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A big price tag. Can Steinhoff digest Conforama?

Sasha Planting considers where the money will come from.

CAPE TOWN – Markus Jooste (pictured above), CEO of Steinhoff International (JSE:SHF), was gutted when his four-year old gelding, Bravura was beaten to the post by outsider Past Master at the J&B Met last week. But he was all smiles when he flew to Paris on Monday night. He was on track to clinch the biggest deal of his life – and no outsider was going to beat him to it.

Last week French unions voted to approve Steinhoff International’s acquisition of Conforama, the second largest furniture retailer in France.

Though word of the deal surfaced in the middle of last year, Jooste has spent years building relationships with the family that owns Conforama holding company PPR and with the management of Conforama itself. By December Steinhoff was the preferred bidder, ahead of private-equity plays for the business, including one lead by Goldman Sachs.

Assuming the deal passes regulatory muster, Steinhoff will become the second largest furniture retailer in the world, after Ikea the €23bn gorilla in the market.

Conforama, in comparison, turned over an estimated €3bn in its financial year to December 2010.

Steinhoff’s retail business is smaller still. Its combined furniture retail businesses in the UK, Switzerland, Germany and Australia turned over in the region of  €1.9bn last year. “I don’t know if people comprehend the magnitude of this business,” says Nedcor capital retail analyst Syd Vianello. “The deal is transformative for Steinhoff.”

With a global turnover of €4.8bn (including SA) some have asked questions about Steinhoff’s ability to digest the €1.2bn price tag on Conforama But the financing is a creative mix of debt and equity. The company raised €600m from six European banks, including financial advisers Citibank, Royal Bank of Scotland and HSBC. €300m was raised by issuing preference shares (prefs). These unlisted shares will be issued in SA and in all probability will be issued to Standard Bank (JSE:SBK) or its clients. Standard Bank is the local financial adviser on the deal. Another €300m was raised with the placement of 137m new shares in Steinhoff International Holdings (JSE:SHF) with a European investor. That generated €300m, bringing the total to the €1200m required.

The €400m that Steinhoff raised on the international bond market last year is earmarked to fund the working capital facility.

“This is digestible,” says Vianello. And, despite the high levels of debt the deal will immediately be earnings enhancing. Conforama’s earnings before interest tax depreciation and amortisation (ebitda) to December 2010 was EU200m. After taking into account interest charges and deducting non-recurring items, Vianello estimates the acquisition (had it already been effected) would have bumped Steinoff’s diluted earnings per share from 244c to 260c last year.

The challenge of course is not the first financial year of any deal. It is the next one. Having bought a business which is earnings enhancing, Steinhoff will be expected to add value immediately. Jooste is confident this can be achieved. Conforama’s operating margins hover at 4%, low when one considers Steinhoff margins are around 10% and Ikea earns margins of 15% – 7% is the average for a global furniture retailer. Conforama will give Steinhoff immediate access and scale in the €9.3bn French furniture retailing market. Its presence in Switzerland, Portugal, Spain, Italy and Croatia complements Steinhoff’s existing retail network, which is particularly strong in Germany and Switzerland. “Conforama will add €1.5bn in purchases within the company – that doubles our existing purchases in Europe and with that we will get better prices. In this market scale is everything,” he says.

In addition, Conforama has a new management team (2008) which has already turned around the inefficient parts of the business and introduced higher margin products. “The results can be seen in improving margins,” he says.

While the deal still has some months to go before it is sealed, investors are already pondering future steps. A European listing perhaps? “We will have the size and bulk for an excellent European listing, once we feel ready for it,” Jooste told Moneyweb radio last year.

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