Steinhoff buying Pepcor

WHOA! This is big. No, this is huge. Two listed companies and another "Titan" of South African business involved in both legs have announced this morning that Steinhoff will be acquiring Brait's 37.06 percent interest in Pepkor for 15 billion Rand in cash (now you know why they raised the money - 18.2 billion Rand in August) and the issuance of 200 million Steinhoff shares at 57 Rand a piece, total consideration of 26.4 billion Rand. Not so long ago Anchor Capital valued the stake at 28.066 billion Rand, Brait seemingly sold at a discount. It does not stop there for Steinhoff, they acquire Titan Premier Investments Proprietary Limited's shares in Pepkor, which represents 52.47 percent of the company, which will be bought for 609.1 billion ordinary Steinhoff shares. And then Steinhoff will buy 2.81 percent from Pepkor management to own 92.34 percent of Pepkor. The balance will be held by Pepkor management (they obviously wanted to cash in some chips). This values Pepkor (enterprise value) at 73.382 billion Rand.

Dr. Christo Wiese effectively through this transaction will have 19.9 percent of the shares in Steinhoff. Note how he (Wiese) through his companies, Titan and Thibault - controlled by the family trust, took shares, no cash. The Brait NAV rockets northwards (through the Steinhoff holdings and cash) to 61.35 ZAR, currently trading in the market at 72 Rand, down 18.59 percent on the day at that level. Huh? The Steinhoff discount, I guess, Steinhoff trades on a 12 multiple (historic) currently, way below the rest of the market. Keep that in the back of you mind for when we explain, why Christo Wiese would have done this.

According to the last annual report from Brait (pay attention here), their anchor investment in Pepkor was valued on 4 July 2011 at 4.1 billion Rand. An effective 6 bagger in just over four years, seems good, not so? They reckoned (Brait) that their 8 time EV/EBITDA multiple (enterprise value divided by earnings before interest, taxes, depreciation, and amortization) was a 31 percent discount to their peer group, consisting of Mr. Price, Truworths and The Foschini Group. Pepkor was 60 percent of the Brait NAV as at 31 March 2014. Pages 14 through to 17 in the last annual report.

Pepkor is of course Ackermans, PEP itself, Shoe City, JayJays, John Craig, Dunns, Flash (nope, never heard of it, yet it is in South Africa!), Power Sales, Best & Less, Harris Scarfe and PEPCO. PEPCO is in Eastern Europe (9 percent of group sales, mostly Poland) whilst Best & Less and Harris Scarfe down under account for 23 percent of group revenue. The rest is Africa, mostly South Africa. 38.2 billion Rand worth of sales. In their peer group, Mr. Price had half year sales of 7.9 billion (market cap of 61 billion Rand), Truworths 10.8 billion Rand for the full year (market cap of 30.763 billion Rand) and The Foschini Group recorded half year turnover of 7.3 billion Rand (market cap of 29.962 billion Rand). Obviously the margins at Pepkor are lower, a bit of perspective however is required in terms of retail sales, Pepkor is a monster relative to these listed businesses.

Dates? Brait shareholders vote on the 27th of January. If that is successful (results immediately), then I guess Steinhoff shareholders will vote, no dates yet, an indication that we will know closer to the middle of December.

Who scores if the deal is sealed by all concerned, the takeover regulation panel, the JSE and the shareholders all give the thumbs up? Who scores? First and foremost, Christo Wiese (the good Dr.) externalises a large portion of his local wealth, if you think about it, prior to the Steinhoff intended acquisition (as per the Steinhoff release): "the proportion of revenues and operating profits that Steinhoff generated from its non-South African operations were 74% and 90%, respectively." He is willing to give up the premium in Brait for the increased Steinhoff stake. And if you were not convinced, Wiese has worked hard to see the Invicta (a business he owns a lot of) spread their wings offshore. Of course along with the Invicta management, just a side note.

If the Frankfurt listing goes ahead, the investment in an African and European emerging markets retailer, which has a strong foothold in developed Europe would be appealing for German investors and the broader asset management community there. Steinhoff shareholders would be winners, that means Wiese, Bruno Steinhoff, Klaus Daun, Markus Jooste and others would see a PE expansion lift their personal wealth. What I am trying to say is that when the listing goes ahead in Frankfurt, there should be a slightly higher valuation (I think) given to Steinhoff in Germany. Good for Brait? Certainly not in the short term, absolutely caned. Obliterated.

I guess the Brait shareholders are telling you that they do not want their Pepkor shareholding to be a part proxy for Steinhoff, they can buy Steinhoff in the market. Plus, lots of cash and not the big premium. We will see how they vote, and by they, I mean Brait shareholders. 7 shareholders of Brait (Directors) own 35.12 percent of the shares in issue. The GEPF hold 11.68 percent. I think that this will pass on their side. We wait, this is interesting.