L4L – Do I stay long in Long for Life?

Long for Life (L4L) recently announced their intention to acquire the entire outstanding shares of Holdsport (HSP). HSP was trading at around R57-R60/share prior to the announcement of the deal and L4L’s revised offer is 12.1 L4L shares for each HSP share. At the current L4L price of approximately R6.20-6.50/share and assuming the acquisition gets all required approvals, HSP shareholders stand to make approximately R75/share – a juicy 25% premium. As I hold some HSP in my portfolio, I am pleased with the premium, but I am now faced with the dilemma of whether to continue holding the shares in L4L or whether to sell them and re-invest the money elsewhere.

What is L4L?

Long for Life is a listed investment vehicle started by industrialist and capital allocator extraordinaire, Brian Joffe. After his retirement from Bidvest, this company is Joffe’s retirement project. L4L listed in March this year at healthy premium to cash with no assets and has since inked three transactions. If all three of these are successfully concluded, the company will consist approximately of the following:

A market cap of approximately R5bn comprised of

  1. R360m invested in bottling and plastics business Inhle (net tangible asset value of R53m)
  2. R116m invested in beauty retailer Sorbet (net tangible assets R5m)
  3. R3,200m invested in Holdsport (net tangible assets R900m)
  4. R1,500m in cash

The Pros

  • Capital allocation: Kevin Hedderwick and Brian Joffe have both built up large fortunes and have healthily rewarded shareholders in their previous companies. These men should have the ability and capacity to recognise value and establish synergies.
  • Good deal: I owned HSP, because they are a good company, at a great price in a sector that is likely to grow significantly in the coming decades. Clearly the L4L capital allocators see the same value and they are investing in a company that is very cash generative and provides a scalable platform for synergies.

The Cons

  • Dividends: One of the main reasons that I owned HSP was the healthy dividend, with a yield of over 5%. L4L is unlikely to pay a dividend, therefore reducing the cash flow from my portfolio.
  • Fees/incentives: Typically, equity holding companies of this type richly reward management with % fees based on assets managed (think Zeder or Reinet). Fortunately, L4L does not follow the same greedy structure. Nevertheless, management is extremely well paid for essentially a portfolio management role and directors all got in at R4/share prior to the listing. Lucrative share bonuses are awarded based on growth rates in share price, which is a reasonable compensation for this type of business, but depends on where you draw the line in the sand. In summary, whilst remuneration is high, it is better than many other companies and not out of line.
  • Overpaying: All three of the first deals are significant overpayments in terms of tangible asset values, introducing a healthy amount of goodwill into the books. Synergies at this stage are also not clear. Particularly the Sorbet and Inhle deals appear to be richly priced, when compared to market peers and the current SA consumer environment.

In conclusion

L4L’s management team have proven that they can create value. They are assembling a portfolio of assets in a period where the consumer is stretched, which should ensure that they are buying these companies at reasonable prices and preparing for an inevitable upturn in sentiment in the future. However, given the current environment, L4L appears to be paying relatively high prices for these acquisitions and they are using over-priced shares that are trading at significant premium to cash and tangible assets for these deals.

For this reason, I will sell my shares in L4L after the conclusion of the HSP transaction, as I expect the share price to trend towards NAV in the future.

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