Good timing and loads of luck

What the hell? JD Group and Steinhoff pounced a statement in the closing auction last evening in which parent company and significant shareholder, Steinhoff want to offer JD shareholders 1 Steinhoff share per 1.9 shares that they currently hold. It is an all scrip tender offer. It is key to note that they, Steinhoff have this offer open as of this morning to everyone who wants to tender their shares, they might get nobody, but I really doubt that, the premium is attractive, but we will definitely explore that later.


Steinhoff currently own 56.4 percent of the business, Piet Viljoen and his deep value crowd, Regarding Capital Management own 7.1 percent, whilst the Government Employees Pension Fund own 6.2 percent, the PIC 5.6 percent and Investec owns 5.5 percent. This is important, so I will get back to it later.


But because Steinhoff are going to use their elevated share price, the timing is good. The equivalent share price offer for JD (27.77 ZAR) is a 38 percent premium to their 5 day VWAP (volume weighted price) of 20.11 ZAR. The swap is based on a Steinhoff share price of 52.77 ZAR, also where a five day VWAP was used. As a JD Group shareholder, you will get 1 Steinhoff for every 1.9 shares you own, valuing the company at.... errrrr.... well I suppose 229 338 322 JD Shares in that ratio. So let us work it out. Of those 229 338 322 JD shares in issue, Steinhoff do not own 129 346 813 shares. So those shares, including the aforementioned shareholders (who own 24.4 percent collectively) would get 68 077 270 Steinhoff shares. Which, at 52.77 ZAR a share, is worth 3 592 437 555 Rand. At Steinhoff's closing price of 53.45 ZAR last evening, the market cap of Steinhoff is an absolute whopping 110.9 billion Rand. Which means that this offer to the minorities (the full 100, they are after only 98 percent - huh?) is worth only 3.23 percent of the Steinhoff market cap. So it is relatively small in the bigger schemes of Marcus Jooste, the Steinhoff CEO, but well timed.


If this deal had been done a long time ago, say at the end of 2012, December 31, the price would have been a LOT MORE. How much more? Let us work it out. Steinhoff closed at around 27.43 ZAR at the end of 2012, JD Group closed at 45.00 ZAR. A 38 percent premium to JD Group's price would have been around 62.1 ZAR. But back then Steinhoff market cap was "only" 56.9 billion Rand, JD Group at 45 Rand at the end of 2012 had a market cap of 10.3 billion Rand. A 38 percent premium would have valued the whole business at 14.2 billion Rand, the shares that Steinhoff did not own would have been a theoretical 8,032 billion Rand. For a similar offer (a like for like), Steinhoff would have to have to shell out around 292 million shares, or roughly 14.1 percent of their market cap. You would have got roughly 1.27 Steinhoff shares for every JD Group share that you own (hopefully my math/maths is right).

And that means two things though. One, Steinhoff would not have got the significant discount that they are getting now (much less dilutive for shareholders) but more importantly, what do JD shareholders feel now? If the deep value crowd, and I am thinking specifically of Regarding Capital Management, is this premium enough to entice them to swap their shares for Steinhoff shares? Steinhoff is not expensive and perhaps the attractive European assets are likely to attract the rest of the shareholders to tender their shares at the premium. But the other option for the existing shareholders, provided that they have enough patience is to follow their rights (JD have announced that already) and to continue to stay in the shares. That remains to be seen, I am pretty sure that Steinhoff would have been chatting hard to these people, their other shareholders.


Steinhoff could also recapitalise the business with cheaper funding with an inter-company loan. Either way, this is again good timing from Steinhoff. Using your inflated share price (in fairness Steinhoff only trades on a 12.2 multiple forward) to acquire a company that is for all intents and purposes at the bottom of a credit cycle, all beat up and vulnerable. These guys, Steinhoff that is, never ever sit still and are smart. Timing in life is almost everything, which means that they are definitely taking what they think is a good opportunity. But it could have been so, so different.


Because if this deal had been done the very first time Steinhoff approached JD, way back in March of 2007 (seven years is a long time), JD Group shareholders would have got 3.6 Steinhoff shares for each and every JD Group that they owned. Back then, if this deal had been done, it would have boosted Steinhoff's NAV by 52.2 percent. JD Group was trading near 90 ZAR a share. Sometimes it is good to fail, but most of the time it is better to be lucky on the timing, and in this case it was great that they were thwarted back then, and are proceeding now. Good timing and loads of luck.