DP World offer for Imperial may not be as good as it looks

At first glance, shareholders in Imperial Logistics, a South African transport group counting clients from beer makers to pharmaceutical companies, appear to be getting an easy cash payout from Dubai Ports World’s (DP World) almost R13bn buyout offer. Until one looks under the hood.

DP World, one of the world’s biggest port operators, has put in a R66 per share bid for Imperial, a generous 40% premium to the price before the offer was made in July and enough to ensure that the board and management led by Mohammed Akoojee, as recommended by an independent expert, rallied behind the proposed transaction as best for shareholders.

Aside from what looks like a compelling commercial argument, the rare Dubai-SA tie-up can easily garner support from anyone else vaguely interested in the welfare of the SA economy. It hands Imperial, one of the most important private sector players in the country, an international partner with deep pockets at a time when the economy is in desperate need of investments.

Since taking over as president in 2018, President Cyril Ramaphosa has made economic revival one of the cornerstones of his administration, putting the Vulindlela unit in his office to unlock the potential of the economy via policy reforms in rail transportation, energy, telecoms and immigration.

In theory, an easier and investor-friendly country should attract investments from private sector players both at home and from abroad to pump money into the rollout of warehouses, stores and factories. For SA, such private sector capital spending would pick up the slack on the expenditure side given the pressure on government finances.

What’s more, it would be naive to expect household consumption expenditure to hold up. Survey after survey, including one from the National Income Dynamics coronavirus rapid mobile survey, paints a gloomy picture of household finances, which had been in distress even before the pandemic.

For these reasons, Ramaphosa has been canvassing companies behind closed doors and publicly via investment conferences to lead SA economic recovery efforts. But the latest GDP data paints a bleak picture: gross fixed capital formation a macroeconomic concept that shows inventory replacement and spending on fixed assets such as buildings and machinery hardly grew in the second quarter. Or the quarter before that.

Domestic capital spending has barely changed since the late 1980s, languishing at about 20% of GDP. In comparison, emerging countries in East Asia have seen a steady increase in investment over the same period, from 25% of GDP to almost 40% propelling countries such as South Korea from being one of the poorest countries of the 20th century to a developed, high-income country in just a few generations.

So, the prospect of bringing DP World as a parent to Imperial is a step in the right direction because it theoretically means Imperial would have the wallet and determination of a R200bn company should there be a need to splash out on new warehouses or truck fleet.

That said, DP World’s offer is opportunistic. It is about 10% below Imperial’s peak in January 2019 shortly after hiving off and separately listing its car dealership division, Motus, and embarking on a strategic shake-up that included selling some European assets to reposition itself as a pan-African transport company.

What’s more, even though Imperial recently agreed to cough up R4.4bn to buy J&J Group, an African-focused transport group that will boost its truck fleet by a third, these new assets will not lead to any adjustment in what DP World has put on the table.

“The offer in its current form is too low and does not reflect the fair value or recovery potential we believe the company offers,” said Justin Floor, fund manager at PSG Asset Management, a topfive investor in Imperial with a 7.5% stake.

It’s hard to dispute that. In the end, it would be up to shareholders to make a call on the commercial merits of the deal, which needs 75% of them to vote in its favour on Friday.

IT IS ABOUT 10% BELOW IMPERIAL’S PEAK IN JANUARY 2019 SHORTLY AFTER SEPARATELY LISTING MOTUS