Adcock shareholders have PIC to thank for loss after CFR buyout

Last month, CFR was bought out in a bid from US-based Abbott Laboratories, which offered a tremendous 53% premium for CFR shares.

The PIC was a kingmaker in the CFR-Bidvest-Adcock battle because it held a large minority stake in Adcock. Its opposition killed the deal.

The bid "if"

There are some "ifs" involved. We don't know how CFR's settlement ratios would have worked out exactly in its bid for Adcock, had it succeeded.

We also don't know whether Abbott would have gone ahead with its bid for CFR had the Adcock deal happened. But we can make some assumptions.

By my calculations, Adcock shareholders are R9bn worse off because the deal did not happen.

They are sitting with a R9.6bn asset that could have been worth almost twice that.

Roughly, CFR intended paying 1.3bn for Adcock.

If half of that had been settled in shares as CFR intended, South African shareholders, and the biggest would have been the PIC itself, would have held US$650m worth of CFR shares.

The Abbott premium would therefore have delivered close on R4bn in profits to Adcock's shareholders. That, of course, ignores the fact that the Adcock share price has depreciated by about a third from CFR's offer price in the interim. Factor that in, and they are R9bn poorer.

That is the lost value to South Africans because of the PIC's opposition to CFR.

Good reasoning?

You would think that the PIC had a good explanation for its decision to torpedo the CFR deal. But the occasional comments the fund manager has offered to explain its decision imply a sort of naive nationalism.

Apparently, its view is that had CFR obtained Adcock, in the long run it would have hurt SA because of the dividend flows that would have left the country back to Chile. So instead, the PIC's role ensured that Bidvest obtained a 35% stake in Adcock, which is enough to block any deal.

That stake creates a classic value trap and is the worst of all worlds for the rest of Adcock's shareholders who are more clearly in the business of generating returns. Bidvest can block any serious buyer from coming in, which it seems is its intention.

The PIC has a bizarre view of its own benevolence.

It is also just wrong. When a company obtains funding it is always on the assumption that it can generate returns with that funding. That is something that is patently obvious to any entrepreneur. One goes into business, borrows or gives up equity, in the knowledge that your profitability will allow you to pay the borrowing back.

But one thing is certain: without the funding there will be no profits and no business.

Foreign capital addiction

As a country, we are already addicted to foreign capital.

Our government's sales of bonds depend enormously on foreign buying.

It can only be economically healthy for the country if our government and our companies are raising foreign capital because we believe we can generate a return greater than the cost of that capital. So for the PIC to say that the benefit of a current inflow from CFR would have been negative in the long run can only be true if the PIC thinks that Adcock is incapable of generating a return from that equity.

And if that is the case, what on earth is it doing owning a stake in the company in the first place? Sure, Adcock instead is funded by South African shareholders. But we know that we as a country suffer a capital deficit, which would have been relieved, ever so slightly, by CFR's money.

The PIC could not have known that Abbott was planning a bid, so one cannot entirely blame the PIC for the R9bn opportunity cost of its actions.

But one can blame it for the poor decision making that underlay its actions. Had it stuck to a proper investment analysis, and put the misguided nationalism aside, we would have all ended up much better off.

Of course, this is said in the midst of what is obviously a leadership battle at the fund manager. It is hard not to think that odd deal-making of this sort has something to do with it.

Apart from Adcock, there is the PIC's even more bizarre deal to invest in a bankrupt US-listed oil explorer, Camac, at a significant premium, which I have criticised before.

Last week the CEO of the PIC, Elias Masilela, resigned unexpectedly. It is not at all clear why. What is clear though is that the PIC's actions are costing its beneficiaries, and the country, money.

Source: Business Day