IMPERIAL HOLDINGS
IMPERIAL HOLDINGS
Split
Definitive PRODUCTION: Colin Chinery
With an operational split a main focus of CEO Mark Lamberti since taking over the Imperial Holdings helm three years ago, 2018 is now set for the fork in the road. “Groups don’t compete, only subsidiaries do, and our job as a Group is to see how we can help our subsidiaries compete.”
INDUSTRY FOCUS: AUTOMOTIVE
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Acquisition for short burst lift is conglomerate-type thinking, says Mark Lamberti - “and Imperial Holdings is heading in the opposite direction.” With a solid 2017 fiscal year - revenue up 1% to R119.5 billion and operating profit 2% to R6.5 billion - the east Johannesburgheadquartered global logistics and vehicles business is set to take a fork in the strategic highway, and potentially split the Group into two autonomous businesses. Founded in 1948 as a car dealership, current Group operations are Imperial Logistics – a leading logistics provider across entire supply chain in South Africa, from distributing pharmaceuticals and consumer goods in Southern, East and West Africa to inland shipping and industrial contract logistics in Europe - and Motus, the vehicles division that includes importing, dealerships, car rental operations, after-market parts and motor related financial services, operating in subSaharan Africa, the United Kingdom and Australia. Preparing Imperial for a split has been a main focus of Lamberti’s since taking over as CEO and Executive Director in 2014. Now a decision on a separation will be announced before the publication of the 2018 results in August next year - unless South African political turmoil or a sovereign rating downgrade forces a delay. STAND-ALONE TIME Currently held together only by Imperial’s balance sheet, separation would allow each business to seek debt and equity independently. “They should each be listed; they are large enough to stand on their own and our major investors have all confirmed that is the way they feel,” says Lamberti, one South Africa’s top entrepreneurs. Unsurprisingly the road to the split has been well laid. “Groups don’t
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//TODAY THE GROUP IS FAR LESS COMPLEX TO UNDERSTAND, FAR LESS COMPLEX TO MANAGE AND RUN, AND OUR INVESTORS ARE TELLING US, MUCH LESS COMPLEX TO VALUE// compete, only subsidiaries do, and our job as a Group is to see how we can help our subsidiaries compete. “Operationally oriented, Imperial traditionally was exceptionally capable but a relatively short-term thinking business, one that focused on this month’s or this year’s results. “What we have succeeded in doing is getting each business to think more deeply about its competitive strategy in its chosen markets, getting people pushing the boat out and thinking what the business is going to look like in two or three years and how it could compete and win.” FLAVOUR OF THE YEAR And this, says 67-year old Lamberti, “has been very much the flavour of the past year as the two structures fell into place.” With the new logistics structure functioning from the start of the financial year 2017 and the motor division’s in the second half, the outcome is two distinctly different and focused divisions, each with its own board, CEO, executive committee and strategies. “Today the group is far less complex to understand, far less complex to manage and run, and our investors are telling us, much less complex to value.” While each business running at between R50 billion and R70 billion turnover, the issue has always been whether further value could be unlocked by making them directly accessible to investors wanting to get into one and not both. Lamberti insists separation is
not about creating immediate value. “Even if the calculations indicate there’s no value unlock, I still think that there’s enormous merit in separating the businesses, each under a dedicated management team accountable to public shareholders. If you were starting with a clean slate you would never say let’s put them together.” IMPRESSIVE STRING If the short boost buy-up habit leaves him cool, Imperial’s CEO has negotiated an impressive string of 42 sell-offs and more than 15 acquisitions, including last year’s R3 billion purchase of British-based Palletways, a pan-European €136m turnover business (May 2016) delivering eight million pallets annually across 20 countries. And in August, Lamberti stepped in to acquire another British company, Pentagon Motor Holdings. In 26 years the Midland-based business has grown from a single Vauxhall site to
IMPERIAL HOLDINGS
a leading motor group representing over 40 individual motor dealer franchise points across 21 locations. It’s a move that opens up operational synergies and enlarged marketing opportunities for Imperial, and at R493m - a sale figure negotiated down post-Brexit vote – Lamberti is well satisfied. “We got it at the right price. “We see ourselves as being able to add value. And the strategic motivation is that we now have a passenger vehicle business in addition to our substantial commercial vehicle business in the UK, which has grown 12% in revenue and 13% in operating profits. And this - in a developed market - we regard as really exciting growth.” ELECTRIC SHOCK? The Pentagon take-over has other – and fundamental – implications. In Europe’s car industry the bell has begun tolling for the internal combustion engine. Britain and France are set to ban
sales of new petrol and diesel cars by 2040, Jaguar Land Rover and Volvo have raced to pledge electrification of their future models. One bank is forecasting that all new car sales in Europe will be electric within two decades. “The switch to electrification will come, and in more developed markets like the UK more rapidly than on the African continent, for obvious reasons.” Meantime Imperial’s CEO is focussing on “other disruptive technologies such as the way consumers are now buying their cars. “People are coming into showrooms knowing more about the motor car than the salesman; they have searched out information on the web and understand what they want. “One implication of this is do we really need these massive cathedrals to motor car retailing which cost a fortune? Can our showrooms be smaller, can we have shared work-shops, shared admin departments, can we have multifranchise dealerships where the front end is showcasing the brand and the
back-end is all about the work? “What are the implications for servicing? In our business today 50% of the profit we make out of a motor car comes from after the sale - from service, parts, financial services and so on. So we are asking these kinds of questions as we move from internal combustion to electrification or combinations of them.” TARGETS ACHIEVED Despite deteriorating trading conditions, currency volatility and an ambitious restructuring programme, Imperial achieved all of the strategic, operational and financial objectives announced at the start of the last financial year, said Lamberti. “We ran the business very well to achieve a satisfactory result concurrent with the massive restructuring of the group. “One of the things we are most pleased about in the results is that gearing - which had had gone up close to 100% at half year – had been pulled that back to 71%, well within our targeted 60% to 80%
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INDUSTRY FOCUS: AUTOMOTIVE
MARK LAMBERTI IMPERIAL HOLDINGS CEO
range. And all of this against the restructuring background. “The headwinds were there especially in South Africa – and these certainly affected the result, but not the way we ran the business. Imperial has always run a very tight ship and our management at every level turns over every rand 20 times before they spend it. “We could not have tightened up more, given the tough conditions. What we did do was to increase our customer focus, providing better value in price or service or a combination of each.” While Imperial’s rapid-fire volley of sales and acquisitions seems to have run its course, Lamberti retains an opportunist watch. “We have the firepower - roughly 12 billion rand of borrowing capacity - to do a reasonable acquisition, and if something interesting appears on the horizon and passes the strategic and financial tests and other criteria – such
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IMPERIAL HOLDINGS
as can we add value, and achieve a return on investor capital 3% higher than our weighted cost of capital - we will certainly go ahead and acquire. But running the business well is ‘Job One’ for 2018.” THE ECONOMY – THE DO-ABLE AND THE SELF-INFLICTED The South African economy may be out of a technical recession, but analysts are still concerned that GDP growth is not robust enough, with projections for 2017 still below 1%. Lamberti, a Non-Executive Director at Business Leadership South Africa, is “disappointed but not surprised”, and points to two fundamental causes. “A large part of the underperformance of the South African economy is due to structural factors. There are simply too many unemployed and unemployable people, and the burden of keeping those people alive through some kind of social grant plays into the whole economy, as does the lack of productivity. “It’s a fundamental problem of education and skills development. And it’s a problem South Africa is not going to fix in a few years. “The other part is avoidable and we never avoided it. And that’s irresponsible politics; politics that has little regard for the interests of the country and more for the inner circle of Zuma allies. That’s a very destructive thing.” With South Africa’s ruling African National Congress set to pick its new leader in December, the political stakes couldn’t be higher, with the winner likely to go on to become the next President. Lamberti admits to “a certain fear and trepidation. “It’s not obvious who is going to win. I think the time leading up to that is going to be noisy, and this may rattle confidence or get people postponing purchases of capital goods.” With national motor vehicle sales projected at around 520,000 in calendar 2017, 7-8% lower than last year. “And part of this
will be a function of negative sentiment arising from - to use a euphemistic term - misguided politics.” GREEN SHOOTS? But Imperial’s CEO sees some recent glimmers of light across the economy. “There has been a very small decrease in interest rates, followed a few days ago by the announcement of a reduction in inflation – partly due to a fall in food prices - accompanied by up-ticks in consumer credit health. “There’s a reasonable chance there could be another interest rate reduction, which could give a little bit of a lift. Put these things together with better output in certain commodity areas, and even manufacturing, and all this may suggest there are some green shoots showing. Pleasing, but then I could be wrong.”
Meantime Lamberti’s Imperial measures are reaching fruition. “With the two teams in place, the priority for the current year is to get down and drive the businesses hard, driving growth and returns off a completely different base. “The job is far from done. I live a life of what I call divine dissatisfaction; I am pleased but never satisfied.”
IMPERIAL HOLDINGS +27 11 372 6500 info@ih.co.za www.imperial.co.za
HEALTH
MEDICAL
PHARMA
RTT PHARMA SOLUTIONS www.rtt.co.za 0861 788 538
Partnering with Imperial Health Sciences to deliver GDP compliant logistics solutions
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OCTOBER 2017