Out of the Steinhoff ashes
Pepco’s listing, in the works for a year now, offers shareholders a fast-growing asset with none of the parent’s taint
ý A break with the infamous Steinhoff name and the promise of cross-border expansion.
In a nutshell, that’s the premise of Pepco’s 442-page listing prospectus ahead of its debut on the Warsaw Stock Exchange later this month.
But if you’re a Steinhoff shareholder, unless you go out and buy Pepco when it lists, you’re unlikely to see much benefit when the company goes public.
That’s because Steinhoff is essentially selling off 17.5% of its shares in Pepco in exchange for cash, which will almost certainly be gobbled up by the legion of creditors and litigants burnt by Steinhoff’s spectacular share price collapse on revelations of enormous accounting fraud at the end of 2017.
Pepco contributed
45% to Steinhoff’s total earnings before tax in 2019, which Steinhoff will forfeit once the listing goes ahead in exchange for about €935m, which is what it hopes to raise once its 103-million shares are listed.
Priced at between 38 zloty (about R143) and 47 zloty, with the final cost to be decided by
May 14, the midpoint of that range values Pepco at €5.34bn.
Aside from the obvious allure of a shift away from its shareholder, what is Pepco’s appeal?
After all, outside the luxury goods market retailers are often better suited to their home markets, with global expansion generally ending in tears.
Even the world’s biggest grocer, Walmart, sold its stake in UK group Asda in 2020, turning
The earnings multiple is very steep, but it is promising hefty double-digit growth numbers
Casparus Treurnicht
its focus back to the US.
But Pepco is doing the opposite.
The discount retailer, which has more than 3,200 stores and 50-million “mom on a budget” customers, effectively wants to treble in size by opening 8,000 stores over the next 20 years, largely in wealthier Western Europe, where it’s begun building a presence.
While it’s flourished in Eastern Europe, Pepco CEO Andy Bond says the company sees its market as “the entirety of Europe”.
Its divisions include the Pepco brand in Eastern Europe, Poundland in the UK (which Steinhoff bought during an acquisition frenzy under the tenure of then CEO Markus Jooste in 2016) and Ireland’s Dealz.
Last year, Pepco opened five clothing stores in Italy. They’ve traded “ahead of expectations”, according to Bloomberg Intelligence, with Pepco attributing their success to the popularity of their childrenswear.
Pepco also took its first foray into a nonEU territory, Serbia, which went better than expected before the pandemic derailed things, according to its listing prospectus.
This year it will expand into Spain and is adding Pepco clothing to the Poundland stores, giving the discounter an advantage over its competitors that don’t sell apparel.
Poundland, which sells toys, cosmetics and homeware, recently added frozen and chilled food to its offering after Pepco bought UK frozen food retailer Fultons Foods in October.
Steinhoff, which is fighting off a multitude of billion-dollar lawsuits globally, chose Poland for the Pepco listing because it remains the retailer’s biggest and most profitable market, its “heart, soul and emotional home”, according to Bond.
The group describes Polish consumers as having “a high cultural emphasis on value for money”, something the pandemic has pushed global and wealthier European consumers towards.
up just more than 1,000 clothing stores in Poland, and says it is well established in small towns with little room for new competitors to disrupt it.
But the share won’t come cheap.
The listing, which has been in the works
Pepco has built
for more than a year, puts Pepco on a valuation of 20 times its most recent annual earnings before interest, tax, depreciation and amortisation of €229m.
Compare that to its SA version Pepkor, which trades on a forward p:e of 17.5.
Gryphon Asset Management analyst Casparus Treurnicht calls the share pricey.
“The earnings multiple is very steep, but it is promising hefty double-digit growth numbers … which is not uncommon in the retail environment of that kind,” he says.
Pepco also has something few retailers have:
“a good track record”, says Treurnicht.
Local retail analyst Syd Vianello thinks bankers are benchmarking the value of the Pepco share to Zara owner Inditex.
“The only reasonable business to measure Pepco against is probably Spanish Zara [Inditex] and it seems to be pitching the valuation on the same type of metrics.”
Inditex is considerably larger, though, with 7,200 stores in 93 markets — and pitched at a more affluent market.
Zara, unlike Poundland and Dealz, doesn’t sell the cheap garden lighting, toys, pet accessories, stationery or food you can pick up for a snip.
The only real comparison between the two companies is the fact that both trade across many countries.
In fact, most of Pepco’s competitors are privately owned — like Primark, owned by sugar and food giant Associated British Foods, and German discounters Aldi and Lidl.
Vianello says: “I’m sure the bankers did their homework. All I’m saying is they are pitching at the top end of potential valuations, which is understandable because Pepco does offer something which isn’t available elsewhere and there should be demand, if markets hold out at current levels.”
Treurnicht agrees. “Investors will be excited to have Pepco join financial markets.”
Inditex also differs in that it earns primarily in dollars and euros, whereas Pepco earns mainly in emerging-market currencies but pays most suppliers in dollars or yuan.
Pepco’s debt is in euros, though, and its lengthy prospectus flags the devaluation of emerging-market currencies against the dollar as one of its main risks.
Another is, of course, competition.
Action, a Dutch-based discounter in France and Belgium, has plans to expand into Pepco’s territory, Poland.
Action has been more successful in its clickand-collect online strategy, where Pepco is seemingly unwilling to play, arguing that delivery fees would drive up its prices.
The Pepco listing is also a major step forward in ditching the Steinhoff taint.
Even though none of the Steinhoff fraud, irregularities and false cash flows has been linked to Pepco, having Steinhoff as a shareholder poses a risk to the group.
“Litigation is ongoing and there continues to be a risk that the group’s association with Steinhoff could result in damage to reputation, brand or supplier trust,” says Pepco.
But ultimately, Pepco thinks it has a “structural advantage in the discount retail segment”. And it’s hoping to prove this over the next two decades.