Scale and synergy
Shoprite and Steinhoff: what's in it for Wiese?
Steinhoff-Shoprite mega-deal to create African retail giant has raised some eyebrows due to lack of detail
December — by any standard — is not a month most investors expect to be confronted by big corporate tie-ups. Or at least it wasn’t until Steinhoff and Shoprite (officially) divulged news that they were indeed hatching a mega-deal to create a unit called Retail Africa through the merger of their African operations.
No-one can say the market was not warned. Christo Wiese, owner of 23.1% of Steinhoff and 15.93% of Shoprite, had made it abundantly clear in a string of not-so-cryptic statements that it would be a "natural development" for the two retail giants to join forces.
Both groups were rather thin on the details when the news broke, leaving many asking: what’s in it for Wiese?
"I love scale," the retail tycoon told the Financial Mail. "Both companies have also been part of my life for a very long time."
Wiese’s association with Steinhoff-owned Pepkor, a key element of the Retail Africa deal, goes back to the late 1960s.
It was also Pepkor that got the Shoprite growth story rolling when in November 1970
it acquired the then eight-store food retailer
In his desire to create Retail Africa, Wiese has the full support of the two groups’ second-largest shareholder, SA’s Public Investment Corp, owner of 8.5% of Steinhoff and 11.05% of Shoprite.
News of the proposed deal — which will create the R170bn annual revenue Retail Africa — has not really gone down well with the broader market. Since its announcement on December 14, Steinhoff’s share price has shed 11% and Shoprite’s 13%.
Rattling the market is the lack of clarity in what smacks of a hastily issued joint statement by Steinhoff and Shoprite in response to Wiese’s slew of public comments. It says little more than that to create Retail Africa, Shoprite will issue new ordinary shares to Steinhoff in exchange for "a significant equity interest" in Shoprite.
The big issues about which the market wants clarity are the critical details of the pricing of the exchange and Steinhoff’s ultimate equity holding in Shoprite.
Wiese is not fazed by the market’s concern about the pricing of the deal.
"All will be clear in time," he says. "We are very excited about the deal."
Ricco Friedrich of Denker Capital believes one outcome is certain: Steinhoff will gain control of Shoprite through Retail Africa.
It is not the first time that big deals executed by Shoprite and Steinhoff have met with market scepticism.
Back in 1991 when the then diminutive Shoprite bought a struggling Checkers, the market reacted by wiping 60% off Shoprite’s share price. Steinhoff’s first major international move, its acquisition of French retailer Conforama for €1.2bn in 2011, was greeted by an equally sceptical market.
The market’s assessment of the deals proved in time to be wrong. Alec Abraham of Sasfin Securities believes the market is making another error of judgement with Retail Africa.
"It is a good move," he says. "It will give Shoprite even more scale than it already has."
It might indeed.
Steinhoff’s contribution to Retail Africa will be its "Steinhoff Africa Retail" division, which will bring with it annual revenue of over R43bn and an operating profit of about R4.7bn. If, hypothetically, Steinhoff Africa Retail were to be valued on a 20 p:e, it would put its price tag at R94bn, just short of Shoprite’s current R96bn market cap.
Shoprite will be bringing to the Retail Africa party revenue likely to top R125bn in its current year to June and an operating profit of well over R7bn.
The companies have aptly dubbed the new venture "the retail champion of Africa".
Retail Africa will, after all, have a huge footprint of around 7,000 stores.
Steinhoff’s biggest contribution will be its star — Pepkor Africa. Steinhoff was prepared to accept a historic 37.4 p:e valuation of Pepkor when it acquired it in 2015 from Wiese’s listed holding company Brait. It also places a huge question mark over the valuation of Steinhoff Africa Retail in the proposed deal between Steinhoff and Shoprite. It is no wonder the market is jittery and wants answers.
With Pepkor Africa will come 3,383 stores trading in SA under brands including Pep, Ackermans, Shoe City, Refinery and the recently acquired Tekkie Town. In the rest of Africa it will add 292 Pep stores in seven countries.
Shoprite’s biggest contribution will be its food retail operations comprising 1,530 Shoprite, Checkers, Usave and OK franchise stores in SA and 207 stores in 14 other African countries.
Steinhoff will in its typical style no doubt be seeking ways of extracting synergies through the merger. One path Abraham believes should be followed is the consolidation of distribution structures in the rest of Africa.
"I believe it would make a huge amount of sense. Basson has long spoken about the need to have the critical mass required to establish distribution centres in Africa," he says, referring to Shoprite CEO Whitey Basson, who retired in December.
Arguably, an even greater opportunity for synergy lies in furniture. From Steinhoff Africa Retail will come JD Group, which turned in sales of R11.6bn but an operating profit of only R100m in the 12 months to September, from 2017 Steinhoff’s new year-end.
JD Group, now in the final phase of a huge restructuring and downsizing, operates 862 stores under the Russells, Bradlows, Rochester, Incredible Connection, HiFi Corp and Sleepmasters brands.
Shoprite’s furniture division will add annual revenue of R5.2bn, 53 House & Home stores and 454 OK Furniture stores, 387 in SA and 67 in seven other African countries. Importantly, JD and Shoprite furniture operations share a common, predominantly cash sales model.
Merged, JD and Shoprite’s furniture operations will provide huge scale.
Put in perspective, their combined R16.8bn revenue will equal 55% of SA’s total furniture market.
Steinhoff’s scale would also receive a huge boost from the consolidation of Retail Africa.
It will be in line with Steinhoff CEO Markus Jooste’s unrelenting drive to achieve the
mega-scale needed to compete in the global retail arena.
Jooste pulled out all the stops in 2016, masterminding the acquisition of UK single-price retailer Poundland for £587m and entry into the US market for the first time through the acquisition of the country’s biggest mattress retailer, Mattress Firm, for US$2.4bn.
In Australia, Fantastic Holdings Group, the country’s third-largest furniture retailer, was added in a A$361m deal.
The 2016 deals put Steinhoff on track to generate annual revenue of at least €20.5bn, a far cry from revenue of €3.8bn in 2010.
With Shoprite added, Steinhoff’s annual revenue is set to jump to around €28.5bn, a level that would have ranked it 33rd in Deloitte’s 2016 Global Powers of Retailing survey.