Aveng turnaround: R700m sale of Trident Steel a ‘major milestone’

The sale by JSE-listed construction and engineering group Aveng of its Trident Steel business for R700 million as a going concern is a major milestone in the turnaround of the group, says Aveng CEO Sean Flanagan.

This follows Aveng announcing that it signed an agreement on 3 October 2022 to sell the business to Trident Steel Africa Pty Ltd (TSA), a new company formed specifically for the acquisition.

TSA is funded by a consortium of local and US private capital providers, including US-based private equity firm Ambassador Enterprises LLC, Joseph Investments Pty Ltd, Arbor Capital Investments Pty Ltd and Trident Steel’s management.

R700m-plus

Flanagan said Trident Steel was sold for R700 million but the group will also receive R264 million, which represents the cash portion from the business, and a ticking fee of R7.45 million per month payable by the purchaser on or before the closing date.

He said the proceeds generated from the transaction will be used to settle the remaining R406 million South African debt currently outstanding.

Some of the proceeds will also go towards helping its mining business Moolmans to renew its equipment fleet and to focus on the bottom line of performance of Moolmans and its Australian subsidiary McConnell Dowell, which has grown its order book in recent years.

“Our focus is to continuously improve the quality of our earnings, the size of our order book and our margins, and generate cash – and then we will have happy shareholders,” he said.

Aveng had external debt of R3 billion when the turnaround strategy for the group was announced in 2017.

Plans and progress

The strategy included plans to recapitalise the business and strengthen its balance sheet to ensure the group’s sustainable future through, among other things, a rights issue and the disposal of non-core assets.

Read:

Since 2017, Aveng has disposed of several businesses – including its SA construction business Grinaker-LTA – collectively raising more than R1.1 billion.

Flanagan said Aveng will be debt-free once it receives all the proceeds from the sale of Trident Steel and will have new liquidity to invest in the group’s two core businesses, Moolmans and McConnell Dowell.

“The transaction marks a significant milestone in the execution of our strategy as Trident Steel was the sole remaining asset to be disposed of.

“The settlement of our legacy debt will enhance our liquidity and improve balance sheet strength and we can move forward with new banking arrangements.

“Settling the South African legacy debt brings to a close a difficult chapter in Aveng’s history and we look forward to turning our attention to our growth agenda,” he said

Empowerment component

In terms of the Trident Steel transaction, Aveng will provide R210 million of funding to a separate company to help it subscribe for 30% of the equity of TSA.

The 30% will be warehoused by Aveng for up to a year from closing date or until a suitable empowerment deal is finalised.

It will receive full payment of this amount plus interest when the 30% is sold or one year after the closing date of the transaction.

Trident Steel, a division of Aveng and a South African steel service centre business focused primarily on the supply of steel products to the automotive, rail and mining industries, had a net asset value of R409 million at end-June 2022 and recorded an operating profit of R220 million and earnings after tax of R81 million for that financial year.

A delayed, but ‘best value’ deal

Flanagan said the disposal of Trident Steel has been protracted and difficult but the group’s board and management are satisfied that this transaction represents the best value for Aveng and its shareholders.

“We are confident the business is being sold to a credible consortium that will continue the businesses’ growth trajectory thus securing the future of our people,” he said.

Aveng initially indicated that it expected to have completed the disposal of non-core assets by March 2020.

Flanagan said the process had been delayed by a number of factors, including that you have to have willing buyers and willing sellers and the two years of the Covid-19 pandemic resulted in people not wanting to make acquisitions because they were unsure of where the world was heading.

Bigger picture

He said Aveng was very clear that it would not sell businesses for below value.

Flanagan said Aveng also wanted to ensure that the business under the new owners was sustainable, because the group has probably halved its staff numbers during the disposal programme.

“We wanted to make sure that our people and customers were properly looked after.

“This disposal programme has been done in a very responsible way. It hasn’t been a fire sale and, touch wood, all the businesses that we have sold continue to exist and are doing well.”

Flanagan stressed that Aveng did not retrench through the disposal process, and now has around 6 000 employees across the world, with about 550 at Trident Steel.

Analyst comment

Rowan Goeller, an analyst at Chronux Research, said the sale of Trident Steel is good news because Aveng will be able to pay down a reasonable amount of its debt and focus on McConnell Dowell and its mining business without any financial constraints.

Goeller said it leaves the group in a position where its balance sheet is almost ungeared.

“So it will be business as usual. We haven’t seen that from Aveng for a long time and that is quite a big turnaround.”

Peregrine Capital executive chair David Fraser said the price obtained for Trident looks reasonable under the circumstances.

He expects part of the proceeds to be redeployed to Australia to bolster the group’s McConnell Dowell business and fund its order book and bonding requirements.

“So I don’t think we would see anything coming back to shareholders,” he said.