Uncategorized 16.4.2014 07:00 am

Foreign forays littered with corporate wrecks

Image courtesy stock.xchnge (bizior)

Image courtesy stock.xchnge (bizior)

The market reaction was anything but positive last week when Woolworths announced plans to buy Australian department store David Jones for about R21bn.

Its share price dropped almost 8% and analysts had varying views on the likelihood that the deal would stand the company in good stead in the long run.

The jitters are understandable. While many South African companies have bought businesses abroad and managed to reap the rewards, there are others who did the same and struggled.

Below are some of the more-high-profile cases of those who took the plunge and paid the price.

Pick n Pay – Franklins

Pick n Pay bought Australian retailer Franklins in 2001. After struggling to turn the business around, it sold the operation for approximately R1.2bn (net of fees) ten years later to focus on its “core Southern Africa retail operations”.

Although it realised an after-tax profit on the sale, this was a small consolation prize while competitors, notably Shoprite, sprinted ahead.

Drikus Combrinck, portfolio manager at PSG, says the company did not really grasp just how competitive the Australian retail market really is.

At the time, maybe due to SA’s apartheid legacy, retailers did not really want to enter the local market – just as the new black middle classs was emerging – resulting in only a handful of competitors and higher margins, he says.

Telkom – Multi-Links

When Telkom purchased a 75% stake in Nigerian telecoms agency Multi-Links in 2007 for $280m, the transaction was seen as a diversifying opportunity to gain a foothold in West Africa.

Two years later Telkom spent another $130m to gain full control of Multi-Links. But the transaction proved problematic and in 2012 it sold Multi-Links for a R896m loss.

Analysts blamed poor market research that underestimated the strength of competition.

Altech – Kenya Data Networks, Swift Global and Infocom

In 2008 Allied Technologies (Altech) acquired a 51% stake in Kenya Data Networks, Swift Global and Infocom – subsidiaries of the Kenyan based Sameer ICT group for over $85m.

The transaction was part of Altech’s strategy to broaden its footprint in Africa and to “participate in the high growth converged technology wave”. Altech later increased its stake to more than 60%.

Last year the company announced it had “realigned its East African network interests” that saw Altech partnering telecommunications provider Liquid Telecommunications as a minority shareholder with a 8.6% stake. It’s disposal was at a loss of R730m.

In an interview with SAfm Market Update with Moneyweb Craig Venter, CEO of Altech, said it had underestimated the capital intensiveness of the venture.

Altech announced plans to sell its 8.6% stake in Liquid for $55m early this year.

Discovery

Discovery launched Destiny Health in the US in 2000 in a deadly competitive market and poured more than R1bn into the venture, but announced that it would exit Destiny Health from the US retail insurance market in February 2008.

Richard Middleton, portfolio manager at Investec Asset Management, says it is extremely difficult for foreign companies to break into this market, which is very loyal to US companies.

Old Mutual

Old Mutual bears many scars of foreign acquisitions gone wrong. It bought wealth management business Gerrard Group for £525m in March 2000 and sold it for £210m three years later. It sold US Life for $350m in 2010 after paying over $600m for it.

Abri du Plessis, portfolio manager and chief executive of Gryphon Asset Management, says Old Mutual bought in times of rand weakness and didn’t ensure it had the right skills on the ground.

He says this is possibly what Woolworths is doing. Ian Moir, its chief executive, is no stranger to the Australian retail market and previously headed Country Road.

 

 

 

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