Brian Joffe’s investment vehicle opts for buybacks not deals

Long4Life, the investment holding company run by former Bidvest CEO Brian Joffe, is buying back as much as R113.8m of its own shares, underscoring the difficulty of doing deals even when valuations take a knock in the toughest economic climate since the Great Depression.

The investment group, which owns beauty chain Sorbet as well as the Sportsmans Warehouse and Outdoor Warehouse brands, will spend a maximum of R3.16 per share to buy as much as 36-million shares — about 4.7% of its issued paper — from December 7 to 14.

Joffe said in October that the group saw no acquisitions on the horizon that would be a better use of its R821m cash pile than buybacks. Even so, the fact that Long4Life is unable to close deals at a time when business earnings are depressed shows the reluctance of owners to part with equity at valuations they deem below par.

“There is always a large disconnect [on valuation] between the sellers of businesses and the buyers of businesses on the private market,” says Keith McLachlan, a fund manager at AlphaWealth. “But, anecdotally, it would seem the wedge between valuations is even higher than normal thanks to Covid-19 because business owners are saying ‘ you can’t value my business on 2020’s results because this is abnormal’. They want their business valued on 2019’s results, but buyers are saying the past year is abnormal but it’s still a reality.”

Investment companies tend to value their targets on a multiple of past earnings, typically paying anything from four or seven times trailing 12-month core profit, or ebitda, for an acquisition.

With SA unemployment exceeding 30% and the Treasury now forecasting a 7.8% contraction in the economy, local businesses have just suffered their worst year in living memory.

While that should technically imply an abundance of distressed acquisition targets, McLachlan says there is a “dearth of quality businesses of the appropriate size that are up for sale” as the owners of such entities are reluctant to sell at current depressed valuations.

Joffe, a famously tough deal

maker, announced in June 2018 that Long4Life had acquired clothing and shoe retailer Rage Distribution for R3.92bn based on it achieving certain revenue and profit targets.

However, less than two months later Long4Life said the deal, which would have been the firm’s biggest to date, had been cancelled by “mutual consent”.

At the time that the deal was first mooted, Long4Life’s market cap was R5.3bn. This has since fallen to R2.62bn.

The group reported a net asset value per share of 627c for the six months to end-August 2020, almost double its share price on Monday afternoon. In the same fiscal first-half period, Long4Life derived 58.1% of its revenue from its Sport & Recreation arm, which includes Sportsmans Warehouse and Outdoor Warehouse. Those businesses, with Performance Brands ( owner of the First Ascent and Cape Storm brands), are the former constituents of the once-listed entity Holdsport, which Long4Life purchased and took private in 2017.

“At this point in its life cycle, the wide sum-of-parts valuation of Long4Life is still largely weighted towards Holdsport,” says McLachlan.

“I didn’t hold that share when it was listed so I don’t see why I should hold it now when there’s another layer of costs that has been added on top of it. Big box sports retail is oversaturated, particularly in the current economic climate. Where else in SA is there space left to put down another Sportsmans Warehouse that will still be profitable?”

Long4Life’s reported cash of R821m for the half-year to end-August, while profit fell to R7.56m, from R131.3m in the same period the previous year.

During the half-year period, the group spent R113.6m buying back its own shares — about 4.8% of its issued share capital from the end of February.