African Bank in Ellerines Partnership Talks to Stem Losses

African Bank Investments Ltd., South Africa’s largest provider of unsecured loans, said it’s in partnership talks for its Ellerine Holdings Ltd. furniture unit as part of a three-year turnaround plan for the bank.

Part of the bank’s strategy “is fixing Ellerines and getting it onto a footing where we are able to conclude an appropriate, strategic relationship with a new retailer,” Chief Executive Officer Leon Kirkinis said in an interview yesterday in Johannesburg, without identifying the potential partner. “Access to Ellerines gives us one of the biggest distribution footprints in the country. We want to hang on to that.”

Abil, as the bank is known, took a 4.6 billion-rand ($407 million) impairment on the unprofitable Ellerines in October and risks another 800 million-rand writedown this year, Chief Financial Officer Nithia Nalliah said in November, adding that a trade buyer with retail expertise may be best suited to run the business.

Losses and a slumping share price prompted Abil to undertake a 5.5 billion-rand rights issue to maintain capital levels. Goldman Sachs Group Inc. managed the rights offer.

“It’s about repositioning Ellerines within a big framework that provides the opportunity to bring our skills to a much bigger retail group,” Kirkinis said. “We’re still in high-level discussions.”

‘Elegant Solution’

A partnership “may be an elegant solution,” Patrice Rassou, head of equities at Sanlam Investment Management in Cape Town, said in an e-mailed response to questions today. “I’m not sure who would want to pay for Ellerines stores.”

Abil’s three-year plan also involves using capital from the rights issue, proactively working with regulators, training branch staff, strengthening its collections unit and pursuing innovative ideas to improve products, Kirkinis said.

Successfully following this plan will boost its return on equity to more than 20 percent by 2017, he said. That compares with 2.9 percent for the fiscal year through September.

A turnaround “should be possible,” Neville Chester, senior portfolio manager at Coronation Fund Managers Ltd., said in an e-mailed response to questions today. “Abil is a significant player in the industry where credit demand remains high. Market participants are behaving more rationally now that the consumer credit bubble has burst, which should result in a return to profitability for the responsible market players.”

Retail Options

The bank previously said it had reviewed Ellerines with the aim of selling it to a retail group. It had received no offers for the business by mid-November, though some private-equity firms had shown interest, Nalliah said.

South Africa’s largest retailers include Steinhoff International Holdings Ltd., Mr Price Group Ltd. and Shoprite Holdings Ltd.

“Shoprite has a cash furniture business, it’s a definite option” as a partner for Ellerines, Mark Hodgson, a Cape Town-based analyst at Avior Research Ltd., said by phone. A tie-up with Steinhoff, which already owns furniture retailer JD Group Ltd., is “unlikely” because it may be considered anti-competitive, he said.

Shoprite, the country’s biggest retailer, declined to comment when contacted by Bloomberg.

Abil fell 4.3 percent to 10.15 rand in Johannesburg, its lowest in more than nine years, after earlier climbing as much as 4.7 percent. The stock has declined almost 16 percent this month, making it the third-worst performer on the 165-company FTSE/JSE Africa All Share Index.

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