Sun International: When friends become foes

25 Jun 2020

Sun International’s Latin American partner is aiming to acquire 50.1% of the company. While it has a novel way of wooing shareholders, its bid serves as a timely reminder to SA investors that there is value in the local market, which may cause foreign investors to swoop.

The board of hotel and gaming company Sun International has rejected out of hand an unsolicited and non-binding proposal from Chilean investment group Nueva Inversions Pacifico Sur Limitada (IPS) to acquire 50.1% of the company for R22 a share. The bid values Sun International at just over R3-billion.

The news that IPS had made an offer to Sun International was communicated to the media after the markets closed on 24 June 2020. It was not made via SENS, or communicated via Sun itself, making it somewhat unusual and provoking speculation on the share price which shot from R14.82 to R18.10 before settling at R17.70.

At face value, the offer seems attractive. The price represents a premium of 44.26% to Sun’s closing share price of R15.25 on 22 June 2020; 68.26% to the 1-month volume weighted average price (VWAP) and 50.09% to the 3-month VWAP.

But it should be noted that Sun’s share stood at R40.53 just six months ago and R50.34 a year ago.

In addition, if the offer becomes binding, IPS undertakes to support Sun’s proposed rights offer. Like many indebted companies around the world, it was not well-positioned to weather the Covid-19 storm, which has exacted a severe toll on the hospitality sector in particular.

Sun has cut salaries and temporarily laid off some staff in order to survive the lockdown.

The board of the firm plans to raise about R1.2-billion to improve liquidity and strengthen its balance sheet so that it is well-positioned to resume full trading post lockdown.

Shareholders have been invited to an extraordinary general meeting (EGM) on 13 July 2020 to vote on this and other issues.

The IPS offer goes further, with an offer to provide Sun interim liquidity support in the form of a bridging loan of up to R1.2-billion, again conditional on the offer becoming binding.

However, IPS will only deliver a firm intention letter if Sun’s management complies with several conditions, including the completion of a “red flag” due diligence (lasting about a week); irrevocable undertakings from Sun’s largest shareholders that they will vote in favour of all resolutions required to implement the Proposed Partial Offer, getting extensions on all upcoming maturity dates from Sun’s lenders and postponing the EGM, among other conditions.

Sun CEO Anthony Leeming would not comment on the matter, but a company statement noted that the proposals (there has been an ongoing discussion between the parties) have “failed to adequately address the concerns consistently raised by Sun International”.

Their partnership with Sun began in 2016, when Dreams merged with Sun’s Latin American business to create Sun Dreams, one of the main casino operators in the region.

In particular, these relate to the pre-conditions as well as Sun’s unhappiness with ongoing litigation between the two companies.

In fact, this litigation suggests that there is no love lost between the two.

By way of background, IPS is Sun’s partner in Latin America and owns about 35% of Sun Dreams, Sun’s Latin American subsidiary which operates casinos and lodging facilities across Chile, Colombia, Panama, Peru and Argentina.

IPS is owned by brothers Claudio and Humberto Fischer who have been involved in the Chilean gaming industry for the last 20 years and were the original investors in Dreams, along with a fund run by Citi Bank.

Their partnership with Sun began in 2016, when Dreams merged with Sun’s Latin American business to create Sun Dreams, one of the main casino operators in the region.

Citi has since exited the company, which saw both Sun and IPS increase their stakes in Sun Dreams.

In April 2019, Sun announced that it was selling a 15% equity interest in Sun Dreams to IPS, which would bring IPS’s share to 50%.

“This was meant to precede a potential listing of Sun Dreams to fund future growth and expansion opportunities,” says Ricco Friedrich, a portfolio manager and director of Denker Capital.

“This deal, however, fell flat. I’m not sure why as all they needed was gaming authority approval.”

As a result, the parties have entered into arbitration proceedings. “I would imagine there may be some bitterness between the parties, which is never a good thing,” he adds.

However, IPS is of the opinion that these proceedings are not material to the proposal to acquire 50.1% of Sun.

According to IPS, it and the board of Sun began discussing a possible transaction several weeks ago. This culminated with IPS sending a proposal to the Sun board on 11 June 2020. This was just a day before Sun issued a notice to shareholders announcing their intention to embark on a capital raising exercise.

It will be interesting to see what investors like Allan Gray, which holds 23.8% of the company and Value Capital Partners, which holds 20.23% will make of the opportunistic offer.

The next day, on 13 June, the Sun board formally ended engagements with IPS.

However, IPS is not taking this lying down as it believes its proposed offer is compelling.

“We have written to the board to consider proceeding with us, as we believe Sun International has an attractive portfolio of properties in Africa and Latin America, which need to be protected against the devastating economic impact of the Covid-19 pandemic,” says IPS co-founder and chairman, Claudio Fischer.

“Our proposal provides an alternative transaction structure with more favourable terms than those included in Sun International’s general meeting circular, dated 12 June 2020, indicating [its] intention to launch the Proposed Rights Offer.”

It was for this reason that IPS decided to play its hand and advise Sun shareholders, by way of the media, of its proposal to the board. It apparently gave the board notice of this.

It will be interesting to see what investors like Allan Gray, which holds 23.8% of the company and Value Capital Partners, which holds 20.23% will make of the opportunistic offer.

In particular, Value Capital, which bought in at between R57.50 and R60 and partially underwrote the group’s 2018 R1.5-billion rights offer, might not take too kindly to it.

While the story has yet to play out, it serves as a timely reminder to South African investors that there is value lurking in their midst.

“What is clear is that if locals don’t jump at the opportunity, foreigners will,” says Friedrich. “We are trying to raise money for our fund to keep these companies in South African hands. Already Metrofile is under offer by foreigners. If we continue to let this happen, dividends and profits from our SA companies will all disappear offshore… not a great outcome.” DM/BM

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