Steinhoff/Shoprite: Hoff we go
The pitch is simple: a discount retailer wants exposure to the sector that accounts for the chunkiest portion of its customers’ wallets — food. Such is the rationale behind the merger discussions this week between furniture retailer Steinhoff and Shoprite. But investors in both companies are rightly cautious.
No official offer has been made, so the terms are not yet known. But the companies envisage a deal whereby Shoprite would take control of Steinhoff’s African assets. In return, Steinhoff would gain a large (possibly a majority) stake in the enlarged entity. The transaction would effectively separate Steinhoff’s African operations from its European ones, keeping its listing in Frankfurt for the latter.
It is clear why Christo Wiese, the South African businessman who is the chairman and biggest shareholder of both companies, might find this attractive. Steinhoff derives a third of sales from Africa, and the shares trade at around 13 times forward earnings. That is a discount to peers in emerging markets, which average around 18 times. A stake in a separately quoted African retail business should attract a premium and make Steinhoff’s own shares much easier to value.
The operational benefits might include logistics and rental savings from food and clothing customers buying under one roof. The often steep up-front costs of establishing outlets in frontier markets could be spread across a larger business. But if the logic in creating an African “retail champion” is clear, so are the pitfalls. Economies of scale in general merchandise do necessarily not translate into food: the logistics of dry goods are different from those of perishables.
Whitey Basson, Shoprite’s retiring chief executive, was thought to be opposed to the deal. Shoprite’s shareholders seem at odds too; the shares fell almost 3 per cent on Thursday.
Mr Wiese needs to justify the operational as well as the financial logic behind such a combination.