Over the last decade we have seen a spate of delistings from the Johannesburg Stock Exchange (JSE), driven by different reasons ranging from management buy-outs to acquisitions by larger multinationals. While delistings often unlock value for shareholders, the dwindling number of listed companies presents challenges for South African investors over the long term. This article explores the reasons behind these delistings, their impact on investors (both positive and negative), and advocates for measures to strengthen the exchange.
This article first appeared in Glacier’s Funds on Friday.
Thirty years ago, at the dawn of our democracy, the JSE was made up of just over 300 constituents. As our young democracy was filled with optimism and growth, this number grew significantly in the boom years and peaked at about 600 listed companies in 2001.
Unfortunately, since the peak, the number of companies listed on the JSE has now dropped to below 300 companies – some of which are dual listed, while some of the fledging companies are uninvestable due to liquidity constraints. In 2023 alone, the JSE had 12 delistings to add to the 13 delistings in 2022. Meanwhile new listings have been few and far between, with three new listings in 2023 and five in 2022.
Figure 1: Number of listings on the JSE
Source: JSE data
There are a multitude of reasons why companies choose to delist from the JSE, including:
- bankruptcy;
- smaller companies finding the cost and compliance requirements too onerous to deal with and, therefore, seeing more benefit in going private;
- management buyouts; and
- mergers and acquisitions.
When viewed in isolation, delistings haven’t all been bad for South African investors.
In many instances, these were events that unlocked significant value for shareholders. Often market valuations were so weak, and liquidity in some smaller companies so low, that a management buyout was the obvious choice which shareholders happily voted in favour of.
Below are five examples of delistings in the last few years which have unlocked value for shareholders.
1. Royal Bafokeng Platinum (RBP)
RBP’s platinum mines were hot property, leading to a prolonged bidding war between Impala and Northam Platinum, centred around the acquisition of RBP. Impala, with access to more cash resources, eventually won the fight for RBP, following the withdrawal by Northam. The real winner in the end was RBP shareholders who received a big premium to the fair value of the company. After becoming a subsidiary of Impala, RBP was eventually delisted in 2023.
2. Distell Group
Distell was delisted from the JSE as a result of a corporate restructuring. The main reason for the delisting was the acquisition of the majority of Distell’s assets by Heineken International (the second largest global brewer in the world). On the one hand, it is positive that a global company like Heineken saw the value and growth opportunity in a South African company like Distell, and shareholders received a premium for their shares. However, on the other hand, the transaction removed a good quality business from the JSE.
3. Mediclinic International
Before the delisting, Remgro owned 44% of Mediclinic. The balance of shareholders were bought out at premium by a consortium that included Remgro and Mediterranean Shipping Company (MSC). The deal was eventually concluded at a ~50% premium to the share price pre the announcement of the deal.
4. PSG Group
PSG was a listed investment holding company which was eventually taken private in 2022. PSG always traded at a large discount to its sum of the parts fair value. Management decided that an unbundling of the listed assets and taking the remaining assets private was the best mechanism to unlock value for shareholders. For many years the management team of PSG were vocal about the compliance challenges in the listed space.
5. Alviva
After being undervalued by the market for many years and experiencing low liquidity in the stock, Alviva’s management decided to execute a buy out and the subsequent delisting of the company. In the end the company was taken private at a price of R28, a 45% premium to the 30-day weighted average share price of R19.29 prior to the announcement. Additionally, this buyout represented a 44% premium to the share price on 24 June 2022, when the expression of interest for a potential deal was announced.
While delistings have unlocked value for shareholders, they pose a challenge for South African investors over the long term.
While we conclude that buyouts, such as the ones discussed above, do unlock short term value for investors, in the absence of new listings coming to market the longer-term impact is concerning. In fact, the rate of new listings is more of a concern than the rate of delistings. The dwindling number of listed companies creates the following challenges:
- Reduced investment options for South African investors, which leads to less opportunities to diversify.
- Less liquidity on the market due to less trading. Figure 2 below shows how trading activity on the JSE has declined in the last 5 years.
- The reduced universe of stocks means fewer options and ultimately a weaker overall market with less opportunities to generate outsized returns.
Figure 2: Trade volumes on the JSE in decline
Source: JSE results presentation
As mentioned above, in 2023 there were only three new listings on the JSE and in 2022 there were only five. The highly regulated nature and high listing costs make it an unattractive proposition, especially for smaller companies. Every new listing we’ve seen recently has come as a result of unbundlings, often driven by financial pressures at the holding company level or strategic changes in how they view the unbundled company. Examples of these include:
- We Buy Cars, which was a forced listing as the company unbundled from Transaction Capital due to financial pressures at Transaction Capital;
- Zeda Car Leasing, which unbundled from Barloworld due to a change in strategic direction at Barloworld; and
- Premier Foods, another forced listing, after unbundling from Brait due to the financial challenges at Brait.
Outside of the forced listings, as in the examples mentioned above, we have not seen any new Initial Public Offerings (IPOs) on the JSE for many years. To encourage new listings and to counteract the delistings, it is crucial for regulators to create a more conducive environment for new IPOs. This could involve reducing compliance costs and easing listing requirements.
Figure 3: New listings on the JSE
Source: JSE data
There are currently some iconic South African companies which are the subject of potential takeovers by big international and local players.
- Anglo American, the iconic South African mining giant is currently subject to a takeover by Australian mining giant BHP Billiton, which happens to have a secondary listing on the JSE. In the absence of this deal going through, there might be more potential suitors waiting in the wings to buy up their quality assets.
- Multichoice is also a hot topic for South African investors with a possible takeover by French media giant, Canal+.
- Meanwhile, Telkom has been the subject of takeover talks in recent years with the likes of MTN interested in its fibre assets.
Outside of the three big names currently in active talks, we certainly see the potential for a few more possible buyouts and delistings in the future, especially with some of the deep discounts we are seeing in the small- and mid-cap space.
Listing booms usually occur when the economy and global markets are flourishing.
When the environment is attractive, we normally see private companies come to the listed market, hoping to reap the benefits. We saw this in the run up to the IT boom in the early 2000s and between 1997 and 2000. But when times are tough, the reverse happens. After the bubble burst, there were 290 delistings between 2000 and 2003.
When the environment is challenging, the stronger companies survive, many weaker companies delist, some of the better-quality companies are targeted as takeovers and even good companies end up delisting (some recent examples being Distell, Mediclinic, Pioneer Foods, RBP). Often these companies are bought out at premiums, unlocking value for shareholders.
Ultimately, a revitalised JSE with a diverse range of investment opportunities would benefit both investors and the broader South African economy.
Markets generally move in cycles. Perhaps with an improved business environment in South Africa and relaxed regulations and costs, new listings will once again become the flavour of the month. This will require a coordinated effort from regulators, government agencies, market participants, and other stakeholders to address the various challenges and promote sustainable growth in the market.
Although the local listed universe is narrower than in the past, it still holds great opportunities.
We see a lot of value within our universe of 100 stocks that our SA equity analysts actively cover, with the median stock trading on a one year forward price-to-earnings multiple of 9x and a dividend yield of 4.9%. Historically, these have proven to be attractive entry levels for long-term investors.
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