TheChek News Flow

Steinhoff and Shoprite (SHP) have announced today that the Boards of the two companies have agreed to enter into formal discussions regarding a potential combination of their respective African retail businesses, to form a new entity to be called Retail Africa. The discussions were “initiated and facilitated” by Titan (controlled by Christo Wiese) and PIC, who are the two largest shareholders of Steinhoff and SHP respectively. Proposed structure: SHP will acquire Steinhoff’s African retail operations in return for new SHP shares to be issued for a value that will be negotiated between the two parties. In addition, Steinhoff will acquire the stakes held in SHP by Titan and PIC (c.27% in aggregate), and issue Steinhoff shares in return, subject to an exchange ratio to be agreed. The announcement notes that this “may ultimately result in Steinhoff acquiring control of Retail Africa”, while also noting that Steinhoff “may be required to extend a mandatory offer” to other SHP shareholders (who will then have the right to either retain their stake in Retail Africa, or opt for a stake in Steinhoff). 

We take no view on the likelihood of the deal closing. If, as noted in Steinhoff’s announcement, the transaction results in Steinhoff acquiring control of Retail Africa, this would effectively mean that Steinhoff gains control of and consolidates Shoprite. For illustrative purposes, we lay out a pro-forma scenario analysis, that suggests potential dilution to Steinhoff’s FY17E EPS of 2%-8% (see exhibit inside). If fully completed, on pro forma basis the transaction would increase Steinhoff’s exposure to Africa from c.22% of FY19E EBIT to c.40%, while also introducing exposure to food retail. We acknowledge that a range of outcomes exist outside what we present here. 

We are Buy rated on Steinhoff. Our 12 month price target of €5.80 is based on a SOTP methodology. Key downside risks include M&A discipline, execution at acquired businesses, currency, low tax rate.