NZX acquired 22% of the shares of the Bond Exchange of South Africa (BESA) on 3 October 2008. The acquisition was the culmination of over a year's work with the BESA team to scope current value and growth options for the company.
Prior to making the investment, NZX valued the BESA business, and its prospects. In NZX's view, the Johannesburg Stock Exchange (JSE) offer of Rand 90 per share, announced on the 24 October 2008 (South Africa time), is not a true reflection of BESA's current, or likely future, value.
NZX's view is based on the following set of facts:- JSE's bid values the total BESA business at only Rand 6 million above the cash value of the business in a dissolution. If BESA were to cease operations, the Guarantee fund would go to shareholders. If the value of defending this takeover is factored in, it would be more financially beneficial to BESA shareholders to pass a dissolution resolution than sell to JSE at the price on offer.
- The offer is at a discount to NAV with the inclusion of other assets. BESA is a strong solvent business, with a stable core franchise and excellent growth prospects. Exchanges as businesses are not valued at, nor sold anywhere near, NAV. By comparison, the JSE’s market capitalisation has valued it between 3.3 to 5.2 times its NAV year to date.
- The offer does not value the business synergies with JSE. Over the lifetime of an acquisition these synergies would be very material financially to the JSE.
- The offer does not take account of the strategic value of the business and BESA's position as a second exchange in the South African market. Strategic assets always attract a decent premium.
- The offer does not value the growth options for which BESA has just raised capital. Given that sophisticated local and international shareholders have recently provided BESA with capital to fund these growth options, they should be built into the valuation.
- BESA has previously been run to break even. The valuation does not take account of the easily attainable profit outcomes that BESA is capable of achieving. Traditionally, exchanges that demutualise achieve at least a 20% increase in revenue and a similar percentage decrease in costs, along with better service to customers.
- BESA has a clear prospect of listing in its strategic growth path. There exists an inevitable value realisation opportunity and uplift for shareholders at the time of such a liquidity event.
There are also clear parallels to when the then NZSE was approached by the ASX in 2000 to be taken over. The cash on the books was NZ$7 million, with an independent valuation of NZ$11 million. The NZSE refused, charted a new direction, and has seen its market capitalisation range between NZ$144 million and NZ$284 million in the last 18 months.
Accordingly, while NZX as a shareholder will await the view from the BESA Board and its financial advisors regarding the valuation by JSE of BESA, upon its own very recent valuation - and taking into account the above factors - NZX's initial view is that the JSE offer price is extremely low, is very significantly below fair value, and NZX would not support a takeover at this offer price.