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24 April 2012 23:14

Steinhoff UPS stake in JD Group: Rob Forsyth - portfolio manager, Investec Asset Management

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Alec Hogg is a writer and broadcaster. He founded Moneyweb

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    How Investec helped Steinhoff’s South African reorganisation.

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    ALEC HOGG: The reorganisation of Steinhoff’s South African interests got over the line today with a little help from the biggest shareholder in Steinhoff, Investec Asset Management. Shareholders in the JD Group were being asked to swap about a quarter of their shares for a stake on Steinhoff’s industrial ark, Kap. The idea here was so that Steinhoff would then own just over 50% of JD and could then consolidate and manage the company as a subsidiary. Well, they needed acceptances of 38m shares. They only got 16.6m from general shareholders, so Investec added the extra. I spoke about the reasons why with Investec’s Rob Forsyth by asking what would be different now after Steinhoff had got its 50.1% controlling stake in the JD Group. That’s up, by the way, from 33%.
    ***

    ROB FORSYTH: Not much has changed really. Yes, obviously through the PSG transaction Mr Jooste has upped his stake, which I think is obviously a very strong endorsement of how he feels in terms of the positioning of Steinhoff at this point in time. But actually, if you look at it you look at, say, Top 40 JSE companies, Steinhoff has been one of the companies that over the years has had one of the highest absolute holdings in rand value by the directors and management in the company consistently over a 10-year period. And also in percentage terms, it's probably getting close to being – I think when I last looked it was second or third maybe behind the founders of RMBH and maybe Patrice Motsepe at African Rainbow Minerals. So in terms of that, they have been long-term committed management to their holdings in Steinhoff and they have not really sold over the years. So they’ve already got a strong endorsement on what they think they can do with the company and they’ve even increased that a little bit, as you’ve mentioned. …

    ALEC HOGG: The excess applications of 21.7m – where does that come from?

    ROB FORSYTH: OK, so essentially the way the deal was structured, you could have tendered 26.2% of your shares to get Steinhoff to the 38.2m shares, and then you could tender excess if you wanted to. So, in other words, you could apply for any more than the 26.2%, which a lot of funds did.

    ALEC HOGG: So there were funds that wanted to get out of JD and put their investment now in Kap in the future?

    ROB FORSYTH: Ja, it’s a little bit complicated by the fact that, say, Investec Asset Management on behalf of its clients was a major contributor of the excess applications.

    ALEC HOGG: And you’ve explained that because you think there’s some good upside coming in Kap.

    ROB FORSYTH: Well, good upside in Kap, and since the deal was actually announced we were reasonably active on behalf of clients in the JD Group market. So in other words our net position in JD Group has actually not been diluted that much.

    ALEC HOGG: Was your arm twisted a little bit in this respect to try and make this transaction successful?

    ROB FORSYTH: No, it was a stand-alone transaction that was proposed to the shareholders and we decided to go along. As I said, the merits of it we thought were strong in all cases. We thought it has merits for making Kap, let’s say, a better entity, a large entity with more sustainable cash flows and a better growth profile. It gives JD Group shareholders a very strong international shareholder in a competitive market that can bring substantive international experience on international retailing, discounting, procurement, that has some interesting views on financial services globally, as well as the fact for Steinhoff it puts the right strategic assets in the right place for the long-term platform and the growth of Steinhoff International Holdings.  

    ALEC HOGG: So you took a holistic view, if I’m reading you correctly…

    ROB FORSYTH: Ja.

    ALEC HOGG: …that this is going to good for Steinhoff, good for JD and good for Kap, so let’s support the transaction?

    ROB FORSYTH: Absolutely.
    ***

    ALEC HOGG: Interesting insights there. Steinhoff’s share price today was up by just under 1% – the group is today worth just a tad under R50bn. From nowhere to R50bn in just over a decade. Quite an extraordinary story.
        As far as the other two underlying shares are concerned, well, it looks like JD Group is probably the one you want to be putting your money in. That hasn’t moved much in the past year. It's worth R10.5bn. It was down 1% on the market today. Kap was up 30% in the past year, and that was up another 5% today. It's worth about R7.5bn. So, if you are going to take your bets, I suppose JD Group is the one that offers the value, but I've always believed you’ve got to follow the money, and in this case the chief executive and the driver of Steinhoff, Markus Jooste, has recently swapped all of his shares in all the subsidiaries into shares in Steinhoff. So probably if you want the best bet there – Steinhoff would be the one.
       
    Rob Forsyth also told us that one of the big reasons why Investec supported this transaction is because it now clears the way to unlock a lot of value for Steinhoff itself. It has 70% of its business in furniture offshore – remember, they bought a company called Conforama for about R14bn in the past year. Well, the idea is to spin off the furniture interests internationally into a separate listing. So you’ll have Steinhoff International, the holding company where Markus has got all his shares tied up; you'll have the international listing, the furniture interests which will be listed on a foreign stock exchange, perhaps London, perhaps Frankfurt, and then you would also here in South Africa have Steinhoff controlling the JD Group after today’s announcements of the transaction being concluded, thanks to Investec’s support; and Kap, which is the industrial interests. A fascinating reorganisation of one of what is now one of South Africa’s biggest industrial companies.

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