Inside Wiese's mega merger plan

Johannesburg - Christo Wiese, South Africa’s

fourth-richest person with a fortune of about $5.7 billion, is at the centre of

plans to create the continent’s largest retailer by combining the African

operations of Shoprite Holdings and Steinhoff International Holdings.

Here’s why a transaction makes sense for the 75-year-old billionaire and

why a deal may face opposition from minority shareholders and antitrust

authorities.

Why are Shoprite

and Steinhoff proposing to merge?

The proposal is for Cape Town-based supermarket chain

Shoprite to buy Steinhoff’s African retail assets in exchange for an

undisclosed yet significant equity interest. This could lead to Steinhoff

taking control of Shoprite via a buyout offer to minority shareholders. Talks

on pricing and structure are ongoing and some investors and analysts expect the

companies to announce an outcome in coming weeks.

That helps Wiese bring part of his 23 percent stake in

Steinhoff and his 16 percent share in Shoprite under one roof. It may

ultimately also help bring both companies under Steinhoff Chief Executive

Officer Markus Jooste, a friend and business partner for two decades.

“He appears to have anointed Markus as the person he has

entrusted with the family jewels,” said Sasha Naryshkine, an analyst at Vestact,

a Johannesburg-based money manager. 

Wiese pulled off South Africa’s largest takeover deal in

more than a decade when he agreed to sell South African clothing

retailer Pepkor Holdings Pty Ltd. to Steinhoff in 2014. The deal, he said

at the time, followed years of talks with Jooste about building a world-class

discount retailer and was driven by the idea that their assets make an

excellent fit.

Read also:  Shoprite, Steinhoff marriage talks continue

Bringing together Shoprite and Steinhoff will give the

combined entity the scale to sell everything from potatoes to sofas and

sneakers at discount prices to consumers on the continent. Steinhoff has more

than 11 000 retail outlets in 32 countries. In Africa, its Pep clothing

retailer accounts for about 2 000 shops. Shoprite had 2 711 supermarkets across

Africa as of June. Separating Steinhoff’s African assets from operations

elsewhere in the world, such as Conforama of France and Mattress Firm in the US,

will help both parts of the business pursue their own growth

opportunities. 

What are the

potential competition hurdles?

The sheer size of these companies means there could be

several antitrust hurdles within South Africa, Simon Roberts, a director

of the Centre for Competition, Regulation and Economic Development at the

University of Johannesburg, said by phone. The combined retailer may be ordered

by the competition authorities to sell some assets, such as either

companies’ furniture units, or to ensure no jobs are lost for a set period of

time.

One way of tackling potential competition problems with

the furniture businesses, in which the combined entity would control a

relatively small market, would be to spin off and separately list Steinhoff’s

JD Group, Naryshkine said. Selling certain brands could also be an option, he

said.

What do investors

other than Wiese think about the proposal?

Without any details on the pricing since the announcement

that the companies are in talks, the shares have declined. Steinhoff

shareholders paid a “full price” when the company bought Wiese’s clothing

retailer Pepkor for R62.8 billion ($4.7 billion), Evan Walker, a money

manager at 36ONE Asset Management, said by phone from Cape Town. In addition to

Pepkor and furniture chain JD Group, Steinhoff also owns South African

tilemaker Iliad Africa, an auto business and manufacturing firm KAP Industrial

Holdings. This makes a potential deal “messy” and investors reluctant to own

shares in the combined entity, Walker said.

The proposal has, though, won the support of South

Africa’s Public Investment Corporation, the continent’s largest money manager

with R1.86 trillion in assets and a shareholder in both companies. The PIC,

which manages government worker pension funds, is the second-largest investor

in Shoprite with a 10 percent stake, according to data compiled by Bloomberg.

Shoprite’s stock has dropped 9.7 percent since the talks

were announced on December 14 and trades at 17.5 times estimated earnings.

Steinhoff has declined 5.2 percent and trades at 14.4 times estimated earnings.

What will the

combined company look like before disposals?

With Steinhoff’s African operations amounting to about a

third of the company’s assets, its brands in Africa include Pep, Ackermans,

Russells, Incredible Connection and Timbercity. Shoprite owns brands such as

Checkers, Hungry Lion, OK Furniture and MediRite Pharmacy. Shoprite’s revenue

was R130 billion in the 12 months through June. Steinhoff’s African units

generated 4.3 billion euros ($4.6 billion) in the 12 months through September.

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