My relationship with the team at Vestact goes back to the niche fund management firm’s founding well over a decade back. What was then my business, Moneyweb, was a founding shareholder and Vestact a sub-tenant in our President Place offices. Sasha Naryskine was founder Paul Theron’s sidekick from the outset and together they have built their business on strong research, excellent communication and forthright opinion. In this blog, Sasha unpacks Steinhoff’s offer to the minority of JD Group. It emphasises Nassim Taleb’s view that in business (and life) luck plays a huge role. It’s hard to believe that just seven years ago, asset managers blocked a similar deal – one in which Steinhoff shareholders would have paid a multiple of what it will now cost. – AHĀ
By Sasha Naryskine*
JD Group and Steinhoff pounced a statement in the closing auction last weekin which parent company and significant shareholder, Steinhoff want to offer JD shareholders 1 Steinhoff share per 1.9 shares that they currently hold. It is an all scrip tender offer.
Steinhoff currently owns 56.4 percent of the business, Piet Viljoen and his deep value crowd, Regarding Capital Management own 7.1 percent, whilst the Government Employees Pension Fund own 6.2 percent, the PIC 5.6 percent and Investec owns 5.5 percent. This is important, so I will get back to it later.
But because Steinhoff is going to use its elevated share price, the timing is good. The equivalent share price offer for JD (R27.77) is a 38% premium to its 5 day VWAP (volume weighted price) of R20.11. The swap is based on a Steinhoff share price of R52.77, also where a five day VWAP was used.
Of the 229 338 322 JD shares in issue, Steinhoff do not own 129 346 813 shares. So those shares, including the aforementioned shareholders (who own 24.4 percent collectively) would get 68 077 270 Steinhoff shares. Which, at R52.77 a share, is worth R3.6bn. At Steinhoff’s R53.45, the market cap of Steinhoff is R110.9bn. Which means that this offer to the minorities (the full 100, they are after only 98 percent – huh?) is worth only 3.23 percent of the Steinhoff market cap. So it is relatively small in the bigger scheme of Markus Jooste, the Steinhoff CEO. But well timed.
If this deal had been done a long time ago, say at the end of 2012, the price would have been a lot more. Steinhoff closed at around R27.43 at the end of 2012, JD Group closed at R45.00. A 38% premium to JD Group’s price would have been around R62.10. But back then Steinhoff market cap was R56.9bn. JD Group at R45 Rand at the end of 2012 had a market cap of R10.3bn. A 38% premium would have valued the whole business at R14.2bn, the shares that Steinhoff did not own would have been a theoretical R8bn.
For a similar offer Steinhoff would have to have to shell out around 292 million shares, or roughly 14.1 percent of its market cap. You would have got roughly 1.27 Steinhoff shares for every JD Group share.
And that means two things. One, Steinhoff would not have got the significant discount it is getting now (much less dilutive for shareholders) but more importantly,Ā what do JD shareholders feel now?Ā If the deep value crowd, and I am thinking specifically of Regarding Capital Management, is this premium enough to entice them to swap their shares for Steinhoff shares?
Steinhoff is not expensive and perhaps the attractive European assets are likely to attract the rest of the shareholders to tender their shares at the premium. But the other option for the existing shareholders, provided that they have enough patience is to follow their rights (JD have announced that already) and to continue to stay in the shares. That remains to be seen, I am pretty sure that Steinhoff would have been chatting hard to these people, their other shareholders.
Steinhoff could also recapitalise the business with cheaper funding with an inter-company loan. Either way, this is again good timing from Steinhoff. Using your inflated share price (in fairness Steinhoff only trades on a 12.2 multiple forward) to acquire a company that is for all intents and purposes at the bottom of a credit cycle, all beat up and vulnerable. These guys, Steinhoff that is, never ever sit still and are smart. Timing in life is almost everything, which means that they are definitely taking what they think is a good opportunity.
But it could have been so, so different.Ā Because if this deal had been done the very first time Steinhoff approached JD, way back in March of 2007 (seven years is a long time), JD Group shareholders would have got 3.6 Steinhoff shares for each and every JD Group that they owned. Back then, if this deal had been done, it would have boosted Steinhoff’s NAV by 52.2 percent. JD Group was trading near 90 ZAR a share. Sometimes it is good to fail, but most of the time it is better to be lucky on the timing. In this case it was great for Steinhoff to have been thwarted by asset managers back then.
* Sasha Naryskine is a director at Vestact.Ā He is the regular Monday market commentator on CNBC Africa’s Power Lunch.
