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Rough gem Brait has plenty bright young things
BRAIT Société Anonyme's new chairman, Mervyn King, agrees that the sight of his grey hair is intended to temper the otherwise bright young things at the merchant-banking outfit to be demerged from Capital Alliance Holdings. With effect from August 3, CAH is to split into two separately listed companies. Capital Alliance retains the name, the life assurance businesses and some investment capital. The other company, coming together via London, Luxemburg and Johannesburg quoted Tolux and to be renamed Brait, will buy CAH's bank, securities, asset management and property operations, 55% of Decimax and 50% of African Alliance. Brait will also buy the businesses of Capital Partners, a private equity specialist founded in 1991. For every 100 CAH held, members will receive 34.9 Brait, 7.6 Super Group and 13.5 Corpgro while retaining their 100 CAH shares. Mark Barnes, chief executive of Brait, describes Brait as a multi-faceted merchant bank and private equity investment house. What used to be prefaced with Capital Alliance now assumes the title Brait. Barnes speaks of complementary specialist skills between the CAH-sourced assets and Capital Partners: "This is a real merger; there are no synergies or cost-cutting elements." Pooling of intellectual capital and goodwill, the allocation or relatively scarce capital, central vision, network circles and cultural compatibility all add to the advantages of the merger. Brait's pro forma balance sheet at March 31 1998 gives a tangible net asset value of $153-million or R759-million. Pro forma earnings are up from R26-million in the year to March 1996 to R107-million to March 1998: Barnes forecasts a fully diluted 60% rise in rand terms to R187-million in the year to March 1999, after "due prudence". New capital of R255-million has been raised through the issue of 7.3-million Tolux shares to give 93.5-million in issue. Translating into dollars, Barnes expects Brait to make $35.1-million in the year to March 1999, 41% up from 1998. Private equity is expected to contribute 32% of 1999's earnings, followed by 18% from capital well deployed: Barnes believes that too much South African capital lies idle and that excess capital lowers the hurdle-rate for investment, producing mediocre returns. Fees for advice will earn 14%, margin 9%, structured products 8% and market risk 6% - directly attributable to movements in markets, according to Barnes. This seems a trifle, but is probably realistic when looking at Brait's small size plus the fact that trading arm Decimax called the markets horribly wrong last year and had to be rescued by Barnes at CAH. So much for risk management skills. Asset management should yield another 6%, property deals 5% and investment banking 2% of Brait's 1999 forecast profit of R187-million. Barnes observes that 70% of the income is annuity-type. Brait will focus on South Africa initially as there are many opportunities arising from the deconcentration of ownership (R21.4-billion worth of assets were unbundled last year), asset dishoarding, the breaking of public-sector monopolies, dismantling of cross-holdings, and so on. Brait's "new order" observes an increase in inward investment from R400-million to R9.9-billion in five years - overbalanced by outward investment increases from R1.2-billion to R17-billion, the arrival of foreign competition, new private-sector industries, privatisation, demutualisation, mature and liquid capital markets and more interest in joint ventures. Changes in JSE ownership are already manifest: between 1995 and 1997, black control rose from 0.3% to 10.3% of market capitalisation; foreign ownership from 3.3% to 6% and directors' participation from 5.5% to 8.4%, this last fact reflecting Barnes's point that managers perform better when their own money is at risk. Brait's shareholder profile meets the requirement, and no one shareholder has more than 10% of the equity. On asset allocation, Brait says the equity-market share will dip towards 50% in favour of higher offshore and private equity initiatives - as much as 10% in each. Capital Partners co-founder Anthony Ball outlines his rules for private equity success: remember you are leveraging deals with other people's money, privately negotiated, and that an exit strategy needs to be planned from the outset. He gives some details on how Capital Partners has performed with its first and second funds, established with Fedsure in 1991 and with Zephyr Management in 1995 respectively. Fund I invested R187-million in 19 companies, has seen R205-million of cash returned and retains unrealised value of R189-million to give an internal rate of return of 44%. Fund II invested $98-million in nine ventures, has returned $92-million, has unrealised value of $154-million and made an internal rate of return of 123%. Brait employs 286 with an average age of 34, almost half being professionals or "revenue generators". Capital employed per person is R2.7-million and the forecast of taxed profit per employee adds up to R650 000. The Brait presentation to the Investment Analysts Society attracted a very large audience and most of the feedback was complimentary. Tolux shares peaked at R85 earlier this month and are currently R74. If it earns R187-million on 93.5-million shares, Brait's forward price-earnings ratio is of the order of 37 times. I've seen worse companies more highly rated and better ones commanding less premium. I wouldn't chase it in this uncertain market, but if it falls back towards R60 it could be worth picking up.
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