60 The Steinhoff shuffle South African billionaire investor Christo Wiese tries new ways to get companies he has invested in to work closer together
After failing to merge major retailers Steinhoff and Shoprite last year, South African billionaire investor Christo Wiese is trying new ways to get the companies he has invested in to work closer together as they expand across the continent
Watch footage of the opening of Shoprite stores in Angola, and you may think you are witnessing examples of Black Friday shopping madness in the US. Thousands of shoppers rush in as the doors open and empty the shelves within minutes. These sell-out openings reflect the huge demand for supermarkets in many under-served countries in Africa, where most large retailers fear to tread but where Shoprite continues to expand. While there are supply-chain, infrastructure and foreign-exchange challenges in some countries, the group continues its charmed expansion on the continent. Its success outside of South Africa is unique among retail chains. Some companies – like the upmarket Woolworths, which pulled out of Nigeria in 2013 citing the cost of doing business – got their fingers burnt. Others bumble along tentatively, with Pick n Pay in only six countries outside South Africa, and Massmart, the owner of Makro and Game, having just 39 stores in the rest of Africa. But Shoprite has forged ahead: revenue from outside South Africa now accounts for almost 20% of its revenue, which recently reached R130bn ($9.5bn). A comparison with its main rival Pick n Pay – which had been the dominant retailer in South Africa for many years – is telling. Pick n Pay reported revenue of R77.5bn in the year ending 26 February 2017, with R4.3bn earned outside South Africa. “How the mighty has fallen,” says Mark Ingham, director of South Africa's Ingham Analytics.
SHOPRITE STORMS AHEAD
Ingham calculates that Shoprite's Africa operations outside South Africa will have pre-tax profits of around R1.7bn in 2018, and R2bn within two years. “To put that in perspective, Shoprite will make as much profit in Africa next year as Pick n Pay's South Africa operations. That's how big it is. It is remarkable.” While the comparison gives a sense of the scale of growth of Shoprite's business, that is not the full extent of the continental aspirations of major Shoprite shareholder Christo Wiese. A series of complex deals involving the major investments of the South African billionaire will forge the business of Shoprite and the African interests of retail group Steinhoff International closer together. Wiese held 16.9% of Shoprite and 23% of Steinhoff International at their latest year ends, and is the largest single shareholder of both companies. In phase one of these deals, Steinhoff Africa Retail (STAR) – representing the African operations of the Frankfurt-listed but South African-formed Steinhoff International – listed separately from the holding company on the Johannesburg Stock Exchange in September. After the next phase, including STAR'S proposed exercise of call options and share repurchase, it will wind up with 23.1% of the economic interest and, importantly, 50.6% of the voting rights in Shoprite. The STAR group's revenue was more than R51bn in the year to September, with operations (see
graphic on page 63) in 12 African countries : Angola, Botswana, Lesotho, Mozambique, Malawi, Namibia, Nigeria, South Africa, Swaziland, Uganda, Zambia and Zimbabwe. As of March, it had 4,498 stores in South Africa and 310 in the rest of Africa. Shoprite, with turnover of R130bn in the year to 2 July, has 2,689 stores in 15 countries, with 437 stores outside South Africa and 43 new stores planned for the financial year. Last year, its supermarkets outside of South Africa generated an 11.7% increase in turnover. Supermarkets in Angola and Nigeria increased customers by 35.7% and 38.2%, respectively. There are now 30 Shoprite stores in Angola, which accounts for the lion’s share of non-south Africa sales, and 23 in Nigeria. STAR and Shoprite are, collectively, a major force in retail on the continent. While Shoprite dominates the grocer y sector, STAR sells apparel, footwear, household goods, furniture, appliances, consumer electronics and building materials, and provides financial and mobile services. Between STAR and Shoprite, “they can almost fill a shopping centre”, Ingham says. “There is a complementary nature to the retail stores that they have.”
SEARCH FOR SYNERGIES
This means that from a real-estate point of view, there may be synergies between the companies. There are other synergies too, including the possible merger of the furniture businesses of the two companies, which may spark competition concerns. But that is unlikely, as Shoprite’s furniture division is a small part of its total business. Steinhoff and STAR are unwilling to comment about their plans, says Ian Nel, a manager at Steinhoff International. STAR’S pre-listing statement, however, offers insight, with STAR saying the listing would offer a direct investment into “the African growth story”, enable it to be independently valued “as an emerging market, Africa-focused, retail company”, and give it access to capital to grow – including through its investment in Shoprite. STAR expects numerous benefits from its closer association with Shoprite. “The acquisition of Shoprite will assist STAR in realising its vision to be the preferred destination for the African consumer, by providing everyday essential products at affordable prices and serving the consumer at their convenience,” it said. It will enhance its relevance to African consumers: “The food and grocery segment is the largest market segment in Africa with strong, defensive growth prospects. Access to this segment and its customers will significantly increase STAR’S market penetration in the continent’s formalising retail market.” And STAR argues that Shoprite will benefit “from the Steinhoff Group’s sourcing, scale advantages, shared best practices and strategic direction as part of one of the largest global discount retailers.” Shoprite has not elaborated on developments, with chief executive Pieter Engelbrecht saying it will be business as usual. The investment community is not yet convinced about the deals, but it is used to, and not necessarily in favour of, Wiese shuffling around his assets. Pepkor, a major element in STAR, was incorporated into Steinhoff some years ago in a hugely lucrative deal for Wiese. He abandoned an attempt last year to merge Steinhoff and Shoprite. This time, however, at least part of his plan is going ahead.
Analysts say the STAR listing may be an estate-planning exercise for Wiese. Evan Walker, a fund manager and analyst at 36One Asset Management, says the deals represent Wiese solidifying control over his investments and at the end of the process, through Steinhoff, he has effective control of both retailers. “This is quite a phenomenal platform to grow the business with a sizeable balance sheet and cashflows all the way through.” Walker says Wiese and Steinhoff International chief executive Markus Jooste may want to “to sit in Stellenbosch” and look for deals. But he is sceptical, saying Steinhoff overpaid for its past few deals. “He [Wiese] is effectively hitching his wagons to the Steinhoff locomotive,” says Ingham. “Jooste is a very successful businessman, and they are kindred spirits.” Wiese was also a fan of Shoprite’s former chief executive Whitey Basson, who was widely believed to have been against any merger with Steinhoff. There are also other reasons for hiving off STAR, including black economic empowerment (BEE) imperatives set by the South African government. “What we have now is quite a clever concoction – with tacit acceptance of the [ government pension fund investor] Public Investment Corporation – to use STAR as a ring-fenced company for BEE,” says Ingham. A company called Lancaster, headed by businessman Jayendra Naidoo, has been introduced as STAR’S BEE partner, with an 8.8% stake in the company. While Wiese and Jooste may be looking for deals, these are likely to
be through Steinhoff International rather than the African interests, where acquisition opportunities of scale are limited. This means growth from African operations will have to be organic. This is where collaboration between STAR and Shoprite may help. At the moment, the two groups' brands will stay separate, says Michael Treherne, a portfolio manager at Vestact. “If Steinhoff International is wanting to get efficiencies out of the companies it has bought, I don't know how many more efficiencies there are,” he says, “but [I]do think they will have increased bargaining power, if, for example, they go to a mall saying: ‘We can bring all these brands to the party.'”
KEEPING PRICES LOW
They also have competitive power. “Shoprite does well in Africa because it has the big organisation and cashflow behind it, and competitors don't. Size and scale is generally a good thing,” Treherne says, enabling them to keep prices low. 36One Asset Management's Walker warns, however, that he is “negative on the landscape”, saying that lower-earning consumers are feeling the effects of difficult economic conditions. STAR and Shoprite focus on the same customer base, and their strategies are aligned. Both are aiming to increase customer numbers by offering essential products at affordable prices, a strategy that has worked for both so far. Walker makes the point that they have first-mover advantage, and there is still significant scope for growth, though not through acquisition. Whether this growth will be of a similar scale to previous years is unclear. “We don't know the scope of growth prospects ahead,” says Ingham. “Shoprite created markets where markets did not exist, and if we take that as an example, they could dig around and create something no one has seen before.” Ingham doesn't see Shoprite's growth to date as organic – “it is a greenfield approach,” he says. It continues to create demand, but the extent of this pent-up demand is unclear. Experience seems to indicate that as long as STAR and Shoprite continue doing what they do, demand will follow. “You don't often know what the demand is if there is no supply,” Ingham continues. “In some markets, they [Shoprite] go in and it is like Christmas. For many consumers, relatively affordable foodstuffs are a dream come true.”
PEP (top left) and Rochester (left) are two of the retailers bundled in the new STAR listing, which also owns call options in Shoprite (below left)