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Avmin is more than a family affair

Published Oct 26, 2000


Johannesburg - Rick Menell's status in government and business circles keeps him busy. He is highly regarded as one of the most expansive and intellectual executives around, which is highlighted by the fact that he sits on the boards of organisations as diverse as Telkom, Stanbic, Business South Africa, Satour, Anglovaal Mining (Avmin), Avgold and the Chamber of Mines.

But his position as the chief executive at Avmin is justifiably closest to his heart, given that the company was founded in 1933 by his grandfather Simeon "Slip" Menell, a stockbroker, and Bob Hersov, a mining engineer.

With the dawn of the shareholder obsession with maintaining focus on core business, Menell was quick to see the writing on the wall for Anglovaal's old-school diverse operational base spanning construction and mining. The company was split into an industries division, headed by the Hersovs, and mining, with Menell at the helm.

As the group's chief executive, Menell fostered an ambitious vision for Avmin. He sold off the group's cash-generative diamond interests to De Beers to focus on ferrous metals, base metals and gold, and undertook to convert the family's high-voting preferential shares into ordinary stock by the end of July next year.

He kicked off the development of Anglovaal's Chambishi cobalt and copper operations in Kitwe in northern Zambia, the expansion of its chrome operations at Dwaarsrivier, nickel and platinum at Nkomati, manganese in the Northern Cape and the massive Target gold mining complex in the Free State.

But the large capital commitments left Avmin's balance sheet stretched and, without the ability to generate cash yet, the group would have proved an attractive target for corporate raiders.

However, a deal struck earlier this month by the Menells, along with offshore investors and Investec, gave Rick and Brian Menell, the grandsons of the founder, an indefinite extension to their iron grip on the company - long after their defensive guard is removed next year.

In a move to protect the company from unwelcome advances, Menell, Investec and unnamed offshore investors embarked on a discreet buying spree of the company's stock in the marketplace, snapping up shares at or above the market price, to give themselves a 40 percent holding. The shares were then pooled into a special purpose vehicle called Arctic Exploration, which would be controlled by the Menells.

But the move has raised the ire of certain analysts, fund managers and minority shareholders who said last week they had been given a raw deal. The worst hit were investors who had bought the stock in expectation of realising a premium if a hostile bid was made.

Peter Major, an analyst at Nedcor, said although the deal would not be great for minorities, it would not punish them unduly either. He said all investors had the right to get in or out of the stock at any time, particularly given the volumes of the stock traded in the run-up to, and after, the announcement.

Another analyst, who declined to be named, said the move reflected a lack of confidence by the management in getting the share's rating upgraded.

"It seems as though they ran out of time to protect themselves by getting the share rerated, so they've effectively drawn a laager to protect their interests and fund managers don't like that," said the analyst. "This move also doesn't keep management on its toes." But he said, management would still be under some pressure to get the stock rerated, regardless of the shareholding structure.

Major said Rick Menell had a strong belief in the company's assets and "probably felt he needed to be at the helm when they were brought to account to rejuvenate the family name". He said the move by Menell had been a surprise.

"I have to ask myself the question whether or not I can benefit my clients by buying this share. The answer is that this deal is neutral in the short term but perhaps a bit negative in the medium to long term and at this time there may be better alternatives," said Major. "I can see what they are doing though, but it is not in line with the times."

Major said one of the concerns hanging over Avmin's stock, which is said to be trading at a 30 percent discount to net asset value, was its large capital expenditure commitments. The share had not moved since the announcement was made because investors had already factored in the risk attached to the capital commitments.

"One of the things history has taught us is that when there is huge capex over a number of years the share usually underperforms over that time," he said.

Brian Menell, Avmin's executive director of new business, dismissed the criticism from the market as misguided, unfair and incorrect. Far from alleviating the pressure on management, the Arctic deal had increased the Menells' commitment and exposure to Avmin.

But he acknowledged that the market might have viewed the entrenchment of family control at Avmin as regressive.

"We did not do this deal for the sake of control ... but it has replaced archaic, artificial control structures and we are now in the same arena, on the same terms as other shareholders," said Menell. "Other shareholders in the consortium have no nostalgic attachment to the company and are extremely vigorous and focused on unlocking value. On our part it is nice to have been a part of the company's history but our only focus now is on creating and unlocking shareholder value."

Menell said the new shareholding structure would not be an impediment to future corporate activity. Management would not stand in the way of any deal that would improve value, even if it meant a dilution of its control.

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