Management at Mpact, the biggest paper and plastic packaging and recycling business in southern Africa, certainly knows how to make the best of a bad hand – and an extremely bad hand is what they were dealt in financial 2020.
First, as we all know, there was the Covid-19 lockdown, which derailed already tentative economic activity. Then there was the “catastrophic failure of a municipal sub-station in Ekurhuleni”, which meant that its Springs paper mill lost more than 50 production days. Finally, there were the common-or-garden variety of power outages South Africa has to contend with.
So it was hardly surprising that earnings for the first six months to end-June 2020 were down a hefty 84% – and given the uncertainty and the fragility of the economy, it seemed reasonable that management decided to preserve cash and skip the interim dividend.
It wasn’t all bad news though
The group managed to generate strong cash flow and met all its debt covenants; net debt was cut to R1.94 billion from R2.7 billion.
And there were expectations of improved demand in some sectors in the second half.
In early August when the interim results were released, the board assured shareholders that Mpact’s strong balance sheet and experienced management team would enable it to navigate the challenges ahead.
“Our focus will continue to be on cash preservation through strict working capital management, the postponement of non-essential capital expenditure and implementing additional cost-containment initiatives to mitigate the effects of the weak market.”
Cash preservation plans evidently didn’t extend to share repurchases.
In late October Mpact informed shareholders that between late September and mid-October, it had forked out R73.4 million to buy back 8.7 million shares at an average price of R8.47.
Key members of management also evidently felt the share price represented good value; in September when the share was struggling to move over R8, CEO Bruce Strong and CFO Brett Clark topped up their holdings.
It turns out to have been a great use of the group’s and the executives’ cash resources. Since then the share price has moved steadily upwards to its current level of R18.71.
All in all, October proved to be a busy one for Mpact shareholders; in addition to Mpact’s hefty share repurchase, Allan Gray topped up its holding to just over 20% and printing and publishing group Caxton (the indirect controlling shareholder of Moneyweb) built up a 5% stake from a holding of just under one million shares.
The Public Investment Corporation (PIC) went against the bullish trend and sold down to 3.4%.
By mid-November the Mpact board evidently felt the share price – trading between R11 and R12 – still offered lots of value. It quickly arranged a meeting of shareholders to get the necessary approval to buy back another 10% of the shares.
On December 11, the overwhelming majority of shareholders gave the necessary approval and within days the company had spent R271 million buying back 16.4 million shares, equivalent to 10% of its equity. This time around the average share price was R16.47.
Meanwhile Caxton, flush with the proceeds from the sale of its stake in Octotel, had been building up its holding in Mpact. Following a splurge of buying from Allan Gray, Old Mutual Investment Group, Visio Capital Management and Ninety One, by December 18 Caxton emerged as the single largest shareholder in Mpact with a stake of 26.45%.
Caxton had acquired 30.5 million shares for R469.9 million – an average of R15.41 per share. A few days later it topped this up with a further 2.6 million shares, bringing its total holding in Mpact to 45.7 million equivalent to 27.8% of the company.
But just weeks later, following the cancellation of the 10% stake Mpact had repurchased in December, it turned out that Caxton’s holding was now equivalent to 31.14%. This means Caxton is very close to the critical 35% level at which an offer has to be made to all shareholders and approval secured from the competition authorities.
That is likely to be a step much too far for the Caxton board, which is currently being coy about any plans it might have for the paper, packaging and recycling business into which it has just invested several hundred million rands.
Caxton chair Paul Jenkins would only say that they don’t want to be “drawn over the 35% line”.
He reckons there is limited overlap in the activities of the two companies: “We use folded carton board for our packaging and they make folded carton board,” Jenkins tells Moneyweb.
He describes Mpact as a “fabulous business” with great management. “We like the management team and are certainly not looking to interfere.”
That team seems unperturbed by the recent significant realignment of its shareholder profile and the prospect of a controlling shareholder. This, despite the fact that since it was demerged from Mondi in 2011, Mpact management has been able to operate without anyone looking over its shoulder. And to date it seems to have done very well without that oversight.
Asked for comment on any possible competition issues related to Caxton’s enlarged holding, Mpact said it was unaware of any.
“Caxton have been Mpact shareholders for a number of years, they are also customers of our cartonboard mill in Springs,” said an Mpact spokesperson.