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JD Group Stock Drops After Steinhoff Agrees to Asset, Stake Swap

JD Group Ltd., a South African furniture retailer, fell the most in nine months in Johannesburg trading after agreeing to buy two divisions from Steinhoff International Holdings Ltd. while selling it a 26 percent stake.

JD declined as much as 7.2 percent to 42.94 rand, the biggest intraday drop since June 4, and was down 4.5 percent as of 2:55 p.m. The stock has dropped 24 percent this year, valuing the company at 7.54 billion rand ($1.1 billion).

The company plans to buy the furniture manufacturer’s Unitrans Motor Enterprises (Pty) Ltd. vehicle dealer unit and the Steinhoff Doors & Building Materials (Pty) Ltd. construction-supply business also called Steinbuild, the Johannesburg-based companies said today in separate statements. JD will in turn sell its stake in Abra, a Polish furniture retailer, to a Steinhoff associate.

JD is “going to be more competitive in the furniture retail market,” and will be able to expand its financial-services business, said Rob Forsyth, an analyst at Investec Asset Management in Cape Town. At the same time, some investors may think JD is paying more for Unitrans than is justified by the car dealer’s earnings.

Steinhoff, Africa’s largest furniture maker, regards JD as a “perfect platform through which Steinhoff will grow and expand its own retail exposure in Africa,” the manufacturer said in its statement. “The JD Group’s retail businesses are expected to benefit from Steinhoff’s expertise in global household goods retailing, and sourcing.”

JD expects to pay 3 billion rand for Unitrans, excluding its cash and debt, through the issue of 60.7 million of its shares at 50 rand each. JD will pay about 169 million rand for the building-supply unit, which owns the Timbercity, Tilehouse and Pennypinchers chains, to be settled through the issue of 3.38 million shares at 50 rand each.

Acquisition in Poland

Steinhoff will pay about 134 million rand for Abra, excluding its cash and debt. The cost will be offset by reducing the number of shares JD issues for the two Steinhoff units.

The final number of shares issued to Steinhoff will be based on Unitrans’s probable “warranted” profit of 263.7 million rand for the year ending June 30, the asset value of Unitrans and Steinbuild on that date, and Abra’s profit for the year ending Aug. 31, JD said. The transaction requires approval from regulators and JD’s shareholders.

Steinhoff will be left with a “business which is much more focused on furniture,” Investec’s Forsyth said. “They had ambitions over time to provide some kind of retail exposure to South Africa and Africa. This fast-tracks that exposure,” and “in the longer term, it is a reasonably good idea.”

Steinhoff stock fell as much as 1.7 percent to 23.63 rand and was down 0.3 percent, giving the manufacturer a market value of 36.8 billion rand.

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