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Steinhoff should saddle up and rescue UK chain BHS

Apr 28 2016 19:15
Andrea Felsted and Chris Hughes


Company Data

Steinhoff International Holdings NV [JSE:SNH]

Last traded 1
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Cumulative volume 3225016
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Last Updated: 01/01/0001 at 12:00. Prices are delayed by 15 minutes. Source: McGregor BFA

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London - In quick succession, Steinhoff [JSE:SHF] has turned its back first on Home Retail Group and now Darty.

The retailer should waste no more time barging into other peoples' bids. It should buy BHS instead.

The 88-year-old British retailer - sold for a pound by Philip Green just over a year ago - is in administration. Nobody wanted to rescue it before its collapse. People close to Steinhoff cast an eye over BHS when it was still owned by Green but didn't bite. It should now.

BHS had sales of £668m in the year to August 30 2014 - the last publicly available accounts - and made a post-tax loss of £70m. Trading is unlikely to have got much better since, given the dire conditions on the UK high street, although sales have picked up since the collapse on Monday, amid an outpouring of nostalgia for a previously overlooked brand.

So Steinhoff won't have to pay that much. It's also unlikely it would be saddled with BHS's pension liabilities. These are likely to end up with Britain's pensions lifeboat, the Pension Protection Fund.

There might be competition for some stores - from the likes of Mike Ashley's Sports Direct and value retailers such as Dunelm and B&M. But in contrast to the Home Retail and Darty situations, there's unlikely to be much competition for the whole of BHS.

If Steinhoff wants to pursue its aim of being a budget retailer for the masses - think a European Walmart - then adding BHS makes sense. The 164 stores would give it a presence on high streets and retail parks across the UK.

The chain is also well known for its homewares, potentially creating synergies with Steinhoff's UK retail businesses Harveys furniture and Bensons for Beds. Green himself looked at adding beds chain Dreams to BHS in 2013, when he still owned the department store.

Christo Wiese, the South African entrepreneur who's Steinhoff's biggest shareholder, also backs Pep & Co, a value fashion retailer, potentially bolstering its buying power in clothing.

The problem is space. Pep & Co has already opened about 50 units on provincial high streets. BHS's stores are large, although some of their space is occupied by Green's other Arcadia brands such as Wallis and Dorothy Perkins. Some BHS stores are also paying high rents agreed many years ago and face long leases. Exiting these will be costly.

Then there are the losses. BHS has not made a profit for years. The stores are tired and in need of significant investment. That doesn't come cheap. Nor does expanding BHS's online presence, something that was already on the current management's to-do list.

But Steinhoff was prepared to pay £1.4bn for Argos, or £1.1bn after taking Home Retail's £300m of cash into account. Before synergies, that would have given it profit after tax of about £60m, a 5.5% return.

Generating £60m of profit from BHS looks like a tall task at the moment. But it's hard to see that acquiring and turning round the chain - which may be pension free and rid of funding constraints - would cost more than Steinhoff was prepared to put into Argos.

This is one time when barging in would be welcome. Time to saddle up.

* This column was published on Gadfly and does not necessarily reflect the opinion of Bloomberg LP and its owners.



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