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By Stephen Friesenecker and Arun Varughese*
Over the years, investors have had an opportunity to invest in retail giant Pepkor, directly or indirectly, in many different guises on the JSE. The latest transaction is the September listing of Steinhoff Africa Retail Limited, or STAR, a new holding company which is a consolidation of Steinhoff International’s African retail businesses, including Pepkor.
The recent listing of STAR gives investors direct access to these sought-after retail assets for the first time since Pepkor’s delisting in 2004.
Pepkor, which began as Pep Stores, was founded in 1965 with a single store in Upington in the Northern Cape, and listed on the JSE in 1972. Over the next three decades, the company would grow its retail offering in South Africa considerably by acquiring interests in inter alia Shoprite, Ackermans, Cashbuild, Checkers and Stuttafords. The group also expanded internationally into the United Kingdom and Australia.
In 2000, to sharpen the group’s focus on cash clothing discount retail, Pepkor sold or unbundled its other retail interests, retaining only its interests in apparel retailers Pep, Ackermans and Best & Less (Australia).
In 2004, Brait, Old Mutual and Christo Wiese led the buy-out and delisting of Pepkor, with a R2.5 billion offer to shareholders. Thereafter, public investors could only achieve indirect exposure to Pepkor by holding shares in the listed private equity manager, Brait, and earning the associated management and performance fees.
STAR price of R20.50 means PE= 21.5x. Not cheap but I've been waiting for direct entry into Pep since Brait sold it to Steinhoff in 2014.
— Karin Richards (@Richards_Karin) September 15, 2017
In 2011, Brait re-invented itself and restructured its business model from a private equity manager to a direct investment holding company. As part of the restructure, Brait raised R5.9 billion to acquire a significant stake in Pepkor and Premier Foods. The restructure allowed Brait to hold on to these assets for a longer time frame and continue to drive value beyond the typical private equity investment period. Over the next three years, Brait’s share price quadrupled from R22.00 to R88.00.
Ownership of Pepkor changed hands again in March 2015, when Steinhoff International bought 92% of Pepkor, from Brait, Christo Wiese and Pepkor management, in a R62.8 billion deal. The transaction broadened the furniture retailer’s product offering, giving it exposure to the fast-growing African apparel market and strengthening its position within the discount retail market segment.
STAR, the latest chapter in Pepkor’s story, is a diversified, multi-format retailer of significant size and scale, which has the largest retail footprint in Africa with over 4,800 stores in over 12 African countries.
STAR aims to provide consumers with both convenience and a vast range of everyday products at affordable prices. It owns well-known household brands such as Pep, Ackermans, Bradlows, Hifi Corp, Tekkie Town and Timbercity allowing the group to provide key products and services across essential consumer offerings such as clothing, DIY, footwear and furniture. Furthermore, the option to acquire a controlling stake in Shoprite Holdings will allow STAR the opportunity to enter the food and grocery retail market.
As Steinhoff International continued to expand in developed markets, STAR retained its distinct strategic and geographic focus. Management and the board of directors of Steinhoff International believed that the intrinsic value of the African retail businesses was not fully reflected in the Steinhoff International share price.
The separate listing allows STAR to plot its own course and focus entirely on becoming an African retail champion that can compete on a global scale. It provides a platform for capital raising and allows an independent valuation of the African operations, thereby unlocking value for Steinhoff International shareholders.
The formation of the group was undertaken in a relatively short time frame from the initial inception of the idea to its eventual listing. A number of unique structural and regulatory complexities associated with the transaction needed to be resolved in an innovative and efficient manner, in order to allow the listing to proceed unhindered and within time constraints.
On 4 September, STAR launched an offer for up to 800 million shares at an initial price range of R18.00 – R23.00 per share, to raise between R14.4 billion and R18.4 billion for Steinhoff International. This was the largest ever South African IPO by a significant margin – an ambitious undertaking given the very tough macro-economic climate and ongoing political uncertainty in South Africa.
The offer was anchored by a R6.2 billion order from Lancaster 101, a black-owned company which received preferential allocation as part of the company’s commitment to the development and support of South Africa’s Black Economic Empowerment initiatives.
Steinhoff says its unit Star has raised R15.4bn via private placement which was 4.8 times oversubscribed. That's a lot of cash raised
— Sure Kamhunga (@sure_kamhunga) October 2, 2017
The listing proved to be extremely well-received by investors. On 14 September, following a multi-city international management roadshow, STAR successfully concluded its capital raising. The deal was priced at R20.50 (being the midpoint of the initial price range) to raise R16.4 billion. The bookbuild offer was multiple times oversubscribed with very high quality institutional investors, underpinned by strong demand from South African investors.
On 20 September STAR listed on the JSE. The strong demand for the shares has continued in the aftermarket, with the share price rising to R23.90 (on 9 October), valuing the company at over R82 billion.
The success of the transaction is testament to the high quality of the businesses which have made STAR a must-own African retail story.
- Friesenecker and Varughese are transactors in Rand Merchant Bank’s Corporate Finance division.