While geographic diversification to circumvent infrastructure challenges in South Africa sounds good on paper, in general, mergers and acquisitions (M&A) are tricky. In particular, South African companies have a poor track record when it comes to cross-border M&A. Hopefully Thungela can buck the trend.
Points of concern from the Ensham acquisition:
- Contributing 98.53% of the funding to purchase 70% of the shares seems like a gift from Thungela to the co-investors.
- The co-investors will contribute 1.47% of the purchase price and will potentially acquire 30% of the shares. Furthermore, they will repay the mezzanine loan with proceeds from the Ensham Business at an interest rate of 10%-15% per annum.
- This rate is not particularly onerous for mezzanine finance, bearing in mind that Thungela’s source of capital for the mezzanine loan is the South African market, where the cost of capital is higher than in Australia.
- The financial ratios in Appendix A show that Thungela had a return on equity of 39% in FY2021. So a loan of AU$68 million (ZAR 819 million) at 10% to 15% is potentially value destroying for the shareholders.
- Sungela Pty Ltd will end up with the entire rehabilitation liability, despite only owning 85% of the Ensham Business. Given the disproportionate purchase price contributions (i.e. a lack of cash from the other investors), it is possible that in some set of unforeseen circumstances, Thungela could end up on the hook for most of that cost. For instance, if the liabilities are joint and several, the party with the money pays, even if they did not receive all the benefits of ownership.
- Idemitsu has negotiated itself a high percentage (50%) of the upside net margin considering it is exiting the Ensham Business and bears no risk going forward.
- Sungela Holdings is an Australian holding company through which Thungela Australia and the co-investors will hold their investment in the Ensham Business. The question is why is Sungela Holdings needed, when each party could invest directly in Sungela Pty Ltd?
- A possible reason is that Thungela and the co-investors have established it with an eye to future joint investments. This would mean that the co-investors will be de facto partners to Thungela in future. (Why not if Thungela is willing to pay a disproportionate amount of the purchase prices?)
It is challenging to make conclusions on the merits of the deal from the limited information released. However, it is clear that Thungela is paying for the dinner but there are a lot of guests at the table.
Full report available here: Thungela Resources – M&A Ensham deal
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