Pros and cons: The elusive ‘magic’ of corporate unbundling

The “unbundling” of Rand Merchant Investments (RMI) resulted in the share price of the company zooming up 14.6% this week, suggesting that  investors strongly supported the move. But if it’s such a “no-brainer”, why didn’t the company do it before, and why don’t SA companies do it more often? In fact, what exactly is “unbundling”? 

According to investment website Investopedia, unbundling is a process by which a company with several different lines of businesses retains core businesses while selling off, spinning off, or carving out assets, product lines, divisions, or subsidiaries. 

Like so many definitions, this tells you what the process entails but doesn’t tell you much about why it’s done, why it works and why it often does not. 

The idea is simple: if a company owns investments listed on a stock exchange, it’s a straightforward matter to add up the values of those stakes and compare them to the value of the company at the top of the pyramid. 

If the value of the company at the top of the pyramid is less than the sum of its investments (it almost always is), then it is trading at a discount to its technical underlying value or net asset value (NAV). So, by distributing the shares to its shareholders, that value is “unlocked”.

What happened with RMI is a great example. Before the unbundling, RMI owned 24.8% of healthcare and finance company Discovery, and 26.8% of insurance company Momentum. 



If you totalled up the value of these stakes and the other investments in the company, it becomes apparent that RMI was trading at a 29% discount to its NAV. In the RMI case, there was also a sting in the tail, since the company is also doing a R6.5-billion capital raising exercise, which investors normally don’t like because it has the effect of reducing the value of their existing shares.

So, RMI’s decision held good news and bad news for investors, but on balance, the news is good, resulting in the share price bounce. 

Compare this process with one alternative: an accelerated book-building process. Here, rather than distributing the stakes in Discovery and Momentum to RMI shareholders directly, the company would sell these stakes to investors. It could also sell the stakes to a competitor, say in this case, to Mediclinic and Old Mutual, which would have the same effect in one important respect: it would result in a whole bunch of cash sitting in RMI’s bank account. 

You could argue, the result is more or less the same because investors in RMI would effectively own a company valued at what it was, but instead of investments, it has (more or less) the equivalent value in cash. 

But, in effect, it is not the same at all. The saucy little secret has to do with the ego of the executives in the company at the top of the pyramid. In the words of Byron Kennedy, a fund manager at Vestact, “management teams make themselves less significant when they unbundle assets. Their responsibilities drop and the size of the business they run decreases significantly”.

Yet, for all of their “no-brainer” status, it is more complicated than that. 

First, not all unbundlings work the way they are intended. When Old Mutual unbundled its 12% stake in Nedbank earlier this year, the effect of the share price of both companies was pretty small. 

The flagbearer for resisting unbundling in SA is the industrial holding company Remgro, and the arguments in favour have often been espoused by its chairman Johann Rupert. 

The essence of Rupert’s argument is that by investing in Remgro, shareholders are essentially getting what could be compared to a unit trust or an investment portfolio, which have stakes in a variety of companies. The crucial difference is that Remgro investors don’t have to pay the exorbitant fees often associated with these financial instruments. 

But even Remgro, which owns stakes in everything from media assets to shipping, also engaged in a big unbundling exercise, distributing its stake in Rand Merchant Bank Holdings (a different but related company to RMI) in 2019. 

At the time Rupert said it was the “end of an era” and that “we simply can’t have 40% of our net asset value tied up in a business where we have no control or influence, nor that we have sought to influence. It just no longer made sense for us.”

Well, sort of. That same logic could also apply to a whole bunch of other companies in the Remgro stable. Shane Watkins, chief investment officer of All Weather Capital that lobbied Remgro to unwind the structure, told Business Day at the time that it was “inevitable that all holding companies that trade at persistent discounts to the sum of their underlying investments will ultimately abolish these structures. It is like trying to defy gravity.” 

But investors historically have backed Remgro because of its ability to not only invest in growing companies but also create them. Rupert famously backed GT Ferreira, Laurie Dippenaar and Paul Harris, who founded FirstRand, which went on to become the financial megalopolis we know today.  

One advantage of investment holding companies is that investors can take advantage of talented and insightful investors in much the same way that talented fund managers can be proactive in creating value. Yet, as we have all learned to our cost, rash decisions can quickly lose money too. 

Arguably, the most egregious case of resisting unbundling is the long-standing Naspers/Prosus fandango. This company has been trying all kinds of corporate manoeuvering to reduce its NAV discount with its Chinese investment Tencent. 

The Naspers-Prosus case does also demonstrate that it is not always as easy as it seems. “I agree the unbundling of Tencent would be the best-case scenario. But that would require a Tencent listing on the JSE and who knows if the communist Chinese would allow that?” says Kennedy. DM/BM