Steinhoff: Is Jooste SA’s top dealmaker? | Fin24
 
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Steinhoff: Is Jooste SA’s top dealmaker?

Aug 29 2016 12:30
Shaun Harris

A few weeks ago, Steinhoff International sealed a large deal in the US market that will make it the biggest distributor of mattress products in the world. The price tag for US company Mattress Firm? A cool $2.4bn.

That's a big transaction, but market watchers who know the integrated discount retailer will not be surprised. It's just another big deal for the multinational group that specialises in large takeovers, illustrating how Steinhoff has grown so quickly over the past decade and what fuels its profitability.

Last month it was UK and European discount retailer Poundland, which after something of a protracted battle to find a suitable partner/acquisition target, it is buying for £610.4m.

"By offering Poundland shareholders an improved cash offer we aim to bring certainty to the transaction, recognising the strength and value of the business and its management team," Steinhoff CEO Markus Jooste said in a statement at the time. 

Jooste is the man who often spots, oversees and settles the many acquisitions that Steinhoff makes.

That is what has driven the spectacular growth of the group. With the many acquisitions he has overseen, he must qualify as one of the best dealmakers from South Africa, certainly in the same league as Brian Joffe from Bidvest and Stephen Saad who heads Aspen.

The big deal for Steinhoff, and in SA corporate history, occurred at the end of March 2015 and involved Christo Wiese’s Pepkor Group. At R62.8bn it remains one of the larger deals done in SA.

In an interview with Jooste by this writer in December 2014 for Financial Mail, he said the big deal (at the time) for Steinhoff was probably Conforama, the furniture chain based in France.

“It was a game-changer for Steinhoff in that it effectively doubled the group’s purchasing power, added six new countries to our repertoire and transformed Steinhoff into the second largest retailer of household goods in Europe.”

Unfortunately, Jooste could not be interviewed at the time of going to print as Steinhoff is in a closed period.

The art of dealmaking 

Not all Steinhoff’s acquisitions prove to be successful. But for a serial dealmaker like Jooste, how could they all be successful?

There has probably only been one significant failure over the years, and that’s the JD Group. Your uncle in the furniture business has become a cantankerous, and at times expensive, old man. But one failure in 15 years can hardly be considered a bad track record. In fact, it is a compliment.

Other listed investment companies owned by Steinhoff do better. KAP Industrial Holdings, in which Steinhoff holds 45%, is rated a buy by analysts polled by INET BFA. Its share price is up 15.1% over the past year.

When investigating possible deals, Jooste shows remarkable patience. And if the potential deal does not seem right, he walks away from it. This happened in March when Steinhoff decided against buying general merchandise chain Home Retail Group.

It happened again in May when Steinhoff pulled out of a bidding price war with rival French retailer Groupe Fnac for French electronics retailer Darty. Its ambitions were met with the acquisition of Poundland. Aiding that deal was the 20% drop in value of the pound against the rand this year amid uncertainty about Britain leaving the EU.

One critique against Steinhoff has been the massive 115% premium it has been prepared to pay for Mattress Firm in the US. Independent investment analyst Ian Cruickshanks told Bloomberg he lamented the big premium Steinhoff is willing to pay.

"It is a very big premium. Shareholders deserve to know why the company is prepared to pay that much to enter the US market.” He added: “I am very nervous about this deal and it has caught the market by surprise.”

Said Jooste in a statement: "This transaction will allow Steinhoff to not only enter the US market with an industry leading partner and a national supply chain, but it will also expand Steinhoff's global market reach in the core product category of mattresses. The Mattress Firm brand and speciality retail concept are a strong complement to the Steinhoff retail brand portfolio." 

Jason Forssman, fund manager at Ashburton Investments, agreed that the deal offers a rare opportunity to acquire assets with similar distribution channels in the US.

“We expect Steinhoff to follow their traditional template in terms of acquisitions, refinancing the existing debt within Mattress Firm and leveraging scale benefits off its existing infrastructure.”

In Europe, where Steinhoff has the majority of its sales, it has boxed clever. When Steinhoff first moved into Europe, it set up manufacturing operations in cheaper Eastern Europe to retail in developed Europe, where it targets cost-conscious discount shoppers. That has always been Steinhoff’s target market.

A bright future

The group’s trading update, due on 29?August, and results for the 12 months to end June (due on 6 September), promise to be good. In the nine months ending 31 March, Steinhoff said revenue increased by 45% to €9.9bn, while operating profit was up 46% to €1.1bn. The operating margin firmed to 11% notwithstanding “the lower margins inherent in the general merchandise category (acquired on March 31, 2015) and kika-Leiner (acquired on December 7, 2015)”, Jooste commented in the results.

Steinhoff’s price-to-earnings ratio (P/E) is on a still reasonable 15.6 times while the forward P/E is 18.6, showing the market expects good upcoming results. The share price is buoyant, advancing by 15.1% so far this year.

The analyst consensus view on INET BFA is that the Steinhoff share is a buy. Now could be a good time for investors to profit from Jooste’s extraordinary dealmaking talent.

This is a shortened version of an article that originally appeared in the 25 August edition of finweek. Buy and download the magazine here.

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