Once again, the Finance Minister stated in the mid-term budget that state assets would be sold to ‘not let the budget deficit and borrowings creep up.’ But what are they worth? Independent analytics and advisory firm RisCura calculated the values of certain state-owned entities and found that the sale of these unlisted assets might reasonably raise R164bn – given the requisite political will.
Despite the 2015/2016 income tax hikes, increased fuel levy and slowly narrowing budget deficit, the Republic needs more capital to fulfil its obligations, particularly now that President Zuma has agreed to a zero percent increase in tertiary education fees for 2016.
One group of assets that has been overlooked by many market commentators is the unlisted investment portfolio held by the state. The Department of Public Enterprises disclosed ownership of over 130 companies, agency bodies and trusts in 2015, spanning industries as diverse as railways, water utilities, forest products, aerospace and defence. These investments present a previously untapped pool of resources that the government may consider selling to help bridge its funding shortfall.
Since these assets are unlisted, it is not immediately clear how much cash could be raised through their sale. In order to better understand this, we performed indicative valuations on the larger and more saleable investments in the portfolio. The valuation process began with determining which of the unlisted government assets would meet the initial screen criteria set by the Minister of Finance as being non-strategic, and with business operations that would be profitable outside of government’s control.
To determine this, various factors were considered such as: the market in which the entity operates, the type of product or service sold, and continued reliance on government’s financial support.
After applying the filtering process to the more than 130 entities, 20 remained. The entities that were excluded in the initial screen were largely regulatory boards, trusts, national councils and development agencies. A secondary screen was applied to the remaining entities capturing investments in high-demand sectors, and investments with potential to create synergies for the acquirer.
Sector demand was calibrated using recent listed and off-market transaction data. Post the secondary screen, seven investments met the criteria for potential sale. The proposed investments were; Airports Company of South Africa (ACSA), Broadband Infraco, Passenger Rail Agency of South Africa (PRASA), Rand Water, Sentech, South African Broadcasting Corporation (SABC) and Transnet.
Airports Company South Africa
ACSA is the owner and operator of South Africa’s largest airports. Government owns 75% of the entity that generated R7.7bn of revenue during 2015. As a result of its sizeable operating foot print and high barriers to entry, government’s stake in ACSA was valued at approximately R18bn, representing a price to book ratio of 1.8x.
Broadband Infraco is primarily engaged in the establishment of national long distance fibre optic networks in South Africa. The South African government owns 74% of the company and our calculated indicative sales price of government’s share in Broadband Infraco is R534m, based on an Enterprise Value to Revenue multiple of 2.1x.
In developed economies, large scale passenger rail services are successfully owned and operated by private companies with government acting as regulator. PRASA disclosed revenue of R6.6bn in the latest financial statements with a moderate loss of R156m. Government’s 100% shareholding is valued at R4.3bn, based on an Enterprise Value to Revenue multiple of 1.9x
Rand Water is the largest bulk water utility in Africa and one of the largest in the world, providing bulk potable water to more than 11 million people in the country’s northern provinces. Rand Water earned R1.1bn over the 2014 financial year. Government’s 100% holding in Rand Water is valued at around R6bn, with an Enterprise Value to EBITDA multiple of 5.8x.
Sentech provides signal distribution services to most of the country’s broadcasters. Sentech is a 100% state owned enterprise and generated operating profit of R176m over the latest disclosed financial year. Government’s shareholding is valued at R1.6bn, based on Enterprise Value to EBITDA ratio of 6.5x.
The SABC provides broadcasting and informational services to the local general public and internationally through television and radio. The SABC earned revenue from advertising, sponsorships and licence fees totalling R7bn, whilst creating a net profit of R652m during 2014. The entity is constrained by elements of mismanagement and this, combined with other risks, resulted in an estimated sales price value of R14bn and reflects an Enterprise Value to EBITDA ratio of 7.2x.
Transnet, which belongs wholly to government but operates as a corporate entity, is the largest part of the freight logistics chain that delivers thousands of tons of goods across South Africa through its pipelines and ports. As the assets of the business were fair valued during the latest financial year, a price to book ratio was considered as an indicative valuation multiple. Government’s shareholding was valued at R119bn.
Other entities that didn’t meet the non-strategic and profit criteria include Denel, South African Airways and the South African Post Office. Factors that excluded the entities ranged from overleveraged balance sheets to not being able to generate significant investor demand at the valuation date. These parastatals, in our opinion, would struggle to be profitable without government backing.
However, the public private partnership model with Telkom has proven to the market that government is willing to support external shareholder value. While it is not a silver bullet, following this path of privatisations of unlisted assets could help to fund some of the general funding shortages faced by the country in coming years.
Rory Ord, RisCura
Nimalan Reddy, RisCura
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