Investors pile in after Ellerines sale warning

AFRICAN Bank investors seem to be caught in the twilight zone when it comes to cutting loose its albatross, Ellerines.

Last year, African Bank said it would cut its losses and sell the ailing furniture business which it bought six years ago for R9.9-billion. But then Leon Kirkinis’s bank did an aboutturn, deciding to rather fix the ailing furniture business before selling it. It even hired a new managing director to return the business to profitability.

So the bank caught the market off guard by saying it was in talks — again — to sell Ellerines. The bank’s share price surged 20% on the day — its highest gain in 19 years.

Some analysts said the steep rise on Monday was a “classic short squeeze” in which traders who have sold the stock short in the expectation of the price falling are suddenly forced to close their positions.

It is estimated that about 25% of African Bank’s shares are shorted at this time.

But even if African Bank does a deal tomorrow to sell Ellerines, this is unlikely to add much momentum to the stock over the longer term.

One analyst, who asked not to be named, said a deal would not have any real effect other than to cause a momentary spike as short sellers tried to cover their positions. He expected the share price to retreat.

The market is unclear about whether a deal will result in a straight sale — for example, to a company such as Steinhoff — or a joint-venture arrangement.

Previously, Kirkinis wanted to sell Ellerines outlets but not its loan book.

But any buyer would walk away from that deal if it excluded the loan book because credit sales, although under pressure now, are where retailers make the most money.

Ellerines credit sales fell 28% to R1.1-billion in the six months to March. It had a R408-million loss for the half-year.

Some analysts believed the retail unit could be sold for a mere R1-billion.

If so, it will be a bitter pill to swallow, given the R9.9-billion price tag in 2007.

Dirk Greeff of Global Credit Ratings believed Ellerines should have been sold last year with its loan book.

While Steinhoff has been touted as a possible buyer for Ellerines, some analysts say Brait or Christo Wiese’s Pepkor may also be in the running.

“This is a typical Christo Wiese deal. He loves to buy distressed assets. They could have deep pockets to do something brave,” said one analyst.

African Bank posted a R4.4billion loss for the half-year.

Greeff said that despite all the woes, African Bank’s institutional shareholders were picking up shares in the open market as they were cheap.

He said buyers knew that although it was going through a turbulent period, the value was likely to soar over time.