Steinhoff and Shoprite tie up

Since Christo Wiese made the comments that he thought that Shoprite and Steinhoff was some sort of natural fit, the share price of Shoprite has outperformed the rest of their retail peers. Since Steinhoff released their results last Wednesday, the stock was up over 17 percent. That was all as at yesterday morning. And then basically around lunchtime, 12:30 to be exact, a release with some clarity as to what is likely to transpire (for Wiese at least) with the two companies hit the screens. Here it is - Steinhoff/Shoprite - Joint detailed cautionary announcement relating to the establishment of African retail champion.

So what do we have to work with here? Firstly, the Public Investment Corporation (PIC) and Christo Wiese are simplifying things here for themselves, getting one holding (of a business listed primarily in Frankfurt) which will be an African titan, excuse the pun. Wiese has built his empire through an entity called Titan Premier Investments, or just Titan. Retail Africa will be a giant that will have/has annual revenues of 200 billion Rand, and EBITDA of 15 billion Rand, roughly at the exchange rates today of 14.6 billion Dollars in sales and 1.1 billion Dollars in EBITDA. That is an epic beast, I was looking for global comparisons, as the company plan to operate in Sub Saharan Africa, I can't find anything outside of here, the local bourse.

For instance, Shoprite has annual revenues of 130 billion Rand, you can see where the other 70 billion Rand is going to come from, you hardly need to be a genius to do that simple math. Pick n Pay, a pretty sizeable business in itself, has six month revenues of 37 billion Rand, roughly the size of the combined Steinhoff assets being sold to Shoprite. Spar has annual turnover of 90 billion Rand, their operations now extend to Europe too, Ireland and Switzerland. Massmart is around the same as Spar, a little less, they are more a "direct" competitor of Shoprite on the African continent. As such, the Retail Africa (as it will be known) giant will be over double the revenues of Massmart, perhaps their closest competitor. Remember that 52.4 percent of the shares of Massmart are held by Walmart, this hasn't exactly been the best of their offshore purchases.

I think that there were two specific reasons why both of the share prices of Steinhoff and Shoprite fell quite hard, and they differ for each stock. Firstly, I suspect that the shareholders of Shoprite were bidding the stock up in anticipation of an outright purchase and perhaps even a premium being built in. Hence, when the dilutionary effects are factored in and the company will have to manage assets that they haven't built over decades, I can understand the marginal frustration of the Shoprite shareholders. The stock sank 7.17 percent on the day to end at 178.97 Rand, a price last seen in July, when the last results were warmly welcomed.

At this point Christo Wiese owns 15.31 percent of Shoprite, the PIC own 12.26, just over 27.5 percent of the business. Add in the employees pool of 6.67 percent and you have one-third of all the shares in issue that are likely to be on the same page immediately.

So how is it going to work? first things first, Shoprite buys all of Pepkor Africa (PEP, Ackermans), JD Group (Russells, Bradlows, Hi-Fi Corp. and Incredible), Steinbuild and Tekkie Town. I have left out a few brands there. Price? Unknown for now?:

"Shoprite will issue new ordinary shares to Steinhoff in consideration, pursuant to which Steinhoff will receive a significant equity interest in Shoprite. The value for Steinhoff Africa Retail will be negotiated taking into account the best interests of both Steinhoff and Shoprite shareholders."

What is significant? Wait, like the Verimark (not in the league of any of these retailers) ads, there is more: "Steinhoff has entered into an in principle agreement with the PIC and Titan to acquire their interests in Shoprite as part of the Proposed Transaction in the form of a Steinhoff share-for-Shoprite share exchange, subject to an exchange ratio to be agreed ("the Exchange Ratio") which may ultimately result in Steinhoff acquiring control of Retail Africa."

So. Steinhoff will control Retail Africa and will shell out real Steinhoff shares to the PIC and Wiese for that, hence the dilutionary effect from their side. So that is one of the reasons why the Steinhoff share price sank. Whilst Christo Wiese then gets to stick all of his eggs in the Marcus Jooste stable at Steinhoff (note to self, horses don't lay eggs), other Steinhoff shareholders get diluted, and that sent the stock price of Steinhoff lower. Yet ...... the board says something else: "This Exchange Ratio will be negotiated taking into account the consideration price for Steinhoff Africa Retail on the basis that the Proposed Transaction will not be earnings dilutive to Steinhoff shareholders."

So whilst this may not be dilutionary now, the market is telling you something, selling the Steinhoff shares down 7.11 percent. You can presume that whilst the primary listing is in Frankfurt, it has only been a year. You would be right to presume that most of the shares are still held on the Jozi share register. And you would also be right to think that the reason that many hold the stock is for international and geographically diverse revenues. i.e. More Europe, the UK and now the US (as well as Australasia) and less African revenues. This is the opposite, at least in the short term.

A lack of dates and a lack of a price (swap ratio) is perhaps weighing on the market too. I think that for the PIC and for Christo Wiese this works well. Less Africa is what the Steinhoff shareholders wanted, which is recency bias and Shoprite is down as a result of perhaps going to be massaged into getting these assets. In the long run, this will work well is my sense. Plenty of logistical synergies between Shoprite and the Steinhoff African operations. Shoprite have great expertise in this area.