Brait needs money. Again.


Brait needs money. Again.


Published Date: 2021-11-24 | Source: INCE|Community | Author: The Finance Ghost

Brait needs money. Again.

I'm not sure what the opposite of the Midas touch is. I might volunteer the "Wiese touch" as a suggestion, given the way that Christo Wiese's twilight years in the market have been going. Being a shareholder in most of his related companies hasn't been a winning strategy.

Brait is down 95% over five years after a series of bad decisions, including the unmitigated disaster that was the acquisition of New Look in the UK. Steinhoff is down 97% since the company's balance sheet was found to have more holes than a Swiss cheese. Same same, but different.

Brait was recapitalised in February 2020, an incredible piece of timing when you consider how the world collapsed in March 2020. There was an equity capital raise of R5.6 billion, an issuance of GBP150 million in convertible bonds and a R6.3 billion three-year revolving credit facility.

The company entered into an investment advisory and administration services contract with Ethos Private Equity in March 2020 with an annual cost of R100 million. Ethos sweetly reduced the fees by 10% for calendar year 2021, taking into account the company's financial position. If you can't see the sarcasm dripping off my writing, you haven't been following my work for very long.

There has at least been some progress made. Iceland Foods and DGB were disposed of, resulting in a R2.8 billion reduction in Brait's debt. Plans were put in place for the three major businesses, namely Premier, Virgin Active and New Look.

Sadly, the lockdowns caused such pain in Virgin Active that significant shareholder capital contributions have been required to ensure the survival of the business. This means that Brait shareholders are being asked to cough up cash once again.

Operational update

Premier contributes 48% of Brait's assets and is a South African FMCG manufacturer that has achieved revenue growth of 12% and EBITDA growth of 20% in the latest interim period. Return on invested capital is 13.8% and free cash flow conversion is 62% of EBITDA. The company recently acquired Mister Sweet for R419 million. Premier may be listed separately in 2022, depending on market conditions.

Brait values Premier on an 8x EBITDA multiple, based on maintainable EBITDA of R1.25 billion.

Virgin Active contributes 45% of Brait's assets and has been smashed by lockdowns, along with the rest of the gym industry. Key membership metrics appear to be looking up, with Brait valuing the gym business on an EBITDA multiple of 9x based on maintainable EBITDA of GBP 105.4 million.

New Look is only 4% of Brait's assets and is rated number 1 for womenswear among 18 - 44s in the UK. EBITDA of GBP26 million is a significant turnaround from a loss of GBP26 million in the prior period. The multiple used by Brait is a more modest 5x and maintainable EBITDA is GBP52 million.

Capital raise

Brait's total capital raise will be a whopping R3 billion, which is huge in the context of a group with a market cap around R6 billion. It's not surprising that the share price fell nearly 10% on the day.

The new instruments are "Exchangeable Bonds" - convertible instruments that will pay a coupon of 5% per annum and will be exchangeable into Brait ordinary shares. They will be listed separately on the JSE.

The maturity date is in December 2024 and the bonds will be structurally senior to Brait's existing convertible bonds but subordinated to the revolving credit facility.

The issue price is R4.37, a 5% discount to the five-day VWAP of Brait prior to the announcement. With the company trading at a huge discount to its net asset value, the last thing it should be doing is raising equity capital (convertible or otherwise). Sadly, it doesn't seem to have much of a choice.

To give further support to the balance sheet, the revolving credit facility was extended from February 2023 to June 2024. The interest rate is JIBAR plus 4%, so around 7.85% based on current three-month JIBAR.

The proceeds will be used to settle part of the committed revolving credit facility, as a 5% coupon is much cheaper than the interest on the facility, at least from a cash flow perspective if not from a shareholder perspective when dilution at a discount to NAV is considered. The interest savings will be around R200 million for 2022, which should help Brait pay those Ethos Private Equity fees.

Ethos Capital Partners, a listed entity linked to Ethos Private Equity, will be participating in Brait's latest capital raise to the tune of R294 million.

It's not just Ethos giving support to the capital raise. Other underwriters include Rand Merchant Bank and Titan Fincap Solutions, an entity linked to the good Dr Wiese. The underwriting commitments are R941.4 million and irrevocable undertakings from institutional and strategic shareholders come to R1.77 billion, so the total committed capital is over R2.7 billion.

This leaves the rest of the Brait shareholders needing to come up with the balance.

Will the pain for this group ever end?


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