By Gugu Lourie
Buoyed by its rising share price, JSE-listed telecommunications firm Huge Group has set its sights on niche acquisitions in South Africa, where it sees itself as a natural consolidator.
Huge Group – which has a market capitalisation of more than R388m –has seen its stock rise close to 300% in the past three years and 164% in the past year.
The counter is currently trading at R3.50 a share for a healthy 61% growth in the past 90 days.
Huge Group’s strategy has clearly struck a chord with investors.
“This price appreciation has strengthened Huge Group’s ability to contemplate mergers and acquisitions on a share for share basis significantly,” CEO James Herbst says in the company’s 2015 annual report.
“The volume of shares traded in the past year is also encouraging and this has strengthened Huge Group’s potential ability to acquire companies for cash on the basis of a vendor placing shares.”
At present the company is trading under cautionary after it advised investors on 28 April 2015 that it was in discussions for a strategic acquisition.
At the time the company announced that no formal agreement or offer was in place; nevertheless the board of directors of Huge was “supportive of the proposed acquisition”.
Its major shareholders include Peregrine Equities with 13.14% interest, Pacific Breeze (an indirect beneficial holders related to the company’s CEO), Praesidium Family Trust holds 9.15%, Eagle Creek Investments 223 owns 8.84%, Huge Telecoms holds 8.70% and Praesidium Hedge Fund holds 7.75%.
These shareholders have stuck with Huge Group even when it was embroiled in a five year legal battle with mobile phone operator MTN and profits of its main operating company Huge Telecom’s had been hit by regulatory changes.
Huge ended up settling the dispute in 2014 by paying a R10m-settlement to MTN, via an issue of shares worth R20m. This move enabled the firm to strengthen its working position.
“The settlement by Huge finally removed an overhang on the share price and refocused investor attention on the quality of the assets,” says an industry analyst, adding that the end of the dispute freed Huge Group’s management time to focus on growing the business.
Huge Group operations centre mainly on its subsidiaries Huge Telecom, which has 30 000 customers with telephone lines, and Huge Mobile. They both provide services such as voice, messaging and data connectivity using a wireless GSM-based, fixed-cellular, last-mile solution to corporate and residential clients.
Ove the past five years, Huge Group also worked on building its business partner distribution network, which it has grown from 63 in July 2010 to 450 to date. This has allowed the telecommunications firm to increase five-fold its installation of telephone lines or connections.
“The acquisition of new business partners is a lead indicator of increased monthly sales of new connections or telephone lines, which in turn is a lead indicator of Huge Telecom’s primary revenue metric – average revenue per weighted day,” says Herbst.
The company believes it is well-positioned to grow in the market the same way as internet service provider Afrihost, which was acquired by MTN for R408m.
The business case for Huge Group is centred on its wholly owned subsidiary Huge Telecom, which has 30 000 customers with telephone lines.
The company believes that Huge Telecom’s control of a “last mile” network for its customers is an advantage.
“Last mile” refers to technology providing connection services to customer premises, which is controlled by Telkom as a monopoly and other industry players want unbundled.
Indications are that Huge Group was likely to grow via a shopping spree and organically.
As a niche player it could surprise the market with good returns in a space, where Telkom as a big player is losing money on telephone connections.