Peter van Zyl: Transformation station ConvergeNet goes from IT to asset management
A great player of the devil’s advocate, Alec pressed ConvergeNet’s newly appointed CEO Peter van Zyl for feedback on the recent change of strategy and positioning of the company from the CNBC studios in Cape Town today. Everything is questioned about the new movements of the company, from the acquisition of a hefty chunk of Goliath Gold with little experience in the gold market, to involvement with Nick Flock’s DigiCore. van Zyl pulls up some very interesting points. A great interview altogether. – CH
ALEC HOGG: Peter van Zyl is with us here, in the Cape Town studio. He’s the CEO (recently appointed) of ConvergeNet. Now, Peter, it’s not the company we used to know. You talk about ConvergeNet. Those who do know it (it’s a small cap) would think it’s a tech company, an IT company, but you’ve completely transformed.
PETER VAN ZYL: Yes, I think over the last two years we embarked on a strategy there of changing what the business is, from a tech company, as everyone sort of knew it, to very much an investment holding company, with a very different strategy.
ALEC HOGG: Why?
PETER VAN ZYL: Two to three years ago, a number of shareholders were getting frustrated with the progress that the tech company was making. It wasn’t really performing. It embarked on some sales of some of its assets and I think it was suboptimal in terms of size and in terms of the technology space. The remaining assets really, where the board got to, was looking for a perspective of not being operationally involved in some of its investments. The last chunk of investments were now, as part of this transaction, sold into a bigger tech company. Essentially, we’ll maintain a 30 percent stake in that company. That’s the business called Tellumat, which was spun out of Plessey, which was originally bought in the mid-90’s by DiData. Our strategy now is to partner with the operational expertise in a particular sector, where we can add more alongside management and maybe some other material shareholders in those companies.
ALEC HOGG: It’s very different.
PETER VAN ZYL: Yes.
ALEC HOGG: If I had bought into your company as a tech company and I was looking to the future and I now discover that you own a big chunk of Goliath Gold, I’m not so sure that I would have been terribly happy to vote you back in onto the board, let alone as CEO. What’s the thinking there?
PETER VAN ZYL: Yes, we’ve made a lot of announcements and communications with shareholders over the last 12 to 24 months, about where the company was heading. I think a lot of shareholders had an opportune time to exit the business, if they didn’t want to follow the new strategy. We just found that our skill-base was more around driving acquisitive growth strategies, corporate finance strategies, and building businesses in conjunction with managing, rather than being operational.
ALEC HOGG: But Goliath Gold…if the gold price collapses, you’ve got a big chunk of your equity tied up in a high-risk asset. What’s the thinking there?
PETER VAN ZYL: I think it is just slightly more than ten percent of our equity, so it’s not massive, in the scheme of things.
ALEC HOGG: So is it just a punt?
PETER VAN ZYL: For us, we’re looking…we wanted to start with a platform, so in February now, we start with a platform. About 20 percent of our equity is essentially exposed to the old ICT, which is in a bigger Tellumat business now, with our remaining businesses in there. About a similar sort of size is exposed to DigiCore, which is more of a technology play, sort of business, and seems to be improving over the last two years. I think there’s still a way to go there but it is doing something interesting, hopefully. Ten percent is in DigiCore. Nearly 40 percent of our net value, is actually in cash on day one, so we have the ability to look to new investments. In each of those investments, we’ve engaged with other shareholders and with management about strategic investments. In each of those investments, we’ve engaged with other shareholders and with management about strategic issues.
ALEC HOGG: What do you know about the gold market?
PETER VAN ZYL: We’ll be very honest. We’re not gold experts, by any stretch of the imagination. The other partners in Goliath are gold experts and together, they represent the controlling shareholders in the business. We feel we can either go along with their strategies, if we like those strategies.
ALEC HOGG: So are you picking entrepreneurs, is this the whole idea?
PETER VAN ZYL: I think we’re picking management. We are also picking businesses where we feel that we can add some value. If we find, over time, that we can’t do that, then we’ll look to exit those assets.
ALEC HOGG: So just in this instance, DigiCore, how are you adding value there?
PETER VAN ZYL: Well, I think we’ve now got to start adding the value. We’ve engaged with obviously, the management. I think in DigiCore you would have seen those three years ago, one of the founding shareholders and CEO’s stepped down, for a period of time; the business didn’t do too well. He’s come back into the business, over the last two years, and there seems to be a balance sheet cleanup, which has happened over the last two years, and hopefully an improvement in operations.
ALEC HOGG: Is that Nick Flock you’re talking about?
PETER VAN ZYL: That’s Nick Flock, yes.
ALEC HOGG: Did he come to you and say ‘we’d like you in our business’?
PETER VAN ZYL: No, we picked some of these assets. One of the bigger shareholders in our business, a 28 percent shareholder, is Dr Christo Wiese, and obviously, that was his historic stake, in DigiCore. We’re looking to work with management and other shareholders, in really defining what the next two to three years could look like, in all of these companies.
GUGULETHU MFUPHI: Peter, it’s Gugu here in Johannesburg. Looking at your most recent results, it does seem as though, from a cash flow perspective, it has been quite challenging for you. From a financial position, are you looking to raise more capital in the market?
PETER VAN ZYL: In ConvergeNet?
GUGULETHU MFUPHI: That’s correct.
PETER VAN ZYL: Is that in ConvergeNet, yes. I think one must realise that the business has completely changed now. The historic…a lot of the cleanup of the balance sheet and disposal of business, the historic businesses, which were held at what we would consider, fairly high evaluations, has led to a lot of income statement damage, in terms of revaluing those assets on disposal. I think that is not a cash flow implication for us, in the business going forward. We start with, as I mentioned, 40 percent of our R550m or R600m, sitting in cash, so cash flow issues aren’t really an issue for us.
ALEC HOGG: What is the net asset value now?
PETER VAN ZYL: It should, on day one in terms of all these transactions should be around R560m to R570m.
ALEC HOGG: So the market is valuing you pretty richly because you are already at R500m market cap, so there’s not much of a discount there. Investment trusts usually have a much bigger discount.
PETER VAN ZYL: No, sure, and I think there is a ‘wait and see’ attitude. Our expectation is the few months will see a flush out of those investors who don’t want to follow this strategy and maybe want to follow a tech strategy, and people who want to climb in on the back of this sort of strategy.
ALEC HOGG: You’ve got a lot of cash. Where are you looking?
PETER VAN ZYL: I think it’s opportunistically. We’ve got a few smaller opportunities that we’re looking at, at the moment. We will deploy some of that cash and then I think we need to hold a level of cash to follow some of the strategies we’d like to follow, with the individual companies that may require cash. We don’t want to be in a position where we don’t have the ability to follow a strategy there.
ALEC HOGG: But who would want to invest in a company like yours? Why not go directly into, if you want, DigiCore, which is the one that…?
PETER VAN ZYL: Look, you obviously get exposure, and DigiCore is an obvious one where you can trade directly in the share. We are obviously, hoping to partner with management and create something interesting there. The rest of the asset base are either less liquid assets or are private assets. Over time, we’ll see whether we continue holding a big chunk of listed assets or not but certainly, it really is not about listed or unlisted. For us it’s about is there an opportunity with the asset, to work with management and define a change in strategy, from what’s been seen over the last three years.
ALEC HOGG: Goliath Gold is also one that you could invest in directly. Well, interesting, Peter van Zyl and ConvergeNet, which has converged or maybe revolutionised its operations. It is a different company today, with a few nice stakes. Nice to see that Nick Flock back at DigiCore gets this kind of strong, solid support, it’s not cheap, the shares. They’re not a whole lot, not far away from the net asset value, but it is…it is one of those companies that might just go out there and do interesting things, so well worth watching.