With JSE-listed global technology distribution and services business Datatec’s valuation languishing far below its international peers, group CEO Jens Montanana has revealed he’s thinking big about ways of unlocking shareholder value.
In an exclusive interview with TechCentral on Tuesday, Montanana said Datatec – although enjoying extraordinary growth in the past 18 months – has not seen a commensurate rerating of its share price.
Its global competitors, on the other hand, have seen a big spike in their valuations, especially this year. And Montanana is considering multiple options, including subsidiary listings and possible asset sales, to address the valuation problem. It has appointed financial services firm Lazard to advise it on its next steps.
Datatec, founded by Montanana in 1986 and listed on the JSE in 1994, has a market capitalisation of about R7-billion.
Montanana told TechCentral that in the last year and a half, there has been a significant increase in demand for the products and services provided by Datatec group companies, driven by the global pandemic and the shifting nature of work. And while Datatec’s share price has risen by more than half in the past 12 months, some of its peers have more than doubled in that time. Some of them are trading on EV/Ebitda (enterprise value over earnings before interest, tax, depreciation and amortization) multiples three times higher than Datatec’s multiple.
Growing fast
That Datatec is growing fast is without question. On Wednesday, the group published a trading update that showed a strong operational performance in the six months to end-August 2021. Group revenue will rise by about 15% to US$2.25-billion, it said. All divisions performed well: Westcon International is expected to report interim revenue of $1.39-billion, up 12%, while the figure for Logicalis is $822-million, an increase from last year of 19%. ICT consultancy Analysys Mason’s revenue will rise by 34% to $43-million.
“Revenues would have been higher if not for the global semiconductor shortage, which has created extended lead times on certain product hardware deliveries,” Datatec said. “As a result, sales orders waiting to be fulfilled grew significantly in both the Logicalis and Westcon International divisions.”
Although Datatec’s share price rose by more than 5% on Wednesday on the back of the trading update, it’s still far below the level Montanana and his team believe it should be.
It sold its Westcon Americas business in 2017 to Synnex in a deal that saw billions of rand flowing back to Datatec shareholders
“It’s forcing us to do a review of our businesses and our positioning, and we’ve concluded that different structures are needed for our different lines of business,” he said.
Citing the recent successful spinoff of IT services group Bytes from JSE-listed Altron – Bytes, which is now separately listed in London and Johannesburg, is worth significantly more than its former parent company – Montanana said there is a huge amount of value that can be unlocked in Datatec.
Datatec used to have a secondary listing in London – on the LSE’s Alternative Investment Market – until about three years ago, but withdrew this as it hadn’t achieved what the group had hoped. It retains its primary – and now only – listing in Johannesburg.
Vexing
The irony, though, is that only about 2-2.5% of Datatec’s revenue is generated from subsidiaries in South Africa. Of the 10 000 or so people who are employed by the group, only about 300 of them work in South Africa, Montanana said.
Part of the valuation problem that is so vexing to Montanana may be related to the size of the South African market and the fact that its shares are relatively illiquid – many of its institutional shareholders stay invested for the long-term dividend flow and have no interest in selling.
However, it’s “not clear” there would be a value unlock if Datatec were to move its primary listing away from the JSE to another market – say London or New York. It might have some impact, but management has concluded that Datatec’s subsidiaries – including Westcon and Logicalis – “need their own place in the sun”, he said.
As a result, Datatec is now mulling a range of options, including listing the companies separately, finding new owners for them or looking at asset combinations where that makes sense.
It’s not as though Datatec has been shy of corporate action in the past. Indeed, it sold its Westcon Americas business in 2017 to Synnex in a deal that saw billions of rand flowing back to Datatec shareholders. (Since that deal was done, Synnex has since merged with Tech Data in a $7.2-billion deal to create the world’s largest ICT distributor.)
Further back, Datatec sold UUNet – a leading Internet service provider in South Africa – to WorldCom (the asset was later acquired by MTN Group). It also disposed of Logicalis’s operations in Australia and New Zealand to IBM. More recently, it sold Logicalis’s operation in the Netherlands to DXC (the company formed through the merger of EDS and Computer Sciences Corp).
So, what’s next? Could TD Synnex snap up the rest of Westcon? It’s a possibility, Montanana said, though there haven’t been any discussion about a deal. “It’s one of a number of logical outcomes for that division,” he said. Westcon could also be an acquirer, “potentially with a financing partner”, and then “sprung out and listed” separately. Datatec can’t, however, use its paper to make pursue an acquisition given the state of its share price.
There are also several options for Logicalis. Datatec has previously disclosed a plan to list Logicalis’s Latin American operations in Brazil, and that looks likely to proceed given the vibrancy of that market and the appetite there for new tech listings. An initial public offering of Logicalis Group on an international bourse – New York, perhaps – could follow.
Watch this space
Montanana, who remains a significant shareholder in Datatec, said its valuation today is “the opposite” of the dot-com bubble of 20 years ago, when tech stocks were hugely overvalued, including those listed on the JSE. Trading volumes have also declined significantly. “JSE-listed companies have become zombified,” he said.
So, why stay listed in Johannesburg? “Moving from the JSE to the Nasdaq would help (with Datatec’s valuation), but it wouldn’t change the fundamental sum-of-the-parts play… We think there must be other (corporate) action.”
In other words, watch this space. — © 2021 NewsCentral Media
