Firstly, go have a listen to Arthur Goldstuck and myself discussing 'new age business models' over here..

Secondly, I think this article on the destructive unionization of South Africa by COSATU by ADCorp's Loan Sharpe is certainly worth reading. Basically, I agree 100% with it, but unfortunately South Africa remains largely subject to the destructive personal agendas of some powerful institutions, of which, COSATU is certainly one of them.

Finally, I've been considering the opportunistic delisting of Excellerate Holdings (EXL) and I have a couple words to say on this matter... Oh, and 'no', I am not a shareholder, but as an equities analyst I don't really like seeing it when private equity/closed-door parties appear to be taking advantage of minorities.

Excellerate Holdings is a Bidvest-styled support services industrial conglomerate that has been quite acquisitive in the past on the road to building critical mass. It has freely used shareholder funds and its listing to do so, and now it wants to buy back minorities at 115cps and delist the group.

And it wants to do this just as the Group's strategy seems to be paying off...

Below is a history of Excellerate's ROE's and a linear progression trying to map the trend (click graph to see full-size graph in new tab):

The trend is quite obvious: Excellerate is coming into its own as its operations hit critical mass and its ROE finally starts to consistently rise.

If you run the Normalize Earnings model to fair value Excellerate (see here - How to Normalize Earnings), you arrive at the following:

- Average ROE of c.9.5%, which implies a Normalized HEPS of c.11.6cps on the current NAV of 123cps,

- Average Price Earnings over the last 14-odd years of c.8.5x, and hence

- EXL's fair value appears to be around 100cps (= 11.6cps x 8.5)

So the 115cps looks attractive, doesn't it?

Nope, I don't think so. This is despite the "independent" expert's (whose professional fees were paid by related parties) opinion that the "conditions of the offer are fair and reasonable to Excellerate shareholders". Those shareholders, though, are they the majority ones or the minorities ones?

I suspect those shareholders are the latter... Allow me to explain my opinion.

The reason not is because of the inherent assumption of the Normalize Earnings Model: this model assumes the past is a reflection of the future.

Excellerate's past was during a period when the Group was still busy refining its strategy, building or buying its operations and clawing its way up to critical mass. But if your opinion is that Excellerate has now settled on its business model, it has established its operations and it has reached critical mass (or, at least, is well on its way there...), then the future of Excellerate looks much more profitable than the past.

In other words, the fair value of Excellerate is much higher than the Normalize Earnings Model implies, as the growth curve of the Group's past returns drags down its Normalized Mean to historical levels are that not indicative of the future of the Group.

The linear progression of Excellerate's ROE implies that FY 13's ROE will be around 14%, which implies HEPS of 17.2cps. At the average PE of 8.5x, this implies a fair value of 146cps for Excellerate shares. This is well above the 115cps delisting price being offered for EXL shares.

Also, bear in mind that a 14% ROE is not even yet above EXL's Cost of Equity (>15%) nor is the 115cps offer actually above EXL's current NAV per share.

The last point is quite interesting: the delisting price of 115cps is below the NAV per share of 123cps of EXL shares.

So, the same team of management that has built EXL's NAV per share up on intangibles and goodwill (i.e. through "clever" acquisitions recommended to shareholders at the time), has turned around and basically "endorsed" the 115cps offer price to shareholders. This is a paradox or there is something amiss...

Let me elaborate: either the NAV per share of EXL is overstated with the Group's management have incompetently spent too much on acquisitions (i.e. goodwill and intangibles) which should have been impaired long ago, or the 115cps delisting offer is too low and minorities are being opportunistically taken advantage of.

I suspect the latter is true, particularly give the trend in EXL's ROE in the figure above.

Basically, this is what I see happening here: Excellerate has used public capital raised on the JSE to share the "start up" risk of Excellerate's strategy and, now that the said strategy is coming to fruition and returns should begin to flow, they wish to opportunisitically delist the Group and horde all the upside themselves.

If I were an Excellerate minority shareholder, I would vote very much against this deal.

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