When R1 changed the way the retail game was played
Shoprite last month announced a deal that would loosen chairman Christo Wiese’s grip on the retailer. By buying back a class of shares that gave Wiese the lion’s share of the voting rights, Shoprite will pay the billionaire about R3.5bn in ordinary shares. Wiese has held control of Shoprite since the early 1980s. And it has been a long road to grow the retailer into SA’s largest. Steady expansion was the secret, but with a few game-changing deals in between. One such transaction was the R1 deal of 1997. TJ Strydom explains in this extract from his unauthorised biography of Wiese titled Christo Wiese: Risk & Riches
In the photograph the two are beaming. At opposite sides [Christo] Wiese and [James Wellwood (Whitey)] Basson are holding a board with the words “OK. We are there for you!”
That was after the transaction had taken place. But it was a close call: OK Bazaars was on the brink of vanishing.
All the same, the two friends managed late in 1997 to buy the retail group, founded in 1927 and first listed in 1929, for only R1.
As part of the deal, Shoprite absorbed a large loss which it could carry over for years to lessen its tax load. And don’t forget about the assets of R540m (even though Shoprite and SAB later slugged it out in court over their exact value). Actually, it was more than R540m.
“Part of the deal was that there had to be R1bn worth of net assets. In truth we never paid a rand; we got a billion rand for buying the business,” said Wiese.
The problem? OK Bazaars was making a loss of nearly R1m per day.
The story goes that OK co-founder Sam Cohen carried a handkerchief in his pocket with the letters YCDBSOYA embroidered on it, writes the financial journalist Marcia Klein. These letters represented Cohen’s business philosophy: You can’t do business sitting on your arse. Unfortunately for OK, by the 1990s that is what had been going on for years.
“When I grew up, the retail scene in South Africa was dominated by the OK Bazaars,” said Wiese.
“[It] was so far number one that nobody else came close.”
Decades after the rest of the retail sector had moved on, OK still ran its outlets more or less as department stores. At the OK you could buy milk and bread, and also a spanner and a lounge suite.
Whereas Pick n Pay and Checkers opened many of their outlets in suburban shopping centres, OK was used to being located at the centre of a town or city’s business life. Many of its stores were too big and they eventually became trapped in city centres where passers-by could not hope to afford its mix of goods.
The chain also waited too long before considering distribution centres and modern warehousing. The OK’s suppliers consequently made deliveries to every shop.
In 1973 SAB acquired a controlling stake in OK Bazaars and for a time Meyer Kahn, later the brewer’s chairman, was the retailer’s managing director.
“When it was run by Meyer Kahn ... it was a great business,” says Wiese.
In 1983 Kahn left for SAB’s head office and in the recessionary years of that decade the retailer declined.
But the brewer was a patient shareholder — perhaps because it was raking in steady profits from its core business and was not dependent on the OK’s performance.
Other shareholders, especially small ones such as individuals, completely lost hope, and eventually it was only a few institutional investors that held the stock in their portfolios.
In 1993 SAB bought out the minority shareholders and made a final go of it by giving OK a complete makeover.
But it wasn’t the exterior or the public face that was the issue; the big problem was behind the scenes — the systems and the technology were ancient.
By 1997 OK did not have a workable computerised system in its head office. Its information systems were so dysfunctional that it was impossible to know which of the retailer’s stores were profitable and which were not.
This is a huge problem if you have about 130 supermarkets, 18 hypermarkets and more than 140 furniture outlets to manage.
“OK is a company that has been bankrupt for numerous years. It is like a man with a Ferrari who cannot get it serviced,” said Basson.
Rumours swirled that foreign retailers were eyeing OK. The UK’s Sainsbury’s and US-based Wal-Mart were named as groups that had a peek but then said they weren’t interested.
But they would have been mad to take it over, says Basson, because they had no structure onto which they could graft the OK’s assets and liabilities.
Pick n Pay possessed such a structure, but it also said no thank you.
By the late 1990s SAB was anxious to dispose of its loss-making subsidiary. The brewer was bent on international expansion, but SA’s exchange controls stood in the way of the large deals it was lining up.
SAB wanted to list in London where it could raise the capital it needed for acquisitions. OK was an albatross that it had to get off its neck before listing abroad.
Investors like knowing what they are in for. A brewer with exposure to emerging markets might be an attractive investment. But if that exposure includes a retail chain that has drained R1.6bn from the brewer’s coffers in three years, it looks much less attractive.
According to Wiese, SAB’s market value was R4bn lower with OK in its stable than it would have been without OK.
And so the brewer sold OK Bazaars to Shoprite for R1.
“They did very well out of it, they got rid of a liability they couldn’t run properly,” said Basson, joking later that he should have bargained the other side down to 99 cents.
Christo Wiese: Risk & Riches is published by Tafelberg. The author is a senior reporter at Business Times