Missing a trick?
Private equity moves into retail when nobody was looking
RETAIL SALES – long the laggards of the market amid fears that consumers are losing spending steam – are basking in the attention being shed upon them by Bain Capital’s R25bn bid for Edgars Consolidated (Edcon).
Since the deal was announced on 8 February the FTSE/JSE Africa general retailers index has jumped 5%, with fashion retailers Foschini, Mr Price and Truworths gaining more than 7% apiece and furniture specialist Ellerine Holdings surging by almost 10%.
Certain that the market wasn’t giving Edcon the credit it was due, the Edcon board approached independent advisers Caliburn to ascertain if there was more value to be had through the private-equity market.
There clearly was, with the R46/share offer price equating to a 51% premium to the price it was trading at before the cautionary announcement on the deal was issued.
The transaction – dubbed as a “huge vote of confidence for SA” – will result in a massive cash injection for the country, with Barclays plc sourcing two-thirds of the financing overseas and the rest being provided by Absa Capital.
Some investors may lament not spotting the opportunity to buy in May/June last year, when retailers were going for a song (see graph). And despite their rerating last year, retail shares have consistently underperformed the overall market in share price terms and are trading on a lower average multiple than that of the broadest measure of the market, the all-share index (see graphs).
African Harvest Fund Managers’ portfolio manager Mark Ansley says the good news for the sector is consistently underplayed. “We can’t escape that there’s been a structural change in the economy: structurally lower rates, a transfer of wealth… and there are many more people coming into SA’s economic mainstream.”
Last year’s derating of the sector – when it was thought that consumer spending “was going to fall off a cliff ” – made for an excellent buying opportunity, says Renaissance Asset Management’s head of research Nothando Ndebele. “While we don’t hold the view that it will fall off a cliff, it’s not plausible to think that earnings will continue to grow at more than 25%.”
While retail shares continue to present more value than the rest of the market, the reluctance to rerate them reflects investors’ refusal to buy the story of structural changes that have taken place in the economy and supports, rather, views that we’ve simply gone through an unsustainable cyclical upswing, says Ndebele.
So while the market ums and ahs about whether to give them a higher rating, the private-equity players move in. Prime targets would be companies that have low gearing, trade at low price:earnings multiples, have cash on their balance sheets and are cash-generative. And the retailers are it.
Many of them don’t have optimally structured balance sheets; with very low levels of debt in many cases (see table) there’s room for capital restructuring.
Says Ndebele: “Fresh eyes are taking a look at our retailers and are spotting opportunities. If you examine the operating efficiencies of our retailers, they’re comparable to those of companies overseas. Why should they trade at larger discounts to the market than their global peers?”