Ellies looks to transform itself with Bundu Power acquisition

Ellies is seeking to transform itself into a smart infrastructure business that focuses on alternative energy supply, backup water systems, and smart home technologies through its acquisition of Bundu Power. 

Ellies was founded by Ellie Salkow in 1979 in Johannesburg with five employees, selling only television aerials.

In 1995, the company founded Elsat with the advent of satellite TV in the South African market.

In the 2000s, Ellies and Elsat became household brands and continued to expand the product range to include audio, telephone accessories, and domestic electrical products.

Ellies was listed on the JSE’s Alternative Exchange (AltX) in 2007. It issued its maiden dividend in 2010 and moved to the JSE’s main board in 2010.

The company became a firm favourite among investors and hit an all-time high share price of over R9.50 per share in May 2013.

However, the delay in digital TV and other challenges took their toll on Ellies. By 2019 it was trading at 10c per share – a level which persists to this day.

The company’s share price declined by 99% over the last decade, making it one of the worst performers on the JSE.

Ellies is currently a wholesaler, importer and distributor of LED lighting, electrical and electronic products and solar solutions for the residential and commercial sectors.

More recently, Ellies announced a plan to buy Bundu Power for a maximum consideration of R202.6 million to strengthen its presence in the alternative energy market.

Bundu Power was founded in 2005 and specialises in the distribution and rental of generators and the distribution and installation of solar and ancillary products.

Ellies CFO, Guy Moretti, said that the acquisition of Bundu Power is part of the company’s strategy to reposition itself as a smart infrastructure business. 

It plans to do this by diversifying away from its satellite business to focus on alternative energy products, backup water systems, and smart home technology. 

The acquisition of Bundu will also increase Ellies’ earnings, and the company has a strong balance sheet, Moretti said. 

Funding the acquisition

However, investors’ main issue with this acquisition is that it is being funded through a rights offer that will significantly dilute investors’ holdings if they do not exercise their rights.

On 13 June, Ellies announced that it would implement a rights offer to finance the purchase of Bundu Power for R202.6 million.

The deal includes paying R72.6 million upfront and three additional payments in 2023, 2024, and 2025 not exceeding R130 million.

The company will finance the initial upfront payment and the first additional payment through a R120 million rights offer.

The offer would allow current shareholders to acquire 2.128 shares at R0.07 per share for every Ellies share held.

The R120 million rights offer is a significant request to shareholders when considering Ellies’ market cap of R72 million.

An investor with 1,000 Ellies shares would have an investment value of R90 at the current R0.09 share price. They would need to make an additional investment of R149 to prevent being diluted.

If not, the investors’ shareholding would be diluted to R80, an 11.11% loss, based on the breakeven share price explained below. 

Daily Investor calculated the breakeven share price after the rights offer from the day of the announcement when the share price was R0.11.

From the day the announcement was made, the breakeven share price was R0.08.

If the share price falls below R0.08 after the rights offer, investors will lose money when exercising their rights, indicating a negative sentiment from investors toward the offer.