Western Cape Business News

Send  Share  RSS  Twitter  02 Aug 2009

ENGINEERING: Racec: CBN On The Wrong Track


Recent Western Cape Business News

CAPE Business News was on the wrong track last month when it suggested that Cape Town-based rail and electrical engineering group, Racec, was set to acquire Solethu Investments’ stake in RLL Grindrod.

Racec recently disclosed it had entered into negotiations with Solethu Investments - an empowerment investment company which holds a 50% stake in RRL Grindrod.

CBN speculated that mooted transaction could be a major move to bulk up Racec’s profitable rail business.

An announcement last month, though, confirmed that Solethu would acquire a 25% stake in Racec as part of a BEE deal.

Racec said the relationship would allow for the creation of numerous synergies between Racec and Solethu Investments, resulting in additional business opportunities.

Basically Solethu – via subsidiary Solethu Civils – will acquire a 25% stake in Racec by subscribing for 35 million new Racec shares at 130c/share. This will raise R45 million in fresh capital for Racec.

Interestingly, Solethu is also offered a PUT option – which would (if exercised) require Racec to buy-back 26.9 million shares at 130c/share.

Racec is clearly not going to sit on its cash pile, and has already entered into agreements that will see the company buy out the minority shareholders in two subsidiaries – Greenbro (a power generation specialist) and Northern Electric.

The official rationale for the Solethu transaction - aside from the obvious BEE benefits and cash injection - angle - is to allow Racec to create a platform for strong growth through the cross-selling of products and services currently offered by the group into a broader range of infrastructure related solutions.

Specifically Racec believes the benefits of the Solethu transaction will be:

the creation of numerous synergies between Racec and Solethu Investments;

additional business opportunities for the company’s subsidiaries;

an enlarged customer base and geographical spread; and

increased exposure to expertise, resources and other business relationships.

A closer look at Solethu – founded by Ted Zulu – shows an interesting ‘logistics’ slant. The empowerment group holds a 22% stake in the Bridge Group, a specialist shipping and logistics company as well as a 50% stake in RRL Grindrod, a company specialising in rail logistics and complementary rail services.

RRL’s services include locomotive shunting operations, inbound and outbound rail logistics, loading/off-loading of rail wagons and tippler operations as well as the supply, maintenance and operation of locomotives

According to Solethu’s website, RRL is part of the Transnet Enterprise Development Programme and is the only rail operator that has been authorised to operate on the Transnet Main Line.

Although CBN might be loathe to speculate on possible outcomes down the line (pardon the pun) after calling the original deal so wrong, we can’t help wondering whether it would not make sense in the longer term for Racec’s rail division and RRL Grindrod to be working closer together.

A merger would certainly create a formidable entity in the rail sector.

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