FIFI PETERS: Pepkor has ventured into Brazil with the acquisition of a majority stake in family-owned retailer, Grupo Avenida. Pepkor describes Avenida as a one-stop shop for home clothing, footwear as well as cellular services. Brazil is the largest country in Latin America, with a population of 212 million people, and it also ranks among the top 10 clothing markets in the world. We do have the CEO of Pepkor, Leon Lourens, on the Market Update to explain the deal and the mechanics behind it.
Leon, thanks so much for your time. I see you’ve been looking at this particular asset for the past two years. How did you find it, and why is it so appealing?
LEON LOURENS: Well, initially we went there in 2018. We had a team that went to South America to look at potential countries that could work for us. We then again visited them, visited Brazil in February of 2019. That was the first encounter we had with the Avenida executive committee. It was a little bit by chance that we met [them] at the time; they were at the time preparing for the listing and we found out about it and went to see them.
Immediately there was a good rapport between the two management teams. They then visited South Africa. We went over there, visited them, did a due diligence and so on. That’s how the two years passed.
It could probably have happened a bit faster if it wasn’t for Covid, but eventually we got the right result in our opinion. So that’s great.
FIFI PETERS: We’ve seen a number of companies which started deals before the pandemic happened, and abandoned those deals as a result of the shift that the pandemic brought to the particular businesses that they were buying. So what has been the Covid-19 impact on Avenida business, just given that Brazil really got hit hard by the Covid-19 pandemic? It had one of the highest numbers of cases in the world, as well as one of the highest number of deaths.
LEON LOURENS: The impact on them was exactly the same as it was on most retailers in South Africa. We had an initial year where we had the lockdown and so on, where we had a really tough time, especially in terms of our turnover – and they had the same.
They had a good year in 2019; 2020 was a terrible year because of Covid – or a bad year; let’s call it a bad year. Then in 2021 they had a great year again. That was after most of Covid had played out and most of the lockdowns were out of the system.
They achieved a 14% growth in 2021 over the pre-Covid period of 2019, which I think is quite remarkable.
So it just shows you that the company’s got resilience, that the management team has got the right business model in place; now it’s just hopefully looking forward and we are over the worst of Covid.
FIFI PETERS: Just sticking to the numbers then, because the business did make a turnover of R2.2 billion in its December year-end, as you did say, turnover growth is coming back or even exceeding pre-Covid-19 levels. But what’s the profit history?
LEON LOURENS: The profit history is satisfactory. There’s a lot more potential than I think they achieved, and that’s one of the big reasons why we are buying the business. They were in partnership with a private-equity business for the last seven years and, as you know, private-equity businesses often don’t invest as much in growth as retailers would. Yes, I think that sort of suppressed their profit performance.
But their margins are quite good and we are quite happy with that. I think with what we can add to the business there’s just huge potential for the future.
FIFI PETERS: Let’s talk about that potential then. It’s presently sitting at 130 stores, mainly in Brazil, different parts of that country. What are your plans for this business?
LEON LOURENS: Well, firstly, we want to capitalise the business. Again, referring back to the past, the business wasn’t well capitalised, didn’t have the capital to grow. So we must make sure that we capitalise the business properly. Then we must go and work out the expansion plans that we feel are good enough for that specific business.
I do believe that in the first two years we won’t run too fast in terms of our expansion, because we must first prepare the business. With a business that has not grown for such a long time you must first make sure that you’ve got the interest structure set up and that you’ve got the business set up and the mindset ready for future growth.
So the first two years we’ll have moderate growth. After that we can expand at the pace that we really want to. That I believe can be very quick.
FIFI PETERS: How much are you capitalising the business, and essentially how much are you paying for this asset?
LEON LOURENS: Well, we are not divulging the purchase price for obvious reasons, but we did state in our Sens it’s less than 4% of our market cap. That should give you an indication of the size of the business or the size of the price. We believe that we paid a fair price for the business, and again, for that sort of price that we paid there’s so much potential. So we are very excited about this.
FIFI PETERS: The numbers that have been thrown around are around R3.2 billion. So would it be around there in terms of the purchase price?
LEON LOURENS: [Chuckling] I think less than 4% of market cap is probably the closest I can give you.
FIFI PETERS: Okay. I had to try. I was looking at the currency conversion, and R1 gets you around 2.8 Brazilian real – you can correct me there if I’m wrong. But the real falls within the emerging-market basket, which is also prone to a whole lot of volatility, especially in this time of rising interest rates, as we’ve seen with our own currency, the rand. Any plans around making moves or putting up safeguards against currency risk?
LEON LOURENS: Well, once we’ve transferred sort of the purchase price to Brazil, that’s going to run on its own. We are not planning on withdrawing dividends from the business, especially not in the first three or four years. We will have to see. But that’s not the priority for us.
For us it’s about investing in the growth. So once the money is in their currency, then we’ll just continue trading in that currency. That’s not going to affect us so much.
FIFI PETERS: And the Caceli family from whom who you are buying this business, they’re retaining a minority interest in this business. Exactly what will their role be in the future of Avenida?
LEON LOURENS: We are fortunate to have them still on board. The fact that they’ve been in the business for their whole lives, because they are the children of the founder and the business has been going for 42 years. So it’s very fortunate to have them on board. The good thing is that they want to be part of this new journey.
They see the potential that we bring. They see the infrastructure that we bring, the leverage that we can give, and therefore they want to stay in the business and we are very happy to have them.
They know the local market, and we don’t know the market as well as they do. So there’s a lot that they can add and obviously a lot that we feel we can add in this partnership, in building this business out in future. So yes, it’s really great having them on board.
Rodrigo, who is the younger brother, is actually going to be the CEO of the business. He’s currently the CEO and he’s been that for I think six or seven years already, and his brother will be a director on the board.
FIFI PETERS: Right. Leon, we’ll leave it there for now. Thanks much for your time. That’s Leon Lourens, the CEO of Pepkor, just talking about Pepkor’s latest acquisition over in Brazil.