Premier went cave diving

Happy Friday!

You’ve made it to the end of the week, and I have some excellent content to see you through to the weekend.

A great choice would be the latest Magic Markets podcast. We talked about the Q3 scorecard, with consumer stocks getting a bright red “F” that they will have a tough time explaining to their parents. This is the perfect opportunity for you to get it on my YouTube channel and hit the subscribe button. I would love to go through 1,000 subscribers before the weekend! You can get the transcript and other listening methods here.

Enjoy your Ghost Bites today. One of them is particularly spicy.

Looking for something you’ve read recently? This link has all the previous editions of Ghost Mail (and Ghost Mail Weekender). Share it with your friends and bring them into the community!

As I wrote at the time that the news broke about Premier’s (JSE: PMR) planned job cuts at the Fruit Products Western Cape facility in Tulbagh, it’s just not going to be that easy for them to implement cuts so soon after telling the regulator that there wouldn’t be any merger-related job losses.

Of course, the company’s argument is that the job losses are due to the underlying industry and the poor performance of the asset, rather than the merger itself. Premier argues that they had no plans to close the facility at the time of concluding the transaction. Their position is that macroeconomic conditions have deteriorated significantly since the deal closed several months ago, necessitating this action.

The crux of the argument is simple: in the absence of the deal, would the owner of the asset have needed to take similar steps?

There’s no doubt in my mind that the macroeconomics have deteriorated and that this has become an uneconomical mess. The problem is that the optics of it are still terrible.

And when it comes to jobs in South Africa, especially when the broader Premier business has been doing very well, perception matters.

I expected a tricky battle with the regulator, but the Competition Commission has taken an even harder stance that I anticipated. They’ve filed an application with the Competition Tribunal to unwind the approval and require the parties to file another merger application!

That will create plenty of uncertainty for investors.

In the meantime, Premier has gone ahead with the s189 process at the facility, where 407 of the 409 affected employees have elected voluntary severance agreements.

I must highlight that the word “voluntary” can be misleading in these cases. The specifics differ from corporate to corporate (particularly in terms of the size of the voluntary package), but it’s important to understand the following rule of thumb…

The choice is not: “Would you like this package, or would you like to keep the job you’ve always had?”

The choice is: “Would you like to take this voluntary package, or go through a formal retrenchment process that will likely end in a lower package?”

It’s a lesser of two evils, not a holiday in the sunshine.

My argument remains simple: Premier’s reputation used to be squeaky clean, with a portfolio of great assets that were being managed to a high standard.

But instead of just riding that wave, they decided to go roll in the mud by doing risky M&A.

Now the company is in a position where instead of investors focusing on the excellent performance of the bakery assets, there will be a huge regulatory overhang for this group that could last for some time.

Empire-building M&A reminds me of cave diving: you have a 100% chance of avoiding disaster by simply not climbing into the cave. I will always struggle to understand why Premier went cave diving here.

Here’s an example of a transaction that makes a lot more strategic sense: the acquisition by Woolworths (JSE: WHL) of 100% of in2food, a deal that was announced in March this year.

Old Mutual Private Equity has held this asset for many years, which suggests that in2food is a private company run to the standards of a listed company. There are many such examples in South Africa on private equity balance sheets, as pursuing new listings is seen as a difficult exit vs. selling to a strategic buyer (listed or otherwise).

Why is this transaction more sensible than the Premier example? Because this is a vertical integration play that gives Woolworths more control over its food ecosystem, as in2food has been a supplier for more than 30 years.

This deal becomes even more important based on the recent strategic announcement at Woolworths that highlights food as its strongest moat. The more control they have over their supply chain, the better.

The latest news regarding this transaction is that the regulatory approvals have all been obtained. Completion of the transaction is expected in the coming month.

Prosus (JSE: PRX) (and by extension, Naspers (JSE: NPN)) gave the market an update on the food strategy.

The Prosus share price is down around 47% in the past year and is trading close to 52-week lows. The important context is that Tencent is down 38% in USD over the same period, or roughly 41% in ZAR.

The share price is still very strongly correlated with the primary asset in China. This is despite all the effort that Prosus has put into trying to convince the market that the rest of its strategy is worthwhile.

For example, the latest letter to shareholders confirms that Just Eat Takeaway.com (JET) has returned to growth after 55 consecutive months of year-on-year declines. This happened after only 9 months of ownership under Prosus.

I maintain that this is the deal that CEO Fabricio Bloisi will be judged on, as it represented a material strategic decision in Europe under his watch.

On the other end of the world, Brazil is very interesting at the moment, especially given the political changes there. It’s a hellishly competitive landscape though, with Prosus having previously flagged an expensive operating environment for iFood where the big players are fighting for market share.

Bloisi notes that competitors are “spending irrationally” and “losing a LOT of money” (the exact emphasis in the letter) – a particularly worrying situation when iFood has 80% market share. They used to have 85% share before competition picked up. Based on global benchmarking, Prosus believes that they’ve defended market share very well here.

It’s going to be ugly in Brazil from a cost perspective. It’s also going to take time for JET to work out. At least the letter notes that the rest of the portfolio is “doing quite well” – especially OLX, Despegar and PayU.

Ecosystem businesses can be incredibly cash hungry beasts before they hit meaningful profitability. In my portfolio, Prosus is my way of playing ex-US tech via a single investment.

Jubilee Metals (JSE: JBL) released an update on the disposal of the Large Waste Project. The legal due diligence for this $35 million disposal has been completed. A $2.25 million deposit is expected in the next few days ahead of the technical due diligence and finalisation of transaction documentation.

In addition to this disposal, the next $15 million from the sale of the South African assets is expected to be received in January 2027. The company has noted that capital will be recycled into the growth of the existing Zambian copper operations.

In case you’ve been wondering, Raubex (JSE: RBX) is still considering its strategic options for the Bauba Resources asset. This may include a full disposal. It may also lead to nothing at all. This is why cautionary announcements recommend the use of caution!

I can only assume that the top execs at Canal+ (JSE: CNP) still haven’t suffered through the DStv app (unless it’s improved since I was last a subscriber?). Either way, they appear to be seeing value here. We’ve seen a fair bit of insider buying and now there’s another transaction, with an associate of the chairman of the board acquiring over R18.8 million in shares.

Do your own research and speak to your financial advisor. Nothing you read or listen to in Ghost Mail should be interpreted as financial advice. This is not a complete review of SENS and does not replace the need for you to refer to company announcements and reports yourself. Every effort is made to avoid errors in Ghost Bites and related podcasts, but I am only human.

US tech and AI stocks corrected aggressively overnight from around all time highs and severely overbought territory. OpenAI reported annualised revenue of almost $50 billion for September, notably below what it had guided, raising questions over the sustainability of AI profitability. Profit taking after such a strong run is also likely contributing to the near term weakness within the sector.

Oil prices rose aggressively yesterday, although have since started to ease after US President Donald Trump said that he will not attack Iran before the 3 November midterm elections.

The US 10 year yield has pulled back to 5.22%, after trading above the 5.3% mark just yesterday. The Fed's Christopher Waller said that further rate hikes are needed, but that there is 'flexibility' around the pace at which they are implemented.

The dollar has softened and US futures are staging a modest rebound, while Asian equity markets are trading mostly firmer today. The softer dollar is also helping precious metals claw back some of their recent losses.

The rand is firmer in early trade, and we expect a positive start for the JSE All Share Index this morning.

This update is provided by Shaun Murison, Senior Market Analyst at randswiss.com. Connect with him on LinkedIn here and follow him on X here.

Key Indicators: 

USD/ZAR R16.54/$ | US 10yr 5.24% | Gold $4,191/oz | Platinum $1,686/oz | Brent Crude $103.18