End of merger talks benefit Shoprite
SHOPRITE shares leapt more than 8 percent on the JSE yesterday on news that talks between the retail giant and Steinhoff International to merge their African operations had collapsed.
Shoprite shares closed 8.6 percent up at R188 on the JSE yesterday.
Steinhoff shares also rose 4.96 percent to close at R70.11.
Analysts said the talks were bound to fail as Steinhoff had overpaid for PEP.
Evan Walker, a portfolio manager at 36ONE Asset Management said the PEP purchase made it impossible for Stenhoff to raise more money or offload.
“Steinhoff overpaid for PEP originally so it could never sell it,” Walker said. “They will struggle to realise half the value they paid for.”
Shoprite and Steinhoff informed their shareholders in December that they are involved in talks that would see a creation of a retail giant Retail Africa, should the talks lead to a new company.
A few weeks later, both companies saw their share prices slump as the market raised reservations about the success of the talks, with Shoprite going down 13 percent by mid-January and Steinhoff losing 11 percent.
Walker added that the companies were better off trading separately. “Shoprite is a retail giant already; they don’t need Steinhoff or PEP. They must carry on doing what they do,” he added.
Equity interest
Shoprite was not immediately available for comment.
The merger would have seen Shoprite issuing new ordinary shares to Steinhoff in exchange for a significant equity interest in Shoprite.
Retail Africa was going to have R200 billion in annual revenue with 186 000 employees.
Ron Klipin, senior analyst at Cratos Wealth, said it was not surprising that the deal came off. He said the merger talks failed to impress the majority of the shareholders. “The deal did not make sense for shareholders except for Christo Wiese.”
“In addition major regulatory impediments were going to be very difficult to overcome, including Wiese voting rights, which would have led to a possible conflict,” Klipin said.
He said that Steinhoff was now a cleaner and focused operation. “In addition European Tracker Funds will once again become comfortable with the merits of Steinhoff; this will result in a re-rating of its share price. From a Shoprite perspective, it remains a focused food retailer with an outstanding growth record, particularly in its African footprint,” said Klipin.
Damon Buss, equity analyst at Electus Fund Managers, said the most likely cause was reluctance of the Public Investment Corporation (PIC) to give the deal its full backing, and Titan and Steinhoff not being able to reach agreement on the exchange ratio.
“Given the differential in price earnings multiples, a non-dilutive deal for Steinhoff would have required an unfavourable exchange ratio for Shoprite, which is the most likely concern of the Shoprite board and the key shareholder, that is the PIC,” said Buss.
Jordan Weir, equities trader at BayHill Capital, said shareholders in the PIC, Steinhoff and Titan also viewed the potential merger with suspicion.
The major shareholders involved in the potential merger could not agree on the exchange ratio that would have been involved in the exchange of Shoprite shares into Steinhoff shares,” he said. Weir said the talks also failed to take the minority shareholders on board.
“What we have seen in the market, with their respectively robust upward movements off the back of the announcement, is simply the rapid swing in sentiment of minority shareholders, traders and the general investor from a wary-powerless outlook back into a positive fruitful one. If ‘relief’ could be defined by market movement, this is what it would look like,” he said.