Merger puts Retail Africa in the house

18 December 2016 - 02:02 By PALESA VUYOLWETHU TSHANDU

In 2014, when Shoprite bought the leases of failing furniture retailer Ellerines, the group's furniture division had 386 stores.

Groceries form part of your everyday living expenses, along with cellphone charges, and fall under the suggested 30% allocation of your income.
Groceries form part of your everyday living expenses, along with cellphone charges, and fall under the suggested 30% allocation of your income.
Image: Getty Images

Today, Shoprite's furniture unit has 497 shops to contribute to the proposed merger between Africa's biggest grocery retailer and diversified furniture retailer Steinhoff - after which the new group is expected to have more than 1000 stores.

And that's just furniture.

The proposed merger between Steinhoff and Shoprite, announced on Wednesday, will create a massive group - to be called Retail Africa - withannual revenues of R200-billion and earnings before tax and other deductions of R15-billion, based on the financial year to June 30 2016.

The deal was initiated by the two largest shareholders in both companies - South Africa's richest person, billionaire Christo Wiese (through Titan Premier) and the Public Investment Corporation.

In terms of the details that are known so far, Shoprite will buy Steinhoff's African retail operations, which include brands and businesses such as Pep, Ackermans, Dunns, the JD Group, Steinbuild and the recently acquired Tekkie Town.

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This week, Wiese, who is the mastermind behind the deal, remained mum, saying only: "We have issued a cautionary statement and all the course of events is exactly what it says."

Some say he has been planning this deal for a long time.

Last year he sold the Pepkor Group to Steinhoff for R62.8-billion, and now its African business will be sold to Shoprite.

But industry pundits warned that Shoprite's minority shareholders may be getting the short end of the stick.

Charles Allen, a London-based senior analyst at Bloomberg Intelligence, said the merger may be a way for Steinhoff to gain control of Shoprite.

Allen - conceding that details were scant at the moment - said the deal, on the face of it, would give Steinhoff shareholders about a third of Shoprite.

"Shoprite's two largest shareholders may choose to swap their shares in Shoprite for Steinhoff stock.

"It may mean that Steinhoff will be the single largest shareholder or would be majority shareholder."

He said "people who had hoped that Steinhoff would become a more developed-market retailer may be disappointed, while Shoprite shareholders would no longer be holding a focused food retail company".

The proposed deal comes just six weeks after Shoprite's long-serving CEO, Whitey Basson - who is believed to be opposed to the deal - announced his retirement.

Industry analysts said there was likely to be push-back from minority shareholders, specifically from the Shoprite side.

In terms of the proposed transaction, Shoprite will issue new ordinary shares to Steinhoff, which will give Steinhoff a significant interest in Shoprite.

The group said in the statement that the value for Steinhoff Africa Retail would be "negotiated, taking into account the best interests of both Steinhoff and Shoprite shareholders. The shareholders may prefer an undiluted pure food retail exposure, while some may have preferred a cash offer."

Shoprite's South African operations contribute 81.2% to total revenue, while its operations in the rest of Africa bring in just 18.8%

After the talks were announced on Wednesday, Shoprite's share price plummeted, ending the day's trade 7.2% down.

Steinhoff shares slid as much as 8.1% in Frankfurt, where the company moved its main listing last year.

On Thursday, Shoprite shares were down 2.78%, while Steinhoff shed 2.13%.

According to a note by Sasha Naryshkine, an asset manager from Vestact, the PIC owns 12.26% of Shoprite, which, when added to Wiese's investment, is just over 27.5% of the business - and when added with the employees' pool of 6.67%, means "one-third of all the shares in issue that are likely to be on the same page immediately" after the merger.

The transaction will be subject to approval by competition authorities as Shoprite will be buying the biggest furniture retailer in South Africa, JD Group.

Sipho Ngwema, a spokesman for the Competition Commission, said it had not received a merger notification involving the parties, but "the transaction will require competition approval as they are two large firms that would definitely meet the statutory thresholds for notification".

Nick Altini, a partner at law firm Baker & McKenzie, said: "I don't see any obvious reason at the moment as to why remedies should need to be imposed. If there are public interest concerns, these might be addressed through, among others, undertakings about maintaining employment levels."

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The two companies have already said the planned deal will not lead to any job losses.

Both Shoprite and Steinhoff will also maximise their existing African operations, which contribute about 32% to total revenue.

The groups' European operations contribute about 60.9% to total revenue.

Shoprite's South African operations contribute 81.2% to total revenue, while its operations in the rest of Africa bring in just 18.8%.

However, the grocery retailer is still the only South African retailer to have gained traction on the continent.

Walmart-owned Massmart's rest-of-Africa operations contribute 8.4%, while Pick n Pay's Africa yield accounts for 4.3% of its total revenue.

David North, Pick n Pay's group executive for corporate affairs, declined to comment on the impact of the merger for Pick n Pay's operations, saying only: "We are, as always, focused on our business and serving our customers."

Altini said although he would not speculate on whether Retail Africa would have an impact on Massmart's plans in Africa, "Massmart/Walmart are adept at competing and I have little doubt that they will continue to compete as they need to in order to achieve their strategic goals".

Shoprite Group declined to comment.

tshandup@sundaytimes.co.za