Be­tween a rock and a head­board

Finweek English Edition - - Companies & markets - ANA MON­TEIRO

SHARE­HOLD­ERS IN furniture re­tail­ing gi­ant JD Group are up in arms about the of­fer they re­ceived from Stein­hoff In­ter­na­tional for the com­pany. The of­fer would see JD Group share­hold­ers re­ceiv­ing 3,6 Stein­hoff shares for each JD Group share on the record date of the scheme, mean­ing that the deal is pegged to pre­vail­ing mar­ket prices.

On 16 March – the day of the an­nounce­ment – the JD Group price was whacked down 5% to R90,75/share while Stein­hoff closed 3,8% higher at R23,89/share. The fol­low­ing day the po­si­tion re­versed, with Stein­hoff shares trad­ing lower and JD Group shares climb­ing.

Us­ing the pre­vail­ing price at the time of writ­ing (R23,80/share), JD Group share­hold­ers would re­ceive around R85,68/share. With JD Group shares trad­ing higher – R94 apiece at the time – the 9,7% dif­fer­ence is sub­stan­tial.

Com­ments on the deal var­ied but were – on the whole – neg­a­tive, with ad­jec­tives rang­ing from “dis­ap­point­ing” to “shock­ing” (the phrase “down­right cheeky” is an­other that cropped up).

One ob­jec­tor to the deal is Cadiz/African Har­vest Fund Man­agers port­fo­lio man­ager, Mark Ans­ley. He ar­gues that the of­fer doesn’t rep­re­sent the true value of JD Group and there­fore there’s no in­cen­tive to dis­in­vest. “One has to ask why in­vestors own JD Group,” Ans­ley says. Shares in the re­tailer are con­sid­ered cheap when com­pared to the rest of the mar­ket, as they trade “at least at a 25% dis­count”.

Also, with its very in­ef­fi­cient bal­ance sheet struc­ture (JD Group has no debt and around R1,6bn in cash), there’s a lot of value to be un­locked. “Per­haps a way around it would be to first re­struc­ture JD Group and then take the com­pany out. In­vestors want and de­serve a re­ward.”

There’s no cash al­ter­na­tive in the deal ei­ther, which could bother in­vestors who would rather take the money and find an­other re­tail play to house it in rather than trad­ing their hold­ing in the re­tail-fo­cused JD Group for a stake in a con­glom­er­ate with in­ter­ests as di­verse as man­u­fac­tur­ing and dis­tri­bu­tion.

There are a num­ber of in­vestors who have size­able stakes in both firms and have to weigh up their op­tions.

One such in­sti­tu­tion is the Old Mu­tual In­vest­ment Group (Omgisa), which holds around 19% of JD Group (ac­cord­ing to the com­pany’s 2006 an­nual re­port) and a much smaller stake in Stein­hoff (given that it wasn’t dis­closed in Stein­hoff’s an­nual re­port, the stake is less than 5%).

Omgisa re­tail an­a­lyst Jea­nine van Zyl says that while each of the 12 as­set man­age­ment bou­tiques within the Omgisa stable will each vote in­de­pen­dently of each other on their re­spec­tive stakes, the over­all house view is that the deal isn’t at all ben­e­fi­cial to JD Group share­hold­ers. “It seems that all the up­side is for Stein­hoff share­hold­ers.”

Apart from the price is­sue, Van Zyl is con­cerned about the change in the na­ture of the JD Group as­set. “Share­hold­ers have bought JD Group as it’s an ex­cel­lent lo­cal play, with high div­i­dend yields and a strong bal­ance sheet. How­ever, Stein­hoff is in­ter­na­tional and has low div­i­dend yields by com­par­i­son. The re­sult is a com­plete change to what in­vestors had orig­i­nally signed up for.”

As Ans­ley says: “The only share­hold­ers who would vote for this would be those who also have Stein­hoff shares.”

The Pub­lic In­vest­ment Cor­po­ra­tion (PIC), which holds a 15,6% stake in JD Group and 15,7% in

Stein­hoff, is for the deal. It says it would sup­port the merger in prin­ci­ple and would vote in favour of the res­o­lu­tions to be pro­posed at the rel­e­vant share­hold­ers’ meet­ings.

An­other in­sti­tu­tion in that po­si­tion is Rand Mer­chant Bank As­set Man­age­ment (RMBAM), though it has a large stake in Stein­hoff (at 12,9%, com­pared with a 7% stake in JD Group).

RMBAM in­vest­ment pro­fes­sional Shaun Bruyns con­sid­ers the of­fer to be fair and sees RMBAM vot­ing in favour un­less a ma­te­ri­ally higher of­fer is put on the ta­ble for JD Group.

Bruyns says that the an­nounce­ment of cor­po­rate ac­tion be­tween the two com­pa­nies has sent the value of JD Group be­yond RMBAM’s deemed fair value of around R90 to R95/share. “We hold Stein­hoff be­cause we think it’s cheap. Given the me­chan­ics of the deal, we’ve had to rec­on­cile the is­suance of Stein­hoff shares at a dis­count to in­trin­sic value to JD Group share­hold­ers.

“On bal­ance we think that the ra­tio en­vis­aged is fair to both sets of share­hold­ers. But at the end of the day share­hold­ers will de­ter­mine the out­come, given that the pro­posal is sub­ject to a scheme of ar­range­ment.”

Se­nior an­a­lyst War­wick Lu­cas, of Imara SP Reid, which holds roughly the same amount of shares in both com­pa­nies for clients, says the deal is “def­i­nitely on the light side” and that with a ra­tio of 3,6 Stein­hoff shares to one JD share Stein­hoff can flick for­ward in its diary to “never”. That said, Lu­cas feels that in light of a weaker rand, JD Group share­hold­ers could ben­e­fit from Stein­hoff’s rand-hedge qual­i­ties.

Ernst & Young com­pleted pre­lim­i­nary eval­u­a­tions of both JD Group and Stein­hoff and has ad­vised that the pro­posed share con­sid­er­a­tion is fair and rea­son­able to JD Group share­hold­ers as at 15 March 2007.

Also, the in­de­pen­dent non-ex­ec­u­tive direc­tors of JD Group gave the E&Y eval­u­a­tion the thumbs up and, as such, the JD Group board is unan­i­mous in rec­om­mend­ing the deal to share­hold­ers.

Why JD Group founder and ex­ec­u­tive chair­man David Sussman would agree to the terms has also been ques­tioned. Sussman (58) will be­come deputy ex­ec­u­tive of the merged en­tity and some view his sup­port of the move as an exit strat­egy as he nears re­tire­ment.

Should the pro­posed merger of the two go through, the re­sult will be an en­tity with a com­bined cash po­si­tion of more than R5bn (R3,5bn in Stein­hoff’s case and R1,6bn in JD’s) and a mar­ket cap­i­tal­i­sa­tion of around R48bn.

For Stein­hoff, the tie-up gives fur­ther im­pe­tus to its strat­egy of cre­at­ing a seam­less and cost-ef­fec­tive value chain – right from raw ma­te­ri­als to re­tail out­lets.

Stein­hoff is al­ready one of the top five furniture groups in Europe and Aus­trala­sia and the largest in Africa. From man­u­fac­tur­ing to dis­tri­bu­tion, the com­pany has a foot­print in Bri­tain (most re­cently through the ac­qui­si­tion of re­tailer Home­style), the Nether­lands, Ger­many, Poland, Hun­gary, Ukraine, South Africa, In­dia, Aus­tralia and New Zealand.

With the merger be­tween Stein­hoff and JD Group, SA could have its next MTN or SABMiller. But JD Group share­hold­ers will first have to agree. And they will, ev­i­dently, put up a fight.

Ob­jects to the deal. Mark Ans­ley

An exit strat­egy? David Sussman

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