Re­tail­ers look ripe for the pick­ing – but opin­ion is di­vided

Finweek English Edition - - Companies & Markets - ANA MON­TEIRO

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.”


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