Wiese banks on Europe's recovery
Behind the landmark Steinhoff-Pepkor deal is an astute businessperson positioning himself to take advantage of a new dawn of growth in Europe.
The deal, announced on Tuesday, will see furniture retailer Steinhoff International paying R62.8-billion and giving almost 20% of its shareholding to Pepkor’s chairperson, Christo Wiese, in return for 92.3% of the company that owns clothing and homeware retailers PEP, Ackermans and Shoe City.
Steinhoff will issue 200-million shares to the holding company Brait (in which Wiese is a shareholder) for its stake in Pepkor. It will also use R15-billion of the R18-billion raised through a rights issue in July to fund the deal, touted as the biggest in South African corporate history.
The agreement will also see Steinhoff paying off three other shareholding entities of Pepkor, including Pepkor management and two family trusts owned by Wiese.
“Essentially, it’s just a swop in Wiese’s stake of one entity [Pepkor] for another entity [Steinhoff],” said Sasha Naryshkine, a portfolio manager of wealth management company Vestact. “With Steinhoff pursuing raising capital in Frankfurt, Wiese is getting access to global markets.”
The majority of Pepkor’s revenue comes from South Africa. In its most recent financial year, 63% of its turnover was generated locally and 5% was garnered from the rest of Africa. Twenty-three percent came from Australia and 9% from Eastern Europe, where its retail offering Pepco has about 600 stores.
Steinhoff, in contrast, has a much more established European presence. It has retailers in 14 European countries, including Belgium, Croatia, France, Germany, Hungary, Italy, Luxembourg, Poland, Portugal, Spain, Switzerland, the Netherlands, Turkey and the United Kingdom.
Move to Frankfurt
Under the direction of its chief executive, Markus Jooste, Steinhoff has announced its intention to move its primary listing to the Frankfurt stock exchange next year.
“It’s a smart move from Wiese’s perspective,” said Nic Norman-Smith, the chief investment officer of Lentus Asset Management. “He has lowered his exposure to Africa at a time when the demand is relatively high and moved into an area of Europe where demand is just beginning to pick up.”
According to Norman-Smith, the move demonstrated that Wiese was “rebalancing” his portfolio. “He’s clearly still invested in the African growth story, but Steinhoff is a more diversified vehicle than the assets he held before.”
Steinhoff is poised to benefit from Europe’s slowly recovering growth and employment figures. It bought struggling French furniture retailer Conforama for R15-billion in 2011, a move that almost doubled its retail footprint in the region.
This allowed it to add 250 stores in seven European countries, and established Steinhoff as the second-largest retailer of household goods in Europe. “When Markus Jooste bought Conforama, no one wanted to touch Europe,” said Norman-Smith.
Since the purchase, the European part of Steinhoff has increased its margin by 190 basis points to 10.7%. In its last financial year, Conforama’s revenue in France increased by 2.5%, despite the French market being in a decline.
Nevertheless, Brait shareholders strongly disapproved of the so-called swop. The stock lost almost 20% on the afternoon that shareholders discovered Brait would be relinquishing Pepkor.
“It’s probably a kneejerk reaction,” Naryshkine said. “If you’re swopping Pepkor shares, if you were to get something similar – something in its peer grouping – it would trade at a premium. But Steinhoff trades at a discount. As a Brait shareholder, you’re now ending up with European retail and food interests.”
According to Naryshkine, Wiese would have anticipated the negative reaction from the Brait shareholders. But he obviously still deemed the move worthwhile. “It’s giving away quite lot in the very short term for quite a lot more in the long term,” Naryshkine said.
Wiese’s new stake in Steinhoff would become more valuable than his controlling share in the local retail colossus Shoprite Holdings. “You’re swopping something that could have been valued higher, but this 20% of Steinhoff, which has a R146-billion market cap before dilution, would be more valuable than the Shoprite stake. Shoprite has a market cap of R97-billion and he has 15%.”
According to Norman-Smith, the structure of the deal showed Wiese’s faith in the Europe-focused furniture company. “It’s certainly a vote of confidence that he’s taking his payment in shares of Steinhoff as opposed to cash,” he said. “Wiese clearly has some faith in the future of Steinhoff.”