TFG sees RAG as entrée to Australia

TFG's acquisition of Australian menswear chain Retail Apparel Group (RAG) will be a platform for TFG to establish a presence in that country for its other brands.

CEO Doug Murray said of the acquisition of RAG, which was announced this week: "Australia has always been on our radar as there are a lot of similarities, lifestyle-wise, with South Africa and we are talking about a huge mid-market consumer.

"We could take something like jewellery, which is a massive opportunity to be a big disruptor in our Australian market. Sports could also go there. But we are not going to dictate what that is until we work with the management that is over there," he said.

RAG is one of the biggest menswear brands in Australia, with 400 stores, and also operates in New Zealand.

A majority stake was sold by its founder, Stephen Leibowitz, to private equity firm Navis Capital in 2011.

Murray said RAG had about 6.8% of the menswear market in Australia, while retailers like Cotton On's menswear division had about 4.8%. "so in some respect its bigger in Australia".

TFG owns jewellery brands American Swiss and Sterns. Its sports brands include Sportscene and Totalsports.

But TFG's balance sheet has taken a knock since it acquired UK retailers Phase Eight in 2015 and Whistles last year, which is why Murray said the company was considering issuing new shares to raise capital to fund RAG's A$302.5-million (about R2.9-billion) price tag.

At the moment the group has gearing of around 50%. "We would ideally like that at 40%, so we probably have more debt than we would like, but it certainly is more manageable."

The purchase price of the group's new shares would be announced once it had shareholder approval for the rights issue, Murray said.

Victor Dima, an equity analyst at Arqaam Capital, said Australia is a difficult market to compete in, given the number of competitors.

"Australia is a developed fashion market, but it is also very competitive, with strong international and domestic fashion retailers. The consumer operating environment remains difficult for the retailers, especially the cash retailers, which are is linked to household debt."

Other South African retailers have been burnt in the Australian market, such as Woolworths with its acquisition of the Country Road brand. But its David Jones business, also Australian, is stable.

Murray maintains that TFG's approach to acquisitions is different to that of Woolworths .

"We've got a turnaround, we have management in place and they have a track record of three to four years of trade.

"None of that could have been said for the Woolworths acquisition [of Country Road]. Plus, they trade on a multiple of 11; we trade on a multiple of seven. The two acquisitions are poles apart," said Murray.

Dima said only time would tell if TFG would achieve success in Australia. "But if you look at the global retailers like H&M and Zara, they create a global market for themselves," whereas TFG acquired businesses to expand its footprint.

TFG's share price gained 0.65% to R133.20 on the JSE on Friday.