South Africa: Richemont's BAT Spin-Off Gets Shareholders' Nod

Source from:  Business Day (Johannesburg) 9 October 2008 10/10/2008

RICHEMONT, which is controlled by SA's Rupert family, is closer to completing its restructuring after its shareholders and Remgro shareholders gave it the green light to spin off its 10,7% stake in British American Tobacco (BAT) yesterday. In August, Remgro and Richemont announced plans to sell their combined 30,1% stake in BAT in a revamp prompted by tax changes. That move would make Richemont Europe's second-biggest luxury specialist. The spin-off would result in BAT listing separately on the JSE and make it one of the largest local listings. The first phase of the restructuring was expected to be effected on October 20. Imara SP Reid analyst Warwick Lucas said along with the announcement in August that Richemont would distribute 90% of its holding in BAT, Remgro would also give investors an opportunity to hold the group's BAT stake as an independent investment. "Shareholders will have the opportunity to invest in international assets without using their offshore allowances," Lucas said. "Based on our calculations, the removal of the BAT holding will lead to great unlocking of value. If the BAT holding was removed at its market value, this would result in the remaining assets in the Remgro portfolio being at a 36,9% discount," he said. However, analysts warned that shedding its conglomerate discount may not give Richemont, a Swiss firm, the valuation boost investors might have hoped for as it was dragged down by the worsening outlook for luxury goods. "Normally, due to the spin-off, the stock could have expected to see its valuation ratings improve by 10%-15% but in the current environment, it might not happen," Claudia Lenz, an analyst at Bank Vontobel in Switzerland, said. A Paris-based analyst said that having shed BAT, Richemont's valuation could be weaker and more vulnerable as its investment in tobacco, a less cyclical industry than luxury goods, gave it a margin cushion during downturns. With high fixed costs and leases, it was operationally geared and less flexible than some peers when demand slowed. In 2002-04, operating margins dropped and this could happen again, Investec Securities analyst Thane Duff said. "We might not see the discount completely disappearing on the BAT spin-off due to the perceived excess operating leverage," Duff said. Enditem