JOHANNESBURG - PSG (JSE:PSG) will score handsomely by selling listed logistics group CIC (JSE:CCI) to Imperial (JSE:IPL) for R724m cash - but Imperial is quite happy with its purchase. The year's low for CIC was 80c in November. Imperial proposes to pay 287c a share cash. That is a premium of 32.5% to the pre-deal price of 212c - and 3.6 times the low of CIC of 80c less than a year ago. CIC's share price gained 14.8% to the offer price of 287c today, suggesting that the offer was a pleasant surprise in spite of the cautionary published on June 9. More than 80% of shareholders have given commitments to sell, so the scheme meeting seems a foregone conclusion. PSG owns 48.6% of CIC, so has seen its investment grow R253m since the low point in November. CIC reported operating profit growth of 49% to R105.1m in the year to end February in spite of a forex loss of N$95m (R95m) because of weakness of the Namibian dollar. Imperial is paying 11.5 times historical headline earnings.

Imperial's head of SA logistics, Marius Swanepoel, said the transaction would not boost Imperial's headline earnings right away but he said the target return on equity of 14.5% exceeded Imperial's cost of capital of 10.5% - one of the criteria for Imperial's acquisitions. CIC has three income streams - agency, sales and merchandise and staffing solutions, in that order of size. Imperial at this stage is not involved in agency work. CIC's agency division actually owns the stock of its clients and trades for its own account from distribution warehouses. It does so even though most of the goods are pre-ordered. It undertakes normal logistics and through its personnel agency, helps clients find staff. CIC enjoys a strong market presence in Namibia, Botswana, Mozambique and SA. It has big ambitions in oil-rich Angola.

Swanepoel said Imperial has significant transport and logistics operations in Namibia, while CIC has a good network in SA. They have a number of common clients, including large ones, such as Tiger Brands (JSE:TBS), Consol and Nampak (JSE:NPK). There is thus scope for rationalisation and integration. Swanepoel said the proven CIC management under Trevor Rogers would stay on board. He said Imperial had done a thorough due diligence but, because CIC is listed, there are no profit warranties. Said Swanepoel: "CIC is asset light. It rents its distribution centres and leases most of its vehicles, so this is not a big transaction for Imperial. It comes to 3.8% of our market cap of R19.1bn." Imperial published a new acquisition strategy in January. In future, it said acquisitions must meet the following criteria: earnings enhancing, a safety margin or value buffer, meet the target return on capital quickly, then to exceed it by four percentage points pa. Imperial must have expertise in the business being considered, profit growth must exceed the need for new capital, the maximum size of acquisition will be 20% of Imperial's market cap, bolt-on acquisitions of R100m-R200m will be preferred, target companies should be asset light.

Swanepoel said CIC met all these criteria. The deal has to be approved by the Competition Commission but Swanepoel had few worries in this regard. While CIC performed excellently to February, the directors expressed caution on the outlook. They were worried about higher wage increases and the threat of lingering and persistent high fuel prices. It warned about price decreases in the pipeline and consumer reluctance to spend. Management hoped for stability in Mozambique towards the World Cup. CIC hoped that published salary and wage increases would restore some upside to consumer spending, particularly around the World Cup. It expected staffing solutions to enjoy some strong upside with the World Cup activity in the hospitality sector in the first six months of the financial year. It also pinned hopes on its major shareholding in Horizon Distributors Limited, an agency business based in Zambia.