Cy Jacobs joins Piet Viljoen - calls time on Mr Price’s R9.7bn German gamble

Key topics:Piet Viljoen & Cy Jacobs urge board to reject NKD acquisitionConcerns over NKD’s losses, weak cash flow and absent audited numbersMarket backlash and calls for Mr Price to preserve an exit optionSign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..BizNews Reporter.There are few things the market hates more than uncertainty. But if there is one thing that terrifies South African investors even more, it is a local retailer announcing a "transformative" acquisition in a developed market. In the past 24 hours, two of the country’s best money managers have come out strongly to urge Mr Price’s chairman, Nigel Payne and his board of directors to reject the proposal to acquire German retailer NKD. Piet Viljoen, founder of Re: CM and portfolio manager of the Merchant West Value Fund, explained his concerns in a deep dive interview with BizNews editor Alec Hogg (click here). Equally independently minded Jacobs, co-founder of 36ONE asset management posted a letter on X that he sent to Payne.We have seen this movie before. We saw it with Woolworths and David Jones. We saw it with Truworths and Office. And now, we are watching the opening scenes of the same horror flick with Mr Price and its R9.66bn purchase of German retailer NKD.The market’s verdict has been swift and brutal. Mr Price’s share price has shed nearly 18% in two days, wiping billions off its market cap. But the real story isn't just the price action; it’s the rebellion brewing in the boardroom.I’ve known Piet and Cy for years—neither shouts from the rooftops without doing their homework. So when Jacobs fires off a letter to a company chairman, you sit up and pay attention. The letter is a devastating critique of what appears to be a reckless gamble.The Red FlagsIn the letter, Jacobs doesn't mince words. He registers "serious concerns" about the acquisition, a deal he argues bears all the hallmarks of the corporate disasters of yesteryear: it is large relative to Mr Price’s own size, it is being funded with debt, and it involves a target with a patchy financial history.36ONE’s forensic analysis of NKD’s numbers paints a concerning picture. According to Jacobs, the German retailer reported negative after-tax profits for four consecutive years from 2020 to 2023. Even more alarming is the cash flow—or lack thereof. In 2023, NKD reportedly generated zero free cash flow after capital expenditure."In our view, NKD's cash profitability is marginal," Jacobs writes.This stands in stark contrast to the bullish narrative spun by Mr Price CEO Mark Blair, who told analysts that NKD is "very cash generative" and that the debt taken on to fund the deal could be paid down quickly. Who are we to believe? Is the CEO trying to sell the agreement, or the asset manager with a track record of identifying weaknesses?.Déjà Vu All Over AgainFor those with long memories, the parallels are chilling. When Ian Moir bought David Jones for Woolworths, it was marketed as a Southern Hemisphere retail giant. It ended in tears and massive write-downs. When Truworths bought Office, it was a gateway to Europe. That too became an albatross.South African retailers have a distinct competitive advantage at home—they know their customers, master the supply chain, and navigate a complex emerging market better than anyone. But that "SA Magic" rarely travels well to the high streets of Frankfurt or London.Jacobs points out a pattern in NKD’s financials that should keep shareholders awake at night: "multi-year losses followed by a sharp profit improvement on relatively slow topline growth, with limited visibility on the underlying drivers." In plain English? The recent numbers look too good to be true, and we don’t know why. The subtext: it looks suspiciously like this is a business being prepared for sale to an inexperienced acquirer? Steinhoff’s accounting fraud was provided the veneer of credibility by a German accounting firm. Red flags much….. To make matters worse, there are no publicly available audited financial statements for NKD for 2024 or 2025. We are effectively flying blind, trusting a due diligence process that 36ONE suggests may have been rushed.The "Walk Away" OptionThe most critical part of the 36ONE letter is the demand for an exit strategy. Jacobs is pushing the board for clarity on whether Mr Price is irrevocably committed to this deal or if there is a "break fee" option."As a shareholder, we would like comfort that the board has preserved the ability – and is willing, if necessary – to withdraw from the transaction on economically rational terms rather than feeling compelled to complete it at any cost," he writes.This is the "adult in the room" moment. It is easy for boards to get deal fever, seduced by investment bankers and the allure of a Euro-denominated revenue stream. It takes courage to look at the market reaction, read the analysis from your smartest shareholders, and say, "We made a mistake. Let’s cut our losses."Context MattersMr Price has long been the darling of the JSE retail sector—a cash retailer with high margins and a defensive model that thrives even when the South African consumer is squeezed. This acquisition threatens to undo that reputation overnight. It introduces debt to a historically clean balance sheet and distracts management with a turnaround project 8,000 kilometres away.As we head into the weekend, all eyes will be on Nigel Payne and the Mr Price board. Will they circle the wagons and push this deal through, hoping to prove the doubters wrong in five years? Or will they heed the warnings from Piet Viljoen and Cy Jacobs?For the sake of Mr Price’s shareholders—and the pensioners whose capital they manage— the conservative approach is the latter. In the world of high-stakes corporate poker, sometimes the best hand is the one you fold.

Cy Jacobs joins Piet Viljoen - calls time on Mr Price’s R9.7bn German gamble

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