Steinhoff, Shoprite Tumble as Deal Leaves Investors in the Dark

  • Shareholders ‘can’t actually work out what the transaction is’
  • Money manager says proposal has ‘no strategic rationale’

Steinhoff International Holdings NV and Shoprite Holdings Ltd. said they’re in talks to combine their African retail businesses in a deal that left some investors complaining about its complexity and a shortage of details.

Under the two-pronged proposal brokered by billionaire Christo Wiese, Shoprite would acquire Steinhoff’s African retail operations in return for new shares, giving the latter a “significant equity interest” and possible control of the enlarged business, the companies said Wednesday. Some shareholders said they don’t understand the transaction -- Wiese himself called it “complex” -- sending shares of both retailers tumbling.

“It’s poor that shareholders can’t actually work out now what the transaction is,” said Evan Walker, a money manager at 360ne Asset Management, which holds shares in both companies. “I think it’s also immensely poor that Steinhoff had its results a week ago and they didn’t announce it at the results. And there’s no strategic rationale for the deal.”

Steinhoff shares slid as much as 8.1 percent in Frankfurt, where the company moved its main listing last year. Shoprite fell 7.2 percent at the close of trading in Johannesburg.

“We’re not surprised by the market’s distaste,” said Anthony Sedgwick, co-founder of Cape Town-based Abax Investments (Pty) Ltd., which has the equivalent of $6 billion under management. “We see pros and cons, but given our confidence in Steinhoff management we are prepared to give them the benefit of the doubt for now.”

Dealmaking Spree

In a phone interview, Wiese acknowledged the complexity of the deal and said there were “various ways this could have been put together,” without providing specifics.

A union with Shoprite would continue a dealmaking spree that’s taken Steinhoff across the U.K., Europe and the U.S. Talks between the companies were initiated and facilitated by their two biggest shareholders -- Wiese and South Africa’s Public Investment Corp., which manages state pensions, the retailers said. Wiese, South Africa’s third-richest person with a net worth of $6.3 billion, owns about 16 percent of Shoprite and 18 percent of Steinhoff.

“This is Christo Wiese looking to organize assets, and having Shoprite and Steinhoff assets in one entity in Africa is a plus,” said Sasha Naryshkine, an analyst at Johannesburg-based money manager Vestact Ltd.

Retail Africa

The combined businesses would be called Retail Africa, and would bring together Steinhoff-owned chains such as Pep and Ackermans with Shoprite and Checkers supermarkets. Retail Africa would have annual revenue of about 200 billion rand ($14.6 billion), more than double that of No.2 grocery chain Pick n Pay Stores Ltd. Earnings before interest, tax, depreciation and amortization would be about 15 billion rand.

Steinhoff, whose recent takeovers include U.K. discount chain Poundland and U.S. retailer Mattress Firm Holding Corp., has agreed in principle to acquire the stakes in Shoprite held by PIC and a company controlled by Wiese’s family trust. That would be done through a share exchange, the companies said.

“The way the transaction seems to be structured would potentially give Steinhoff control of Shoprite without it paying a takeover premium for the company,” said Charles Allen, an analyst at Bloomberg Intelligence.

It’s likely that Steinhoff will be required to make an offer to buy out minority shareholders under South African securities regulations, Graham Renwick, an analyst at Exane BNP Paribas, said in a note. The companies still need to answer key questions regarding the valuation of Steinhoff’s African assets and the enlarged Retail Africa business, he said.

The announcement comes just a month after Shoprite’s founder and longtime CEO, Whitey Basson, said he would retire, leading Wiese to say the retailer was at a “crossroads.”

The proposed transaction “will likely raise some eyebrows,” Exane’s Renwick said. “The ultimate entity could see the African and European valuations crystallized, and a simpler business emerge. However, there are clearly some headwinds and noise to navigate before that comes to be the case.”

— With assistance by Loni Prinsloo, Colin McClelland, and Janice Kew

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