Will Clicks hear a per­fect pitch?

Modise-led con­sor­tium pos­si­ble bid­der for off-song re­tailer

Finweek English Edition - - FRONT PAGE - ANDILE MAKHOLWA andilem@finweek.co.za

MU­SICA – South Africa’s largest re­tailer of mu­sic and re­lated en­ter­tain­ment mer­chan­dise owned by the sprawl­ing health­care group Clicks – may soon find a buyer. Finweek has learned from re­li­able sources that a con­sor­tium led by Ken Modise – for­mer di­rec­tor of liq­ui­dated mu­sic dis­trib­u­tor Mu­sic for Plea­sure – has been court­ing Clicks man­age­ment for a pos­si­ble deal and that in­for­mal “dis­cus­sions are at a sen­si­tive stage”.

If pitched, the bid is likely to ap­pease an­a­lysts, who have for some time been rais­ing con­cerns that Mu­sica could dis­tract Clicks from its am­bi­tion to build a net­work of 500 health­care re­tail out­lets over the next three to five years and to op­ti­mise its phar­macy whole­sale busi­ness UPD.

Mu­sica is a chain of 152 out­lets, claim­ing a 45% mar­ket share of SA’s CD in­dus­try, 23% in DVD and 9% in gam­ing soft­ware. How­ever, it’s trou­bled – like its com­peti­tors – by pi­rates and the down­load­ing of mu­sic and movies from the In­ter­net. Mu­sica has bat­tled to grow its turnover over the past few years, with an­a­lysts of­ten de­scrib­ing it as “a prob­lem child” that Clicks should get rid off and fo­cus on health­care.

How­ever, group CEO David Kneale says Mu­sica is a cash-gen­er­a­tive busi­ness and the group would only dis­pose of it if it re­ceived a com­pelling of­fer. How­ever, he’s ad­mit­ted Clicks has be­come a health­care busi­ness and that its long-term plans don’t in­clude Mu­sica.

Sources close to Modise say he be­lieves Mu­sica could un­lock value if it were to be un­bun­dled from Clicks, whose pri­mary fo­cus is health­care re­tail. Modise has vast ex­pe­ri­ence in the mu­sic and me­dia in­dus­try and was at one stage CEO of the State In­for­ma­tion Tech­nol­ogy Agency (Sita) be­fore drift­ing back to busi­ness.

Abri du Plessis, chief in­vest­ment of­fi­cer at Cape Town-based Gryphon As­set Man­age­ment, says mu­sic re­tail is a dy­ing in­dus­try and Clicks should sell Mu­sica and chan­nel its re­sources to where it mat­ters most: health­care re­tail. In at­tempts to re­main in busi­ness, Mu­sica has over the past few years tried to diver­sify its of­fer­ing, but sales re­main weak.

Du Plessis says po­ten­tial buy­ers for Mu­sica may be only look­ing at ac­quir­ing sites, with plans to con­vert those into some­thing else. “Sell­ing CDs is go­ing to be­come a niche mar­ket in fu­ture,” he says, adding Mu­sica’s com­peti­tors – such as Re­li­able Mu­sic Ware­house – didn’t sur­vive the de­cline and had to dis­ap­pear from the scenes. He says new en­trants in the SA re­tail mar­ket, such as Euro­pean fash­ion gi­ant Zara, would do well to make an of­fer for some strate­gic Mu­sica out­lets and con­vert them into its own cloth­ing stores.

In 2009, Clicks at­tempted to sell 17 Mu­sica out­lets to cell­phone net­work op­er­a­tor MTN for around R15m but the deal was even­tu­ally scrapped, ap­par­ently be­cause less than 50% of the land­lords on whose con­sent the trans­ac­tion hinged ap­proved leases be­ing as­signed to MTN, which wanted to con­vert the out­lets into its own cell­phone stores.

An­other pos­si­ble buyer could be Ed­con in shop­ping cen­tres where it doesn’t have sub­sidiary CNA stores and then to con­vert these into CNA out­lets. A man­age­ment buy­out is also a pos­si­bil­ity. Other than that, Clicks may have to put the busi­ness out to ten­der and sell Mu­sica stores in­di­vid­u­ally be­fore much of their value has been eroded.

But price might be an is­sue. Du Plessis says be­sides the sites, Mu­sica as a brand isn’t worth much. How­ever, Clicks may dis­pute that. In its 2010 fi­nan­cial year, Mu­sica turned R952m and de­posited R52,4m in profit be­fore tax.

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