The companies benefitting from the JSE delisting disaster 

While the JSE delisting trend may be bad for investors, some companies looking to streamline their operations and save costs are able to benefit from leaving the stock market, as it will allow them to save money, cut administrative burdens and adapt to market conditions. 

This was explained by legal firm CDH’s Nastascha Harduth Dane Kruger and Gavriel Bender. 

They said South Africa’s stock market is experiencing lower levels of liquidity, particularly in small- and medium-cap companies. 

Investors are choosing to put their money into larger, more liquid companies instead, partly because of growth in exchange-traded funds (ETFs), whose index spread mitigates risk for investors. 

Over the last few decades, the JSE has been hit with a tide of delistings, going from approximately 850 listed companies in the 1990s to less than 300 today.

“Ultimately, small- to medium-cap listed companies are perhaps becoming less relevant in the investor universe and are finding it more difficult to attract and raise equity capital through the public markets,” Harduth, Kruger and Bender said. 

This means that listed companies need to consider their financial strategies to ensure they remain profitable and add value to their stakeholders. 

“Amongst other potential strategies, delisting may be a useful mechanism to contribute to a strategic turnaround,” they said.

They explained that companies will generally list on one or more stock exchanges to get easier access to equity capital to fund growth. 

“However, in the South African market in recent years, listed companies have generally found it increasingly challenging to raise equity capital for a number of reasons, such as economic uncertainty and reduced investor confidence,” they explained.

Equity capital is also more expensive than loan capital which offers debt tax-deductible interest payments, lowering the effective cost of debt. 

“Equity dividends, however, are paid from after-tax profits, making equity more expensive for companies from a tax perspective.”

“With that being the case, if a company cannot raise equity in the market, or raising equity comes at a high price, companies may ask themselves: why remain listed?”

Harduth, Kruger, and Bender explained that the additional costs are a major trade-off for companies that decide to list. This includes the cost of listing, advisory and non-executive directors’ fees. 

“Listed entities must also factor in the wasted opportunity cost of compliance – management will be required to spend a considerable amount of time away from running the company’s business to adhere to a demanding regulatory and reporting environment,” they said.

“The regulatory overlay imposed by the securities exchange also creates an additional compliance layer which may impede the company’s ability to nimbly pursue transactions and other opportunities.”

Instead of spending this much on administrative costs, companies may wish to invest these funds instead. 

Therefore, given how expensive listing can be, delisting may allow companies to save much-needed money and resources. 

It could also allow businesses to respond to market conditions or pursue opportunities with less regulatory compliance burdens.

“For those companies, the benefits of delisting may outweigh the net benefits of being listed,” they said.

They added that, when it comes to foreign investment, where the money comes from can influence an investor’s stance on delistings.

Institutional investors like unit trusts and pension funds might need to sell their shares if a company goes private, based on their investment rules. 

In contrast, private equity firms, development financiers, and traders might be eager to invest in companies going private.

Sasfin

One of the most recent roleplayers in the JSE’s delisting trend is, Sasfin, a South African-based bank-controlling company, which has been listed on the JSE since 1987. 

Recently, Sasfin announced a proposed delisting of the group. The company said that WIPHOLD and Unitas would each subscribe for an effective 7.5% shareholding in Sasfin Wealth at an implied valuation of R500 million for Sasfin Wealth.

Additionally, Sasfin Wealth will make an offer to acquire up to 10% of Sasfin Holdings. 

“The offer provides minority shareholders with the option to remain invested or exit at a substantial premium to the current market price,” the company said. 

“These structural changes enable the proposed delisting of Sasfin Holdings from the JSE.”

Sasfin’s reasons for considering delisting include many of the reasons Harduth, Kruger, and Bender outlined.

This includes the ability to pursue its strategic plans more effectively as a private company, reducing listing costs, and supporting the growth of Sasfin Wealth through significant commitments from its two largest shareholders and the management team.

“These proposed transactions, subject to the relevant shareholder and regulatory approvals, are the next step in our strategic reset announced in March 2023,” Sasfin’s CEO Michael Sassoon said.

“The aim is to simplify the group by backing our core businesses and ultimately unlock value for stakeholders.” 

Currently, a large portion of Sasfin’s shares are held by a small number of investors, which can reduce their liquidity and marketability.

This makes delisting an optimal strategy for the company, Harduth, Kruger and Bender explained.

“As an unlisted company, Sasfin will be able to execute on its strategic reset, which will include further strategic actions,” they said.

“An entity looking to adapt to changing market conditions, escape a rigid regulatory environment and reduce the high costs of being listed ought to at least consider a delisting as part of its business turnaround strategy because it can be value-constructive.”