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

The Africa Report - - CONTENTS - By Mar­cia Klein in Cape Town

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.

RING-FENCED BEE

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)

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