Founder: Turnaround Talk
Since the beginning of the Covid-19 Pandemic, companies have been looking to expand into industries where demand remains high despite the disruption caused by the crisis. The aluminium industry has shown its robustness as the demand for lithium-ion batteries (used in electric cars) and aluminium cans (a cheaper and more recyclable alternative to plastic) drove the industry’s growth. Hulamin, South Africa’s largest producer of aluminium steel, garnered a lot of attention from international buyers, and a transaction was on the card until Government threw a spanner in the works.
Hulamin’s shareholders would have benefitted significantly from the transaction as Hulamin is a high value company a unicorn in a market where value is hard to come by. Governments actions are yet another indication that Government is acting as an agent of disruption and questions are being raised about its commitment to lay a foundation of economic prosperity in a country that faces deep economic challenges.
A recent article by News24 details the Hulamin drama. Subheadings were inserted by Turnaround Talk.
Hulamin shareholders Hugely disappointed
The article points out that Hulamin shareholders were left hugely disappointed on Monday when the company announced the keenly anticipated takeover deal would not be concluded after the potential buyer walked away.
The name of the interested party has not been disclosed.
According to Hulamin, a maker of aluminium products, the suitor “was unable to agree satisfactory terms with all stakeholders”. Further, the potential buyer “has become concerned about recent global economic uncertainly”, the company said in a statement on Monday, sending the share price down 30% on the day.
Photo By: Canva
Falling at the final (Government) hurdle
The article points out that sources with knowledge of the talks told Fin24 that the terms of the agreement had been settled, but that “non-money” requirements from the Department of Trade and Industry and Competition (DTIC) caused the potential buyer to walk away.
The Industrial Development Corporation (IDC), Hulamin’s largest shareholder, said it supported the potential takeover of Hulamin, after which it engaged the DTIC, IDC’s shareholder, for regulatory approval as is guided by the Public Finance Management Act.
“The DTIC approved the transaction with certain conditions, which were previously discussed with the prospective buyer and were in line with undertakings provided by them,” said Tshepo Ramodibe, IDC’s head of corporate affairs.
The News24 article adds that the potential deal was an exciting prospect for investors, said Greg Davies, head of wealth at Cratos Capital. “We always knew that the net asset value was higher than the share price it was trading at,” Davies said.
The Hulamin share price plunged nearly 33% since the news.
Although the takeover deal has been in the works for some months, it is still unknown who the interested buyer was.
Value seesaw
The article points out that since news of an interested buyer entered the market, the share price shot up from R2.20 to above R4 in October last year. Last month it breached R5 a share for the first time.
“In the back of everyone who’s been buying’s mind is probably that a more attractive deal is coming at a higher price than the shares trading,” Davies said.
That global economic uncertainty also led to the potential buyer walking away is a red herring, according to Brendon Hubbard, fund manager at ClucasGray.
“The one issue that Hulamin has never faced, and doesn’t face at the moment, is a demand issue. They sell every single ton they can make,” he said.
the article adds that robust global demand is driven by the use of aluminium in lithium-ion batteries, in the body of electric vehicles and in aluminium cans which are a greener, recyclable alternative to plastic.
“If you look at these businesses elsewhere in the world, they trade at very, very big multiples, [which is] why people want to buy Hulamin … it’s the best renewables operation we have in South Africa,” he said.
Added to that, the IDC is not in top shape and needs some wins – this deal would have been one.
“This is just a tragedy for South Africa,” said Hubbard. “You have a government that actively chases foreign investment because when [potential buyers] pitch up to do a deal, they get chased away by unrealistic expectations.”
Hulamin is still a decent business
Fundamentally, Hulamin remains a decent business, said Abdul Davids, head of research at Camissa Asset Management. “Two big things are working in their favour,” he said. “Their biggest supplier, South32, has secured an agreeable multi-year electricity supply agreement with Eskom, and there is strong demand for aluminium across the markets they service.”
Hubbard however said the business had been constrained by a lack of strategic thinking from management.
Hulamin sells a commodity, aluminium, but has not benefitted from its use in lithium-ion batteries, electric cars or cans. Hubbard said that transforming the company from a commodity business into a product business will bolster profitability.
Photo By: Mango
Blow for blow
The news of Governments role in the unsuccessful Hulamin deal comes a day after reports of Public Enterprises Minister Pravin Gordhan withholding significant cash that was promised to low budget airline Mango who now has to turn to its BRP to find the remaining cash to resolve its liquidity issues.
At the beginning of the year, President Cyril Ramaphosa (who is under pressure in a personal capacity at the moment) said that South Africa needs to rethink its economic policy and find new drivers of economic value. A report released by the World Economic Forum suggests that any recovery from the Covid-Pandemic needs to be built off the back of economically strong companies that will add value to the fiscus.
With the demand for aluminium being so high, surely Government would be looking for ways to make the Hulamin transaction possible? Adding all of the above into one side of the equation, and the report of Gordhan’s news to Mango on the other side of the equation, one can only conclude that Government may not be as serious about growth as it claims to be.
It will be an interesting year for South Africa politically. The ANC has their policy conference coming up and then their national conference at the end of the year when the new leader of the ANC is selected. If Ramaphosa gets a second term, he will have to be a man with a concrete plan for economic growth and the political will to carry it out.
