Commenting on why it was being approached now, chief financial officer Deon Viljoen said, “Interested parties will have assumed that we are in the process of preparing the group for a relisting in the not too distant future. This is normal in the case of a sought-after group such as Alexander Forbes, which has strong positions in the markets it serves.”
Alexander Forbes is a diversified financial services firm, offering short- and long-term insurance, as well as retirement, medical aid and employee benefit consulting services.
The private equity consortium that delisted the group in 2007 and took it private may be considering an exit in the not-too-distant future (as is the norm for a private equity investment horizon).
“Normally an exit such as this could take various forms, which includes a relisting of the group, but may also take the form of a trade buy, financial buyer or a combination of all of these,” explained Viljoen.
Investment analyst at Kagiso Asset Management, Justin Floor said Alexander Forbes was one of the few players able to make money from retirement fund administration.
Alexander Forbes is required by solvency regulations to hold less shareholder capital on its balance sheet because of the nature of the business it writes (for example, limited guarantee business).
A fair price?
The group’s listed subsidiary, Alexander Forbes Preference Share Investments allowed investors of Alexander Forbes Limited to remain invested when the group went private, by way of a 28.4% equity stake in AFEH.
The remainder of their shareholding previously comprised primarily payment-in-kind (PIK) debentures (i.e. additional debt/equity in the business, instead of cash dividends), which were recently paid off.
“Alexander Forbes effectively utilised the proceeds of its Guardrisk sale, as well as some of the debt raised internally, to pay off these PIK debentures, paying a dividend of R9.30 a share to its preference shareholders,” explained Sean Ashton, chief investment officer at Anchor Capital.
If a sale were to occur, Floor believes that it would most likely be an outright sale, probably to a foreigner, as Competition Commission issues might preclude a local buyer.
“If the offer price is too low then the directors will likely default to a listing, where market forces and supply and demand can arguably place a better value on the company (although no control premium will be available in that scenario),” Floor said.
Anchor Capital considers R11bn to R12bn to be a fair value for 100% of AFEH (+-R3bn for the 28% held by AFP).
This equates to 10x earnings before interest, taxes, depreciation and amortisation of R1.2bn to R1.3bn, less some debt.
“Without the heavy and expensive debt structure overhang of a private equity transaction, Alexander Forbes would be able to have a fairly aggressive dividend policy,” Ashton commented, which could equate to a 4% to 5% yield as a listed entity, assuming the above valuation.
In the event of a listing, Ashton said that the private equity investors owning the remaining shares could either be reversed into the preference share structure or an entirely new listed entity could be established.
By 11.13am yesterday, AFP was up 1.93% at R9.33.