Ellies making a big power play — but it could be too late

Ellies plans to more than double its current debt to acquire a company worth five times its own value in the hopes of returning to profitability.

The well-known South African electronic equipment manufacturer first announced its plan to buy Bundu Power in February 2023.

Founded in 2005, Bundu Power specialises in alternative energy products for residential, commercial, industrial, agricultural, and recreational applications.

Its offerings include petrol, diesel, and gas generators in a wide range of capacities, as well as solar pumps, panels, inverters, and batteries.

Ellies initially wanted to finance its Bundu Power acquisition with a rights offer — a proposal to existing shareholders to buy shares at a discount to increase their stake and help the company raise funding.

Ellies said it would allow shareholders to buy 2.13 additional shares for every share they owned at a price of 7 cents. It aimed to secure R120 million with this approach.

At the time of the rights offer, Ellies’ shares were trading at 11 cents.

However, the share price subsequently crashed to less than the rights offer share price.

With the proposal losing its appeal, Ellies cancelled the rights offer in an announcement to shareholders in early December 2023.

New acquisition terms explained

Ellies planned to make a first payment of R72.6 million for Bundu Power, followed by three earn-out payments not exceeding R130 million in the 2023, 2024, and 2025 financial years.

That would have amounted to a total price of no more than R202.6 million.

Under the revised terms of its acquisition,  it plans to fund the acquisition with a debt facility, with payments to be made as follows:

• Five interim payments of R1 million each to be made to the vendors in proportion to their shareholding in Bundu Power on each of 1 September 2023, 1 October 2023, 1 November 2023, 1 December 2023 and 3 January 2024.
• An initial payment of R150 million to be paid on the date of acquisition fulfilment or waiver of the conditions
  for the acquisition.
• Two deferred payments of R26.3 million each to be settled within 60 days of 29 February 2024 and 28 February 2025, respectively.

The new total cost of the acquisition is R207.6 million.

This is over five times Ellies’ market capitalisation and more than its net debt of about R183 million at the end of its last financial year.

The company incurred a comprehensive loss of R85 million during that year, which it blamed on waning demand for its satellite dish installations and a portion of its retail offering.

The Bundu Power acquisition is part of Ellies’ plan to diversify away from its satellite business to become a “smart home infrastructure” company.

Despite being a veteran in the electronics industry, Ellies failed to capitalise on the demand for backup power products during South Africa’s worst years of load-shedding.

Investors were initially optimistic about Ellies’ alternative energy prospects, with its share price peaking at 50 cents on 7 December 2021.

The share price collapsed as it became clear that Ellies was not tapping into this opportunity. As of late January 2024, it was just 5 cents.

The Ellies share price surged towards the end of 2021 and remained high into early 2022, but faltered as the company’s satellite business began to struggle.

The company has blamed its inability to properly expand into the alternative energy segment on a lack of working capital.

In contrast, Bundu Power has had tremendous success in making money off the load-shedding crisis.

The company’s net assets grew 59.5% from R48.7 million at the end of February 2022 to R77.7 million a year later. Its assets alone are now worth more than Ellies.

Over the same period, Bundu Power’s after-tax profit surged from R11.2 million to R32.4 million, an astounding increase of 189%.

It remains to be seen if this type of profit growth is sustainable.

Based on feedback from alternative energy experts, Bundu Power could have experienced a highly profitable 2024 financial year — which includes ten months of 2023.

2023 saw a big surge in demand for backup power products as South Africa endured record levels of load-shedding.

However, towards the end of the year, demand started to taper off due to an oversupply of products and consumer price pressure.

Energy experts agree that load-shedding will likely continue for several years, so the opportunity to benefit could still be there.

What is in no doubt, is whether the market has become much more saturated than it was by the end of 2021, with intensified competition from an increase in backup power providers.

In 2021, Ellies was in a much better financial position to seize this opportunity, with a comprehensive profit of R30.4 million for the year ended April 2021 and revenues on the rise.

MyBroadband asked Ellies for comment on its latest plan to acquire Bundu Power, but it did not provide feedback by the time of publication.