in the share price – to the frustration of management.
“We have asked ourselves why [the share price has not re-rated] many times,” says Laas. “Perhaps because M&R is such a strong brand that investors still see a company that builds roads and bridges. But we think the market is slowly starting realise that we are not a construction stock and have a different value proposition.”
Source: Moneyweb and Profile Data
In the last financial year in particular (which ends June 30 2018), the focus has been on restoring shareholder value. Laas believes the Aveng deal has the potential to take the group’s market cap to over R10 billion. “We are sitting on a market cap of R7 billion. Smaller companies with lower market caps attract lower multiples while bigger companies that are above $1 billion attract full value. We want to grow the group and see Aveng as an opportunity. We must just make sure we don’t repeat the mistake we made when we bought out our Australian subsidiary, Clough.”
The acquisition of the 36% of Clough that M&R didn’t own cost the company R4 billion in 2013. Laas now admits that this was a costly mistake. “We paid too much.”
While shareholders supported the deal at the time, there were some notable exceptions. Allan Gray for one, advised shareholders to vote against the deal. “It turned into a disaster relative to the price they paid,” says Duncan Artus, portfolio manager and director at Allan Gray.
Duncan Artus: The market has been sceptical of M&R's capital allocation
M&R was punished further for the costly deal in 2014 when the bottom fell out of the oil price, a turn of events that the sector has yet to recover from. “When we did the deal in 2013, we could not have foreseen what was around the corner,” says Laas. “We still have faith in the sector, but we think it will take two years for investment to return.”
However the Clough overpayment is one decision that sticks in many shareholders minds and may explain why management does not have the full support of its shareholders. "Why was M&R trading at R9 when it had net cash on its balance sheet? Possibly because the market was very sceptical of their capital allocation,” says Artus.
The sale of M&R shares by big institutional shareholders Coronation and Allan Gray last year is the reason management now finds itself saddled with a shareholder that wields negative control over the company, a tricky situation if there ever was one.
Aton exerted its influence immediately, voting against a proposed share buy-back scheme in 2017. “Being on a different page to one's biggest shareholder is a difficult situation to manage,” Laas says. “But they have paid for that position and have the right to influence the business within certain parameters. If a shareholder buys more than 50%, they can change the board too,” he adds.
Unfortunately there is a perception in the market that Laas and his board are deliberately using the Aveng deal to frustrate the Aton offer, a suggestion that he vehemently denies: “Just look at the composition of our board. Those are reputable people – they would not play the silly games that have been suggested.”
The truth is always more complex. The fact is that Aton was not unknown to the M&R management team when it invested last year. The two companies tried to do a deal in 2016 and could not agree on terms. So when it started buying shares last year, it was unlikely that its interest was innocent.
But, considering the work that has been done to reposition M&R for growth, one wonders whether an institutional shareholder with an influential stake has a responsibility to discuss a sale with management?
“We have zero obligation to management. We will listen to what they have to say, but ultimately we make our own independent decisions,” says Artus. “We sold a line of shares to Aton in 2017 without knowing who the buyer was. It was not a question of not liking M&R or their strategy. It was a case of 'is this a fair price?' We thought it was a fair price and accepted it - we buy and sell shares every day by assessing the price relative to our view of fair value.”
Laas was not happy about the sale of M&R shares. But adds: “I cannot complain about shareholders like Allan Gray and Coronation. They have been loyal shareholders, supporting our rights issue in 2012 and staying with us through some tough times. Like any other business they also make decisions about how to allocate capital and they too have a responsibility to get the best returns for their clients.
“I was not happy about the sale, but I will still greet them in the street.”
Other shareholders are willing to settle in for the long ride. One of these is Daniel Malan from Perspective Investment Management.
“M&R is one of the better known case studies of the long-term problems that loomed within the construction industry around 2008 to 2010. The market was rewarding order book and revenue growth above all else, and as a result several construction companies took on ‘trophy’ contracts. These were contracts with slim margins but lots of complexity and hidden tail risks."
Eight or nine years later, look around and see who is still standing tall, he says. With the exception of WBHO, Murray & Roberts and Raubex, many other construction companies have struggled or even failed outright.
While M&R is not yet shooting the lights out, its current management team stabilised, de-geared and repositioned the business for long-term growth. “Management teams that have the vision and courage to make strategic decisions at the bottom of a business cycle are rare things.”
He also has a different view on shareholder rights and responsibilities. When it comes to the decisions that shareholders make, he believes that the unwritten rules and responsibilities are quite different for investors who own significant stakes in listed companies. “Their public and non-public interactions and decisions may cause intended and unintended real-world consequences for investee companies and their various stakeholder interests, including employees and their families,” he says.
It is not yet clear how the story will unfold, but it is likely that M&R and its shareholders will have to face a few more twists and turns in the road.■