IQuad is a niche financial services group that offers forex, treasury, verification and business development services. The Group hails historically from the Eastern Cape, but has recently relocated its Head Office to Gauteng in order to begin aggressively capturing the industrial market in the economic heart of South Africa.

The Group is trying to aggressively grow its treasury arm and, in fact, recently acquired Kagiso Treasury Solutions making IQuad's treasury services division one of the largest South African independent treasury operations in both clients and numbers of transactions processed. That said, the Group's bread and butter comes from investment incentives segment that, basically, helps advise, administer and collect on Government incentives for businesses (e.g. the old MIDP and the new incentives replacing the scheme).

The Group's administration of the MIDP scheme (and its recent replacement) has exposed it to the local automotive sector, which meant that its revenue base was always quite cyclical. This, unfortunately, has seen IQuad's post-Credit Crisis profits dipping the last couple of years (though last financial year also saw Goodwill impairments, but headline earnings still puts the share on a PE of 6.6x...).

Despite these recent disappointments, IQuad has literally thousands of clients and a body of highly skilled employees. Not only that, but the Group's move into the mostly untapped Gauteng incentives market should open up a growing arbitrage of the low operating costs of the Eastern Cape being resold into the higher revenue Gauteng market.

More recently, though, the Group's anchor shareholder has historically been PSG's Paladin, which was nice as a shareholder of reference, but in reality was nothing much more than a relatively passive private equity shareholder. Now, Paladin has just become subject to PSG rationalisation via a takeover offer once its Curro investment was unbundled (read: Paladin & Curro - PSG Taking Paladin Out).

In other words, Paladin no longer has a raison d'etre and PSG is absorbing it back into the fold. Hence, suddenly, all the non-Curro investments are looking for a new master... That includes IQuad and thus the Group just announced that Paladin has sold its 42.9% stake in IQuad to Sasfin Holdings Ltd.

The Paladin-Sasfin sale was done at 257cps and, as the transaction breaches 35% of IQuad's share capital, it is considered an effective takeover, thus forcing Sasfin to offer to buy IQG shares from all shareholders at the same terms: i.e. 257cps.

Now, the fact that the lowest IQG share offer is 250c and this offers a 2.8% arbitrage on Sasfin's 257cps offer is not news...

What really is exciting, though, is the fact that Sasfin has positioned itself as a strongly entrepreneur focused bank with a broad and wide clients base in the SMME sector, while IQuad offers services and skills specifically aimed at SMME's. Where Paladin was just a relatively passive private equity investor, Sasfin is more than likely to become quite an active anchor shareholder (or even parent, if the takeover offer at 257cps is taken up by enough shareholders to push Sasfin's shareholding over 50%).

On paper, this really may present itself as a true cross-selling opportunity between Sasfin and IQuad and even provides opportunity for Sasfin to perhaps spin other assets into IQuad to build its critical mass. And, funding will never be problem with a bank as a majority shareholder. Entrepreneurs in Sasfin's client-base have businesses that would appreciate IQuad's value-enhancing services, while IQuad's client-bases are businesses that all appreciate further access to banks, funding and advise...

My only concern is the fact that IQuad's treasury division tends to compete head on with banks for services they offer, hence there may be a bit of conflict of interest. IQuad' CEO, David Edwards, assures me that the conflict of interest will be managed on an arms length basis with clients interests coming first. Practically speaking, this means that if Sasfin services can be offered as a backup to IQuad's clients and visa versa.

We just saw Onelogix come out with some good numbers, particularly from increased vehicle deliveries in its VPS segment (RGT, MOR, OLG & DCT) that bodes very well as a leading indicator of vehicle sales. All this not only points towards an improving economic climate (despite what the Roubini's of this world say), but also specifically bodes well for IQuad's prospects.

Add to this IQuad's potential to grow its revenues (and margins) from capturing increasing amounts of the Gauteng market along with the backing, funding, deal-making and cross-selling that comes from Sasfin's anchor shareholding, and perhaps you can see why I am starting to think that the tide is beginning to turn for this niche financial services small cap...

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