By Alec Hogg
It’s rare that the termination of a proposed merger triggers an increase in the share prices of both companies. But there was a very good reason for that surprising result when a proposed R100bn deal between Steinhoff and Shoprite was aborted yesterday.
On December 14th, the biggest shareholders of the two groups – entrepreneur Christo Wiese and SA’s state retirement fund custodian the Public Investment Commissioner – dropped something of a bombshell by proposing executives of the companies consider a R100bn merger.
___STEADY_PAYWALL___
Philosophically, the idea was sound. Putting Shoprite’s chains together with Steinhoff’s retail brands (Pep, Russells, Bradlows, Timber City, Tekkie Town, etc) would create a continental champion (Retail Africa) that would employ 186,000 staff, generate R200bn in annual sales and deliver R15bn in pretax profit.
In return for injecting its retailing brands and after a share swap with Wiese and the PIC, Steinhoff would end up as the controlling shareholder of this new giant. And the group would have the heft to meet any challenge in Africa. But what looks good on paper doesn’t always rest well with investors.
On the day of the announcement the share prices of both companies dropped an identical 7.1%. Most times when a major transaction is proposed, Mr Market decides one of the parties would be better off, and demand for the stock duly lifts its share price. Seeing both fall, as happened here, is rare.
With hindsight, it all makes sense. Steinhoff has been transformed into a global business, is primary listed in Frankfurt and has more than three quarters of its revenues in hard currency. Its largely global shareholders are buying into a retailer focusing on the First World with an inherited African interest. The deal would have changed that profile by adding a sizeable emerging market slug.
When negotiations were called off yesterday, the prices of both stocks rallied, reflecting Mr Market’s relief that the deal won’t happen. There should be more upside as Steinhoff’s market capitalisation is still R26bn below where it traded before the deal was proposed; Shoprite’s value is off by R3.5bn.
Steinhoff is in our Biznews SA Champions portfolio, so the proposed transaction – and its abortion – is of more than passing interest for us. I’m happy at the news. For one thing, swapping hard-currency dominated Steinhoff shares for soft-currency based Shoprite at a lower rating makes no sense in the long-term.
For another, it shows once again Steinhoff’s Markus Jooste won’t get caught up in the chase and isn’t afraid to walk away when the numbers don’t stack up. That’s the kind of CEO I’m always happiest trusting with my savings. Such rationality is often in short supply in an increasingly emotional world.
