Here come the vultures
Mr Price — ungeared and cash flush — looks set to swoop on rival Jet, with the market’s blessing
ý Is Mr Price about to buy Jet?
The clothing retailer, which is debt free and has strong cash flows, surprised the market last week with its plan to raise up to 10% of its share capital from the market — equal to about R3bn.
Equity, after all, is considered an expensive form of funding. That’s because a company has to share its profits with a bigger pool of investors into perpetuity.
But group CEO Mark Blair says they want to “act early” and gain access to what could be “a limited and decreasing pool of investor funds”. He tells the FM that market conditions
“should present the opportunity to acquire value-accretive assets at attractive valuations. We seek to be able to take hold of these opportunities from a position of strength.”
Blair says the group considered all funding alternatives, including debt.
“Our historically conservative balance sheet is the very thing that is supporting our unique strategic opportunity. Had this not been the case, we could have been in the situation of having to raise additional debt to fund operations or issue shares to extinguish debt.”
Evan Walker, portfolio manager at 36One Asset Management, says it’s an ideal time to buy Jet. “They’ve come to market before other retailers, which almost crowds out the others …
Asset managers won’t have the capacity for a lot of capital raising,” he says.
“Jet is a good business; it could be resurrected. This would give a company like Mr Price Group leeway to give a bigger credit profile, and it would be a good fit.”
Even if the company ends up buying nothing at all, Blair says that having more money in the kitty will help secure Mr Price’s prospects.
Describing its business model as resilient,
Blair says: “There is significant uncertainty arising from Covid-19 … We will be asking shareholders to fund growth, knowing that the existing business is financially secure.”
The company is loath to take on debt, no doubt reminded of its perils by Edcon’s experience.
“We have little appetite to change the approach which has served us so well, and to incur significant debt in the midst of the greatest global risk and period of volatility in the country’s history,” Blair says.
Wayne Mccurrie, portfolio manager at FNB Wealth & Investments, says: “It doesn’t matter if you do a rights issue if you’re buying something that’s cheaper than your [business]. Then it’s good.”
Mr Price says it has identified areas for organic growth but that acquisitions “will be evaluated on the basis of accelerating these opportunities, or on their standalone merits”.
Unlike its retail peers, the group hasn’t gone offshore in a meaningful way and has largely focused on operations in SA.
In total, it sells its low-price high-fashion clothes, homeware and sports kit in 13 African countries, having exited its Australian and Polish test stores.
Analysts say that while Mr Price, Truworths and TFG were among the apparel retailers most heavily affected by the initial lockdown, Mr Price’s margins make the group more resilient than some of its peers.
That view is clearly shared by the Public Investment Corp, which recently increased its stake in Mr Price to 15%.
Veteran retail analyst Syd Vianello says time is of the essence. “They believe opportunities are going to come about as a result of Covid-19 and they are 100% correct. The one that sticks out is Jet; it fits into their business perfectly.”
Vianello says Jet’s distribution can easily be absorbed into Mr Price’s structures.
“The kind of product is similar to Mr Price’s, and the price points are similar.”
It would be a good deal for Edcon’s rescuers too.
“For a business rescue practitioner to get rid of a business without any major retrenchments is a huge win. If someone comes with a credible offer for Jet, they would take it,” says Vianello.
Walker believes Jet might have other suitors, including Truworths and Pick n Pay and even Walmart.
EYEING OPPORTUNITIES
Mr Price Group vs JSE general retailers index – daily – based to 100
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Source: Infront
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Jul
Source: Infront