This week's shake-up at Barloworld came swiftly and unexpectedly. By announcing a plan to unbundle its 72% stake in cement & lime producer PPC, the group has done much to allay investor concerns about the valuations of assets in its portfolio.
The holding company's share price immediately rose 7%, reflecting investors' approval of the news.
The PPC unbundling is only one step in a broader process that includes new top management, board changes, asset disposals and black economic empowerment (BEE) deals for both companies.
It indicates Barloworld has elected to become a smaller and more focused group, generating better returns from its operations. Says new CE Clive Thomson: "Decisions about the assets that remain in the group or that are disposed of will depend in the end on shareholder value."
Thomson says all group businesses will be required to produce an 8% cash flow return on investment. Previous CE Tony Phillips applied the same criteria, but it seems the board wants a tougher approach towards under performers.
The change of CE was unusually quick, though the way seemed to have been prepared by senior management changes earlier this year.
Thomson (40) had moved from his job as finance director to run the earthmoving division, historically Barloworld's core business. Before he joined the group, in 1997, he was a partner at Deloitte & Touche. Don Wilson, who worked at Barloworld some years ago, was recruited back from an eight-year stint at Sappi to take over as finance director.
Phillips (60) retires as CE immediately but remains an executive director until the AGM on January 25. This quick, clean exit contrasts with the measured process at groups such as Massmart or Grindrod, where the old CE has stayed on after announcement of the handover.
Barloworld has done well during Phillips' eight years as CE, but some of its unlisted activities, domestic and international, have struggled to produce the required returns.
Phillips says in his review that the group has disposed of R7,6bn in assets since 1999, selling one business on average every two months. It has also acquired assets for R6,8bn.
Over several years, PPC CE John Gomersall has headed an internal Barloworld team, reviewing the group's operations and strategy, and considering ways of improving shareholder value. That led to the decision to unbundle PPC.
Thomson says management considers the group's unlisted operations are "somewhat undervalued". The PPC unbundling will improve liquidity in that stock and focus management and investor attention more closely on the remaining Barloworld assets.
In some ways, PPC has come to resemble a cuckoo in the nest. Since January 2002, the cement & lime producer's share has outperformed Barloworld's counter by 90%.
At the beginning of that period, the holding company's 72% stake in PPC had a market value of R2,9bn, or about 22% of Barloworld's then market cap of R13bn. With PPC's market cap having grown to R20,6bn, the stake now represents 46% of Barloworld's market cap.
This partly reflects PPC's strong record, as well as its direct exposure to SA's fixed investment cycle, but it also shows the market's rating of Barloworld's unlisted activities. PPC's five-year compound growth in earnings per share is 26%, and in dividends, 25,5%. That compares with 18,1% and 22,2% respectively for Barloworld.
Recent asset sales by the group include its steel tube division and the US and UK handling lease books. Proceeds of R1bn are to be returned to shareholders. But more such sales are likely. Trevor Munday, ex-deputy CE of Sasol, joins the Barloworld board and will "assist in the disposal programme".
Of the remaining divisions, the biggest contributors to operating profit this year were equipment (R1,1bn), motors (R636m) and coatings (R283m). Other were industrial distribution (R146m), scientific (R80m) and corporate (R200m).
There are still underperformers, says Thomson, in the industrial distribution, scientific and coatings activities. In the scientific division, the Melles Griot business is being sold and options are being considered for the laboratory business. Returns have improved in industrial distribution but there are still problems.
The coatings division does well in SA but loses money in Australia, where the group has been reviewing its options since regulatory authorities blocked an intended acquisition there. Thomson says the earthmoving business in Iberia is performing "very well", though its profits were flat this year.
With PPC out, the group's international profile - and rand hedge exposure - will be much larger unless new acquisitions are made locally.
Several of the remaining SA-based operations are already market leaders. That limits scope for acquisitive growth locally. Logistics, a new business, is one activity that could grow locally by acquisitions. Other operations could grow through their exposure to mining, transport and infrastructural investment.
If the board is serious about shareholder value, it will need to find ways of reducing or eliminating the discount the market applies to conglomerates. That could require further focusing, perhaps reducing the portfolio to earthmoving and motors. The dilemma is that would lead to a smaller asset base and an easier target for takeover.
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