Basically Sun International revised its buyout offer to shareholders of RAH to 530c/share last month. Last week RAH, however, rejected the revised bid - claiming it still under-valued RAH's shares.

RAH presented an independent valuation of 563c/share and a directors' valuation of 599c/share - both figures excluding any upside from litigation involving the exercising of options in SunWest, Sun International's subsidiary that controls the Grandwest casino in Cape Town.

RAH holds significant minority stakes in arguably the most profitable Sun International casinos - namely Grandwest, the Boardwalk (PE), Sibaya (Durban) and Carnival City (Gauteng).

Discount rates

On Tuesday RAH said: "The Board is of the view that the increased offer consideration remains neither fair nor reasonable as it is still below the minimum value... accepting the revised offer denies RAH shareholders participation in the growth potential inherent in RAH's gaming portfolio."

Sun International, however, has questioned the value RAH has applied to its subsidiary Afrisun Leisure Investments - which houses the casino investments.

Sun International pointed that RAH applied discount rates ranging from 10.6% to 11.5% on estimated free cash flows in valuing the casino investments. These, Sun International argued, are significantly lower than discount rates generally used to value listed companies.

"These discount rates don't take the appropriate risk into account and have not factored in the recent increases in interest rates."

Sun International indicated that RAH's interests in National Casino Resort Manco (NCRM) and Gauteng Casino Resort Manco (GCRM) had been valued by capitalising dividends at a rate of 4.5%.

Valuation assumptions

"These management companies distribute their total earnings by way of dividends and therefore the basis of using a dividend yield in valuing these operations is inappropriate and overstates their values."

Sun International also argued that the NCRM and GCRM management contracts expired around 2013. "Yet the valuation assumption assumes that this revenue continues in perpetuity."

Sun International maintained that RAH had not taken into account in their valuation the ongoing listing and corporate costs. These amounted to R12m for the year to end March 2006 and R23m for the year to end March 2005.

"The present value of these ongoing costs (assuming that the 2006 level of costs are incurred in the future) of approximately R125m (or 35c/share) has not been factored into RAH's valuation."

Empowerment questioned

In another strong contention the gaming giant argued that if RAH's valuation of the underlying casino investments in which Afrisun holds an interest is incorporated in Sun International's own valuation, this would result in a valuation for Sun International of about 12000c/share.

"Sun International is currently trading at a price of 9600c/share, and therefore the implied valuation represents a 25% premium."

Sun International also slated RAH's approach to empowerment - noting that RAH stated in its recently published annual report that it "remains committed through its business partnerships" to empowerment.

"This is inconsistent with the actions of its subsidiary Afrisun, which has actively pursued acquisitions of our empowerment partners' shareholdings and this latest claim continues to frustrate Sun International's efforts to enhance the empowerment status of SunWest."

Sun International admitted these empowerment considerations had been a factor in the decision to acquire the RAH shareholding.

Board shake-up

The liquidity issue around RAH shares was also highlighted by Sun International. With 55% of RAH's shares already held by Sun International there is scant liquidity for traders and investors.

Sun International added that the RAH share price was currently underpinned by the buyout offer, which is effective until September 15.

Sun International's parting blow to RAH was an inevitable confirmation of a board shake-up. Sun International has already notified RAH of its intention to reconstitute the board by removing the current RAH directors and appointing Sun International nominated directors.

The board shake-up should ultimately put an end to RAH's claims against Sun International around the exercising of options to secure further shares in SunWest and a possible damages claim of over R300m.

Finance24/I-Net Bridge (Business)