Who’s Buying Up SA’s Small Caps — and Why You Might Want to Pay Attention

Mahube Infrastructure and Curro are completely different businesses. One is focussed on renewable energy investments, and the other is one of SA’s largest private school operators. Yet they share something in common… It’s not that they’re small caps listed on the JSE. Rather, it’s the recent news of potential buyout offers, which sent their share prices surging 34% and 50%, respectively.

This is part of a bigger trend in SA Small Caps…

Over the past two decades, the JSE has been getting smaller. Back in the late 1990s and early 2000s, there were well over 600 companies listed. Today, that number has dropped to fewer than 300.

Every year, it feels like another batch of small and mid-sized companies disappears from the market. Some leave because they get bought out at a premium, others because the costs of staying listed are simply too high, and some can’t survive tough economic conditions.

For small companies, being on the JSE can be expensive. Annual compliance and reporting requirements can easily run into millions of rands – a huge chunk of profit for a business that isn’t very large. Add to that the frustration of low trading volumes – many small-cap shares hardly trade at all – and it’s not surprising that boards often decide it’s better to go private.

Sometimes management teams or private equity investors buy the business out, and sometimes bigger companies swoop in with a takeover. For shareholders, that can mean a healthy payday, as buyout offers usually come at a nice premium to the market price.

This trend isn’t unique to SA either…

Markets in the US, the UK, and Europe have also seen a steady decline in listings, as private capital has become more attractive and regulation more demanding.

The difference is that in bigger markets, there’s still a deep pool of mid-cap companies to invest in. On the JSE, the shrinking list makes the market more concentrated.

It’s not all bad news though. While the number of listed companies has shrunk, the average size of those still on the JSE has grown. In other words, the exchange now hosts bigger, more established businesses.

Plus, delistings themselves often highlight hidden value – if someone is willing to buy out a company at a big premium, it shows that the public market wasn’t valuing it properly. Investors who were patient enough to hold on often walk away with solid gains when these offers come through.

So, what makes a company a potential buyout target?

There’s no strict formula for what makes a company a buyout target, but a few things often stand out. Usually, the company’s undervalued – its shares trade for less than what the business is really worth, or it owns assets and earns profits that the market hasn’t fully noticed.

Steady cash flow also makes a difference, because buyers like companies that bring in reliable money each month or year, even if growth is slow.

Fit matters too: a bigger company might see a smaller one as a perfect addition to reach new markets, gain customers, or cut costs by combining operations.

And often, it’s the smaller, quieter companies that attract attention, because they’re easier to acquire without a fuss, they’re undervalued, shares are illiquid and buyers often spot ways to make them run more efficiently.

Simply put – some of the best opportunities today may come from holding undervalued shares in companies that are later taken out at a premium. Of course, you can’t predict exactly which firm will get an offer, but the recipe is usually the same: low liquidity, undervalued assets, and steady cash flows.

If you’re patient and selective, today’s forgotten small cap might just be tomorrow’s buyout story. Make sure you’re reading Red Hot Penny Shares to be the first to hear about these opportunities.