South Africa is the land of monopolies. Historically, under the National Party, South Africa was cut off from the rest of the world and isolated from international competition. This led to the development of massive local monopolies such as that of SA Breweries and Anglo American (which at one stage controlled more than 50% of the blue chip companies on the JSE). Many of those monopolies consisted of enormous conglomerates of companies tied into structures which usually left them trading at considerably lower prices than the value of the share which they owned.
In the new South Africa, there has been a trend towards breaking up those structures and releasing shareholder value. One of the most recent examples has been Naspers which first unbundled Multichoice into the hands of its shareholders and then restructured with the formation and listing of Prosus on the Euronext in Amsterdam.
It is a well-known fact that investment holding companies traditionally trade at a discount to the value of their underlying assets. This discount can be anything from 10% to 40% depending on the company. One of the ways to “unlock” this value is for the holding company to unbundle the shares of a subsidiary or a large holding into the hands of its own shareholders.
Thus, if company “A” owns a 40% interest in company “B” it can distribute that holding of company “B” shares to its own shareholders and then it steps out of the picture and the structure is simplified. This often has the effect of increasing the prices of both companies’ shares on the JSE. Read More