November 25, 2014 / 12:40 PM / 4 years ago

South Africa's Steinhoff expands discount offer with $5.7 billion Pepkor buy

JOHANNESBURG (Reuters) - South Africa’s Steinhoff International SHFJ.J will buy clothing retailer Pepkor in a $5.7 billion deal that gives the budget furniture firm exposure to Africa’s fast-growing apparel market and strengthens its business in eastern Europe.

The acquisition will allow Steinhoff, one of the world’s largest listed furniture companies, to diversify into clothing as rising sub-Saharan wealth lifts consumer demand.

Worth nearly $13 billion, Steinhoff currently sells beds and cupboards to lower-income shoppers in Europe, southern Africa and Asia. Pepkor operates across 16 countries, targeting South Africa’s lowest income bracket, such as impoverished township mothers shopping for school uniforms for their children.

The 62.8 billion rand ($5.7 billion) cash and share deal will also help Steinhoff build scale in eastern Europe, particularly Poland, where Pepkor also sells kitchenware and household goods that overlap with Steinhoff’s range.

Steinhoff said the acquisition would strengthen its position in discount retailing at a time when “customers across the spectrum are ‘trading down’ as discount retailers have become more socially acceptable.”

Nic Norman-Smith, Chief Investment Officer of Lentus Asset Management which owns shares in Steinhoff said: “It certainly will provide scale benefits and scale is one of the few areas where you can generate a competitive advantage in retail.”

The deal - the third-largest acquisition of a South African company in history - will see Steinhoff buy 92 percent of Pepkor from private equity firm Brait (BATJ.J) and entities controlled by Christo Wiese.

Synonymous with Pepkor in South African business circles, Wiese is regarded as one of the country’s savviest retailers. He is worth an estimated $5.4 billion and was ranked as Africa’s fifth-richest person by Forbes magazine. He is a top shareholder in retail giant Shoprite (SHPJ.J).

STIFF PREMIUM

The deal is the latest endorsement of Africa’s rising consumer demand, which has been underpinned by infrastructure investment and strong agricultural production.

The IMF has forecast sub-Saharan Africa to grow at over 5 percent in 2015, while consultancy McKinsey says African consumer spending on shopping, banking, telecoms and tourism could grow to $978 billion by 2020, from $570 billion in 2010.

Although 68 percent of Pepkor’s $3.5 billion in annual revenue comes from Africa, it is also the top non-food retailer in Poland, through its Pepco stores.

Steinhoff makes more than three-quarters of its sales overseas, where it runs no-frills chains such Harveys in Britain and Conforama in France.

The deal price however represents a stiff 77 percent premium to Pepkor’s annual revenue, adjusted for the 92 percent stake.

“There’s a lot positives about this business but the pricing doesn’t exactly appear to be a steal,” said Lentus’ Norman-Smith.

Steinhoff said it will buy Wiese’s 52.47 percent stake for 609.1 million shares at a price of 57 rand each and Brait’s 37.06 percent for 15 billion rand in cash and 200 million shares. It will also buy 2.81 percent from Pepkor’s management giving it a 92.34 percent stake overall.

Steinhoff said it will fund the cash portion through existing cash resources.

The deal will give entities controlled by Wiese, a director of Steinhoff, about 20 percent of the furniture company and will therefore require endorsement by an outside expert as to its “fairness”, Steinhoff said.

Half of its shareholders have already approved the deal.

Shares of Steinhoff were up 3 percent at 57.65 rand at 0631 EST, while Brait’s shares plunged 15 percent, reflecting investor concern it was losing its key asset.

Steinhoff, which is seeking a listing in Frankfurt, said the acquisition would not delay those plans.

(1 US dollar = 11.0235 South African rand)

Additional reporting by Helen Nyambura-Mwaura; Editing by David Clarke and Sophie Walker

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