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Port Elizabeth - The announcement that international furniture manufacturer Steinhoff [JSE:SHF] will try to increase its interest in the troubled JD Group [JSE:JDG] from the current 56% to close to 100%should not have come as a surprise to shareholders of either Steinhoff or JD Group.
That Steinhoff might buy out minority shareholders has been expected since it increased its shareholding in JD Group two years ago, and since JD Group asked Steinhoff a few weeks ago to underwrite a rights offer.
Steinhoff currently owns 56.8% of JD Group. It picked up a large stake when it acquired additional shares from minority shareholders in March 2012 when it exchanged some of its shares in the listed Kap Industrial Holdings [JSE:KAP] for JD Group shares. This transaction increased its interest from around 37% to 50.1%.
Since then, Steinhoff picked up more JD Group shares in deals that were too small to acquire shareholder approval or general announcements.
JD Group approached Steinhoff a few weeks ago with a request to underwrite a rights offer of up to R1.5bn. Steinhoff would probably have ended up with more JD Group shares if the plan to issue more shares would have gone ahead, depending on how many JD Group shareholders would have declined to invest more into the loss-making JD Group.
JD Group announced a loss of R135m in the 6 months to December 2013 compared with a profit of R504m in the same period a year ago, when performance was already seen as unsatisfactory.
The main cause of the latest loss was an increase of more than R1.1bn in provisions for bad debt from consumers who bought furniture and electronic goods on credit.
The new offer by Steinhoff to acquire up to 98% of shareholders’ JD Group shares in exchange for shares in the fast-growing and profitable Steinhoff seems to be to the benefit of JD Group shareholders.
Steinhoff is offering to acquire JD Group shares in a ratio of 1 Steinhoff share for every 1.9 JD Group shares, which is equivalent to R27.77 per JD Group (calculated at the average prices of Steinhoff and JD Group shares over the last few weeks).
This is a premium of more than 38% to the JD Group share price during the few days before the transaction was mooted. If the transaction goes ahead, Steinhoff can easily meet JD Group’s financing requirements from its cash reserves of R10bn.
In contrast, JD Group would have had to price a rights issue very low to make it attractive enough for shareholders to invest more capital. Alternatively, Steinhoff would have picked up shares cheaper in their role as underwriter.
It is thus not surprising that institutional and larger individual shareholders have already given support to the deal. JD shares jumped from R20 per share to R28 when the proposal was announced.
Steinhoff mentions in the offer document that JD Group is facing many challenges in its furniture retail and consumer finance businesses. “These challenges will take some time and additional capital to overcome. The increase of Steinhoff’s investment in JD Group will enhance Steinhoff’s ability to support the operations of JD Group.”
The additional benefit to JD Group shareholders are that they get to invest in Steinhoff at a discount if one consider the relative share prices before the proposal was announced. Steinhoff is the second largest furniture retailer in Europe. It is growing at a fast rate and offers investors international exposure, as well as greater liquidity when trading shares.
Steinhoff management declined to comment on their plans to fix JD Group, or explain why they are offering to acquire only 98% of JD Group and not the full 100% of the shares.
A likely explanation is that Steinhoff wants to keep enough shareholders on board to maintain JD Group's listing on the JSE. It can then move the JD Group businesses out of the listed entity to use it to list Steinhoff's property portfolio, which has grown to a multi-billion rand business of property development and investing.
One of Steinhoff's executive directors did mention a listing of the property arm at a cocktail party a few years ago...
That Steinhoff might buy out minority shareholders has been expected since it increased its shareholding in JD Group two years ago, and since JD Group asked Steinhoff a few weeks ago to underwrite a rights offer.
Steinhoff currently owns 56.8% of JD Group. It picked up a large stake when it acquired additional shares from minority shareholders in March 2012 when it exchanged some of its shares in the listed Kap Industrial Holdings [JSE:KAP] for JD Group shares. This transaction increased its interest from around 37% to 50.1%.
Since then, Steinhoff picked up more JD Group shares in deals that were too small to acquire shareholder approval or general announcements.
JD Group approached Steinhoff a few weeks ago with a request to underwrite a rights offer of up to R1.5bn. Steinhoff would probably have ended up with more JD Group shares if the plan to issue more shares would have gone ahead, depending on how many JD Group shareholders would have declined to invest more into the loss-making JD Group.
JD Group announced a loss of R135m in the 6 months to December 2013 compared with a profit of R504m in the same period a year ago, when performance was already seen as unsatisfactory.
The main cause of the latest loss was an increase of more than R1.1bn in provisions for bad debt from consumers who bought furniture and electronic goods on credit.
The new offer by Steinhoff to acquire up to 98% of shareholders’ JD Group shares in exchange for shares in the fast-growing and profitable Steinhoff seems to be to the benefit of JD Group shareholders.
Steinhoff is offering to acquire JD Group shares in a ratio of 1 Steinhoff share for every 1.9 JD Group shares, which is equivalent to R27.77 per JD Group (calculated at the average prices of Steinhoff and JD Group shares over the last few weeks).
This is a premium of more than 38% to the JD Group share price during the few days before the transaction was mooted. If the transaction goes ahead, Steinhoff can easily meet JD Group’s financing requirements from its cash reserves of R10bn.
In contrast, JD Group would have had to price a rights issue very low to make it attractive enough for shareholders to invest more capital. Alternatively, Steinhoff would have picked up shares cheaper in their role as underwriter.
It is thus not surprising that institutional and larger individual shareholders have already given support to the deal. JD shares jumped from R20 per share to R28 when the proposal was announced.
Steinhoff mentions in the offer document that JD Group is facing many challenges in its furniture retail and consumer finance businesses. “These challenges will take some time and additional capital to overcome. The increase of Steinhoff’s investment in JD Group will enhance Steinhoff’s ability to support the operations of JD Group.”
The additional benefit to JD Group shareholders are that they get to invest in Steinhoff at a discount if one consider the relative share prices before the proposal was announced. Steinhoff is the second largest furniture retailer in Europe. It is growing at a fast rate and offers investors international exposure, as well as greater liquidity when trading shares.
Steinhoff management declined to comment on their plans to fix JD Group, or explain why they are offering to acquire only 98% of JD Group and not the full 100% of the shares.
A likely explanation is that Steinhoff wants to keep enough shareholders on board to maintain JD Group's listing on the JSE. It can then move the JD Group businesses out of the listed entity to use it to list Steinhoff's property portfolio, which has grown to a multi-billion rand business of property development and investing.
One of Steinhoff's executive directors did mention a listing of the property arm at a cocktail party a few years ago...
