Mara Delta Africa Property Holdings (MDP) announced on 6 December that they were engaging in another acquisition. With this, they are continuing to execute on their strategy, which was defined in their last annual report by Chairman Sandile Nomvete as:
“In the short term we will continue to capitalise on our knowledge base and diversify our sectoral exposure by expanding in current jurisdictions such as Mauritius, Morocco and Mozambique.”
The target is the recently constructed Mall de Tete in Mozambique’s coal rich Tete province. The wording from the press release:
“The Property is in line with Mara Delta’s investment strategy to acquire rural retail centres in under-serviced markets which meet the rigid investment criteria of strong counterparties, underpinned by long-term dollar-based leases.”
Mall of Tete is in the largest town in a province that is not only growing rapidly economically, but whose population has not seen a Western- style Shopping centre on their doorstep before. This fits perfectly into the MDP investment fundamentals.
The main reasons why I think this is such a great acquisition, is how it is financed. I have simplified things slightly to the main points and numbers:
- The purchase price is $25m, with a Gross Rental of approx.. $2.4m/annum, resulting in a gross yield of 9.5%
- 95% of the rentals are denominated in US$ and 29% is underpinned by one tenant, Shoprite
- As the rental contract with Shoprite is still being negotiated, there is some risk associated with the Shoprite rental yield. The conditions of sale therefore stipulate that if the desired rental terms are not achieved the Seller will reduce the purchase price, so that the yield to MDP is brought back to expectations
- Half of the purchase price is settled by a loan from the Bank of China. The interest rate is not given, but it is likely to be far below the yield of 9.5% and more in line with MDP’s average cost of debt, which is about 6.2%.
- The other half of the purchase price is settled with new shares in MDP, which are issued at a price of R22.60/share, significantly above the current share price of R18.50. This enhances shareholder value and once again implies the inherent undervaluation in the company. It also reduces the risk that there are “skeletons in the closet” for the buyer, as the seller remains invested in the business.
The structure of this deal significantly de-risks the acquisition for MDP shareholders, whilst leveraging of their Mozambican and African Retail experience. A phenomenal fit for this undervalued company.