Cape Town – A tie up between Shoprite [JSE:SHP] and Steinhoff does not make sense in terms of shareholder value, according to retail analyst Evan Walker of 36One.
Analysts said that the announcement on Monday that Shoprite CEO Whitey Basson would retire at the end of 2016 meant a merger was becoming more likely.
Christo Wiese, who is the chairperson and largest shareholder of both Shoprite (16%) and Steinhoff (18%), told Business Day on Monday that “there had been talk of a tie-up between the two retailers since 2006”.
"Such a deal would involve giving shareholders all the options you can," Wiese told the paper, adding that a tie-up with Steinhoff would give Shoprite an international balance sheet.
He also told Reuters in September that it would be a "natural development" for the merger to occur.
READ: Retiring Shoprite CEO Whitey Basson: ‘I am tired’
Walker said he was surprised that Wiese was so vocal on his intention to merge the companies, saying that while this was beneficial to Shoprite’s share price, it was also detrimental to Steinhoff’s share price.
“He has substantially more wealth in Steinhoff, so I don’t understand why he is saying these things,” Walker said. “It is hurting the share price.”
The share price of Steinhoff, which listed on the Frankfurt Stock Exchange in December 2015, has reduced from €6.138 (R91.18) a share on 18 August to €4.86 (R72.30) at close on October 31. Shoprite’s share price has soared from R126.11 on 20 January 2016 to R199 on 31 October.
READ: Meet the man who will fill Whitey Basson's shoes
Walker said talk of a merger will keep the Steinhoff share suppressed as shareholders will expect the firm to start raising capital for the merger.
“He takes a 10-year view and doesn’t care about the immediate term,” said Walker. “Shareholders do care and we do worry about that, because we have a longer-term and nearer-term view.”
The merger would unite Wiese's retail assets after Steinhoff's R82.8bn acquisition in 2014 of clothing retailer Pepkor from Brait – another firm where Wiese is the top shareholder - and create a global retail giant worth at least R400bn, according to Reuters.
“Steinhoff’s acquisition of Pepkor 18 months ago gave them scale in value,” said Walker. “They over paid for that transaction and we still have to see if that transaction pays off. It hasn’t been an earning enhancement yet and the jury is still out if it will become one.”
With talk of a Shoprite merger, Walker said he doesn’t see what the rationale would be for shareholders.
“Steinhoff have made some big first-world acquisitions,” he said. “Their strategy has been to move fast in first-world economies. It might not be a bad thing to balance the portfolio with an emerging market, but I am not sure what the ultimate shareholder base would look for. I am struggling to see the strategic rational to buy Shoprite, a food business in Africa.”
READ: Whitey Basson to retire as Shoprite CEO
Walker said there could be better ways of aligning Wiese’s interests. “I understand that Christo wants his assets housed under one roof,” he said.
“Perhaps Steinhoff could keep the Shoprite listing and then gain control of that and run it through the Steinhoff operation,” he said. “They could acquire a 51% stake in Shoprite and have an economic and voting interest in Shoprite. But that’s not really their style, although they did it in the case of Kap.”
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