Between a rock and a headboard
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