Great deal in a market growing faster than SA

Spar’s image has long been one of a reliable but dull investment. It is rapidly losing that image as it moves into a new phase of dynamic international growth.

The game changer is an 80% stake in Irish Spar brand owner BWG, acquired in August for €55m. The deal, struck at a low 4.8 PE, fell into Spar’s lap.

“BWG approached us,” says Spar CE Graham O’Connor. “They turned down two better offers. They wanted our expertise.”

BWG is a perfect fit for Spar, both sharing a business model of wholesale distribution to owner-run stores. They also have a 50-year relationship through Spar International, coordinating body of Spar brand owners in 36 countries.

“BWG is a great acquisition,” says Richard Middleton, manager of Investec Growth Fund. “It will be a winner for Spar.”

It is already proving so. Consolidated for only two months of Spar’s year to September, BWG boosted Spar’s pre-tax profit from what would have been a 8.2% rise to 11.2%.

BWG brought with it 850 Spar and Mace branded stores in Ireland and 250 Spar stores in southwest England. Unlike Spar in SA, where the focus is on large Superspar stores, those served by BWG are concentrated in the convenience sector.

BWG’s market focus could not be better at a time when German discounters Aldi and Lidl are making big inroads into UK and Irish food retail markets.

“They are targeting big supermarkets, not the convenience sector,” says O’Connor.

The timing of Spar’s BWG deal was also opportune. Ireland, hard-hit by the global financial crisis, is on a robust recovery path. Ending a five-year recession, Ireland’s GDP growth has rebounded and, says its central bank, will in 2014 come in at 4.5%, the highest in Europe. Annual growth will average 3% over the next five years, predicts Irish finance minister Michael Noonan.

BWG is well positioned to ride Ireland’s growth surge. Having used the proceeds from the Spar deal to repay a heavy debt burden, it will plough €100m into expansion over the next five years, says O’Connor.

Spar is also looking to ramp up operating margin on BWG’s annual turnover of some R17bn. At 2.4% it is well below Spar’s 3.5% in SA. Moves so far include shifting BWG’s perishable product distribution into its own warehouses with assistance from Spar’s logistics specialists, says O’Connor.

In SA, Spar is more than