A sweet something for Steinhoff in JD deal

01 March 2015 - 02:00 By Rob Rose
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Markus Jooste, racehorse enthusiast and one of the savviest dealmakers in South Africa, doesn't do too many silly deals.

He doesn't like to pay over the bar either, so each time he walks through the glass-fronted doors of JD House in Braamfontein, Johannesburg, he must bristle.

Jooste's company, Steinhoff, first bought into JDGroup - which owns HiFi Corp, Joshua Doore, Russells and Incredible Connection - in 2011 for about R50 per share.

(Well, to be technically accurate, in a mark of the sort of paper-heavy deals for which Jooste has become famous, Steinhoff didn't part with any actual cash to get its hands on the retailer, but managed this through a complicated series of share swaps. Still, in theory, Steinhoff paid about R50 per share for JDGroup.)

Today, JDGroup is trading at nearly half that level - R29.40. A week ago, it was even worse.

This week, JD Group's stock bounced 17.6% after 100% of its shareholders voted to sell its finance book to French bank BNP Paribas for a not-inconsiderable R4.6-billion.

On the face of it, it seems to be a good deal. JDGroup made an utter mess of handling its loan book: bad debts shot through the roof last year as thousands of people who'd bought furniture on credit just stopped repaying. So it's a safer option for JDGroup to go back to what made it famous - selling furniture - rather than being a quasi-microlender.

It turns out, from paging through the circular issued for the deal, that it cost JD Group shareholders R20-million to do this deal.

Some people made hardly any cash out of it. The JSE for example got a measly R23000 for "documentation fees", while the transfer secretary, Computershare, got an almost forgettable R5000. This is considerably less than the beneficiaries of an interesting-looking line item, "travel and contingencies", who took home R708000.

But it turns out that there are some handy benefits to being JD Group's parent company. By far the largest payment for these deal costs was made to Steinhoff itself.

Of the R20-million in expenses, Steinhoff was paid R18-million - 90% of the total cost.

Details of what Steinhoff actually did for this money are vague: "transaction support, legal and corporate advisory" are the only description.

Now, you might ask why this would be important if Steinhoff owns 86% of the retailer. But JDGroup still has a bunch of long-suffering minority shareholders who stuck it out after the bad debt bubble popped, and through a revolving pipeline of CEOs and top brass.

Asked this week, JDGroup CEO Peter Griffiths said Steinhoff was paid a "small and reasonable fee for the work they did".

"We didn't overpay. If you look at what investment banks charge, you'll see it's a small fee. And even if the number was 10 times that amount, it was fully disclosed."

Asked what Steinhoff actually did, Griffiths said it "provides a lot of capacity as a group, a lot of expertise in group services - such as the preparation and circulation of the circular, and the drafting of it".

Let's hope that means more than simply the fact that the company is pretty adept at Microsoft Word.

It's an interesting case, because there have been many instances of parent companies leaning on their subsidiaries to do things that they, arguably, wouldn't have otherwise.

For example, it's anyone's guess quite how Anglo American convinced its 78%-owned subsidiary Amplats to buy its Unki mine in Zimbabwe in 2009 for $22-million. And the fact that Absa hiked its dividend substantially several years ago might have pleased shareholders, but it will also have been most useful to its parent Barclays, which was going through a pretty rough patch during the financial crisis.

Griffiths pointed out that 100% of shareholders voted in favour of the BNP Paribas deal, so "none of them thought it was an issue".

But he is aware that his company needs to remain independent of its burlier parent company.

"The reality is that Steinhoff is an 86% shareholder, so obviously they have a big say. But we do have an independent board and we take our fiduciary duties seriously so that we don't compromise any [minority shareholders]," he said.

Griffiths might be right that JD Group would have paid far more if it had hired a top-tier investment bank. But that doesn't mean investors shouldn't keep a watchful eye on Steinhoff for signs that it may overstep the traditional rules of a parent-child relationship.

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