SPAR shareholders do not appear to have been unsettled by this week's news that the group had to provide a ₤220-million (about R3-billion) guarantee to the Bank of Ireland, although this is disturbingly more than the ₤130-million indicated at the time Spar acquired Irish-based BWG last year. Although the share price was a little softer on Friday, trading around R183, and is down from a peak of R199 in April, it remains well ahead of the levels it traded at before last August's announcement about the acquisition of the owner of the Spar brand in Ireland.And the share looks set to continue its upward trajectory, given analysts' enthusiasm for the rand hedge dimension provided by BWG.story_article_left1Mark Godfrey, the finance director of the JSE-listed Spar Group, said the original ₤130-million amount was the term debt on BWG's balance sheet at the time of the transaction."Since then the term debt has increased to ₤160-million because of BWG's recent acquisition of Londis (another Irish-based convenience retail chain) and there's also BWG's ₤60-million overdraft facility."The "parent guarantee" provided by Spar South Africa would, said Godfrey, reduce the interest rate charged from 4% to 1.75%, adding ₤4.5-million to ₤5-million a year to profits.He accepts Spar SA might have made it clearer how much was involved, but said it was always understood that Spar SA would provide a guarantee to the Irish banking consortium. This was one of the attractions for BWG as it searched for a white knight."We were looking to Africa, not Europe, for strategic international growth, but in February last year, we were approached to do the BWG deal. It was a price play," said Godfrey, referring to the cash price of just ₤55-million. "But it's still a very, very good investment."The choice of Spar SA was an obvious one in light of the close relationship between the South African and Irish businesses dating back to the 1980s.The search for a white knight followed a refinancing of BWG's hefty debt burden in late 2013, which led to Irish banks writing off ₤125-million of the ₤400-million owed to them as a result of a management buyout in 2006.The management buyout was completed just months ahead of the financial crisis in 2007. Bank funding for it had relied on greatly inflated, even by Celtic Tiger standards, property valuations. The debt was restructured again at the time of the Spar SA transaction.block_quotes_start The Irish business never defaulted on its debt in the past, it will always be able to service it block_quotes_endGodfrey is adamant there will be no call on the guarantee and dismisses criticism that BWG has been doing little better than "treading water" for the past several years."The Irish business never defaulted on its debt in the past, it will always be able to service it," he said. "This company survived one of the biggest crashes in history, the economy was almost obliterated, and still it managed to service its debt. That's a lot better than just treading water."Analyst Syd Vianello said he was not overly impressed with recent trading figures from the Irish operation but noted Spar SA had got it cheap and that there were plans to drive down costs. He expressed some concern about the larger-than-expected ₤220-million guarantee.story_article_right2The ability to extract stronger returns from the Irish business depends on a variety of factors, chief of which is the country's economic growth rate. But at least as important will be BWG's ability to do better than "tread water" and the extent to which powerful discounters Aldi and Lidl, as well as other players such as Tesco and Dunnes, are able to make inroads into BWG's traditional market. After causing huge disruption to the Irish retail sector since their arrival in 2 000, growth at the discounters has slowed this year.Industry sources in Dublin said although BWG claimed a 35% share of the Irish convenience market, this segment represented only about 20% of the total retail market."There's a huge number of operators in this market and wherever there's a gap, Aldi or Lidl usually moves in," said one Irish analyst, who declined to be named. He said scope for lifting margins by centralising distribution was limited.Godfrey said centralised distribution accounted for 40% to 45% of BWG's sales, compared with Spar's at about 70%. He reckons there is scope to lift it by only about 5% in Ireland.Despite the uninspiring operational prospects, local analysts are excited about BWG's expected contribution, with a consensus forecast for Spar's full-year earnings to be up 20%.As Sasfin analyst Alec Abraham notes, given the subdued outlook for growth in South Africa as well as the outlook for the rand, the prospect of euro earnings is very attractive...