Pricing issues cloud Shoprite-Steinhoff deal

When you are as big a retailer as Shoprite, with a market capitalization of R99.4 billion, or Steinhoff, with a market capitalisation of R287 billion, you do not have the luxury of negotiating a deal in secret.

Last December intense speculation, fuelled by the retirement of Shoprite’s former CEO Whitey Basson, forced the two parties to issue a bland statement notifying the market that the companies were in talks to create an African retail champion.

A mere 90 days later a similarly bland statement announced that the negotiations had been terminated because majority shareholders including the PIC, Christo Wiese’s Titan and Steinhoff could not agree on the terms of the deal – in other words the price to be paid for the assets.

Loosely, the idea was that the two companies would merge, but Shoprite and Steinhoff subsidiaries like Pep and other assorted ‘Africa’ companies would be hived off into Retail Africa, with Steinhoff the ultimate master.

The original sens statement was careful to suggest that this vision was supported by majority shareholders the PIC and Christo Wiese’s Titan Nominees, but neglected to say who else supported the deal. Wiese owns 16% in Shoprite and 23% in Steinhoff, while the government’s pension fund, the PIC is the second-biggest investor in Shoprite and Steinhoff with 11% and 8%, respectively.

While some appreciated the merit of creating a diversified pan African retail group, many shareholders were concerned, and this was reflected in the fact that shares in both fell about 10% from the announcement of the deal.

“I’m relieved,” says Brian Pyle, portfolio manager of Old Mutual’s industrial fund. “I would like to see some decent results from Steinhoff. I want to see how their European retail strategy unfolds and I don’t want it clouded by what Wiese is up to.”

According to Tuesday’s sens statement, the sticking point was the pricing of the deal. This was something that was anticipated by analysts. “We were worried,” admits Patrick Ntshalintshali, a portfolio manager with Perpetua Investment Managers. “These are different quality businesses with different valuations.” While mergers of this nature are not unusual, there was a sense that this was a merger driven by vested interests and that Shoprite shareholders were going to be the ones ‘paying up’.

“I suspect that from a Steinhoff shareholder perspective the concerns were about what appeared to be a deviation from stated strategy, and from a Shoprite shareholder perspective the issue was about obtaining a fair price in the exchange of Steinhoff assets for Shoprite shares,” says Unathi Loos, analyst, Investec Asset Management.

The terminations of the discussions resulted in an automatic recovery in both counter’s share prices, reflecting the fact that the market did not like the uncertainty the transaction introduced.

None of the parties – not Christo Wiese, the PIC, nor Markus Jooste, CEO of Steinhoff would comment beyond the sens issued. “We don’t know who walked away,” says Graeme Ronne, CIO at Cadiz Asset Management, “because limited information has been released. Any comment would be pure conjecture. What was clear was that the two companies had different perceived growth-paths, a different quality of earnings and thus ascribed different valuations to their businesses.”

Shoprite, he says, is a defensive business with consistent, high quality earnings that convert to cash. Steinhoff is a discretionary business, operating in a lower growth environment where sales do not always convert to cash. In addition, thanks to its acquisitive growth strategy, Steinhoff has a geared balance sheet, which adds to the perception of perceived risks.

“You get the sense that shareholders did not want the deal enough to make the sacrifices necessary to get over the hurdles,” he says.

Whether the deal will be revived is subject to conjecture. Fortunately, the deal was not crucial to either Shoprite or Steinhoff and its failing should not detract from the investment case of either company, says Loos.

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