Little benefit seen in retail giant

Since the announcement of the Shoprite-Steinhoff move to launch a retail giant in December, investors and analysts have feared that the deal is being struck at the expense of minority shareholders.

The shares of Steinhoff and Shoprite have fallen 5.3% and 3.3% respectively since the announcement.

Karl Gevers, head of research at Benguela Global and a minority shareholder in Shoprite, said: "We don't see any benefits for Shoprite shareholders in this deal, given the lack of obvious synergies. If anything, the high-quality Shoprite business will be lumped together with lower-quality apparel, furniture and hardware retail business."

Benguela, whose client funds have invested 3% in the grocery retailer, said Shoprite shareholders could support the proposed deal only if the Steinhoff Africa retail business was attractively priced or valued. "This would leave some unhappy Steinhoff shareholders, given the recent premium price Steinhoff paid for Pepkor at about 30 times the price: earnings ratio," Gevers said.

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According to the terms of the deal, Steinhoff would sell its African assets to Shoprite in return for a controlling stake in Shoprite, while Steinhoff would exchange Steinhoff shares for the Shoprite shares owned by the top two shareholders, the Public Investment Corporation and Christo Wiese.

Wiese said on Thursday the two companies were trading under cautionary announcements, "so we don't discuss the transaction at all. When companies operate under strict rules, it's a very risky thing to make any comment."

Wiese said it would be difficult to determine when another statement on the deal would be made as "these things are hugely complex, so it's very difficult to commit to a timetable".

However, if the transaction were approved, it would see Steinhoff selling its African assets, including brands such as furniture retailer JD Group, hardware chain Timbercity and Hardware Warehouse and Pepkor, into a new, separately listed merged entity called Retail Africa.

The deal, estimated to be the biggest transaction yet in the South African retail sector, would see Retail Africa become the continent's largest retailer with annual turnover of R200-billion, an 186,000 employees, according to a statement in December.

Andreas Riemann, an equity analyst at German-based Commerzbank, said investors were puzzled by the structure of the deal, as they were unsure how the shareholding structure would work.

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"[Investors] ask themselves if Steinhoff is doing deals because of strategic reasons, or is it just because certain investors have an interest and they want to combine certain assets."

Riemann said the majority of investors believed that "the deal is highly likely to happen because there are people behind it who want this deal".

For Riemann it seems that Shoprite may be the biggest benefactor - this depends on the exchange ratio of shares, which hasn't been disclosed yet. "But it appears Shoprite bought out [Steinhoff companies]. But when the announcement was made both shares where down, but it appears that Shoprite bought out [Steinhoff companies].

Kaeleen Brown, a retail analyst at SBG Securities, said one reason for the deal taking its time was the many technicalities. "I think what's going on it's just a load of hurdles to meet and its highly complex."

If the deal did not materialise, "we could expect to see the [share] prices return to their former levels, but I don't think the deal is going to go away. I'd be quite surprised if they put anything out any time soon because of the inherent complexity.. ."

Shoprite closed 2.04% lower at R173.05, and Steinhoff was down 1.34% to R66.80 on the JSE on Friday.