Retailers look ripe for the picking – but opinion is divided
RELATIVE TO THEIR PEERS overseas – who are shedding staff, slashing prices and in some cases closing doors for good – South Africa’s retailers put in a good showing amid the economic gloom that hung over festive season trade, analysts say.
While those shares have been afforded a higher rating than the all-share index since August 2008 they have still taken a beating overall, with the JSE’s general retailers index falling 21% from January 2008 to date compared with the all-share index’s 28% fall over the same period.
Some sector analysts and commentators say those good quality retail counters could be ripe for some private equity action, although not all agree.
Gryphon Asset Management’s chief investment officer Abri du Plessis is a proponent of that. “Retail counters such as Foschini and Truworths are attractively priced and for a private equity player could be a longer-term option. If they aren’t, private equity players should be looking.”
For example, Du Plessis says in the case of Foschini a private equity player may look at selling its debtors book and gearing (that is, introducing more long-term debt) on to its relatively debt-free balance sheet to buy the business.
Nedcor Securities retail analyst Syd Vianello disagrees, saying although “it’s a great theory” it is unlikely to happen. He points out Foschini’s only debt is due to its financial services business RCS, a joint venture with Standard Bank that offers mortgages, insurance and store credit cards to Foschini’s customers and those of Makro parent Massmart and Rex Truform’s Queenspark. Says Vianello: “There’s no way Foschini would sell RCS – the business is self-funding and has no further funding commitments.”
In October last year Foschini said it was looking to source R2bn through debt funding for the fixed-term (mortgage) portion of its finance business in tranches of R300m over the next three years in the SA market.
In April last year, Woolworths sold 50% plus one share of its financial services business to Absa for R875m.
Du Plessis says those commitments wouldn’t rule out a deal. “There’s still a big portion of debtors that can be sold in both companies and they’re good assets, good operations. Those businesses could also be restructured. With offshore retailers in trouble they wouldn’t have the capacity to enter the SA market through acquisition. Not an international retailer coming in. Private equity should be looking.”
There’s been no shortage of interest in the sector: both large companies and small. Brait Private Equity made an unsuccessful R14bn bid for food retailer Shoprite in 2007, while Bain Capital successfully concluded SA’s biggest private equity deal to date, a R25bn bid for Edgars Consolidated Stores (Edcon).
Absa Capital Private Equity, which facilitated a management buyout of JSE-listed EnviroServ late last year, says current market conditions may give rise to opportunities in the form of unbundlings, as companies concentrate on their core business activities. “The best deals have historically been done in downturns and vintages [investments] associated with the economic downturns of the early Nineties and early 2000s also show the best returns.”
With funding being in short supply owing to the economic downturn, a company’s debt capacity is an important consideration, says Absa. “As financial engineering loses some of its lustre as a principal source of returns we’ll see more private equity players rolling up their sleeves and getting actively involved in strategic and operational management to drive value creation post-acquisition.”
Absa says while the pace of SA private equity deal flow may be slow, “the model is still intact. While funding is indeed more difficult to come by, the emerging markets
private equity model is based mainly on revenue growth and margin expansion and isn’t overly reliant on debt.”
Ethos, a private equity house that bought out JSE-listed House of Busby (which represents brands including Guess, Aldo, Nine West, Mango, Esprit) and Tiger Wheel & Tyre in 2008, and bought Sportsmans Warehouse parent Moresport in 2006, says the retail sector has been attractive to private equity investors globally due to economic growth and the availability of cheap leverage that fuelled consumption expenditure, says Ethos partner and Moresport director Ngalaah Chuphi.
SA has experienced strong retail growth due to an expanding economy, driven in part by the substantial expansion of the black middle class, which has made the market attractive. But despite that, Chuphi doesn’t think private equity transactions of scale are likely in the near future due to uncertainty in global financial markets. “However, things could change once the offshore non-investment grade capital markets reopen.”