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Corporate magic and the whimsy of the authorities

The magic touch can be hard to replicate (ask Walmart) while the stance of the CompCom has become impossible to anticipate: a look at Massmart, Cambridge and Rhino, Burger King, York Timber and Net1 UEPS.
Cambridge Foods, a profitable and well-run businesses at the time of its acquisition by Massmart, will now become part of the Shoprite stable. Image: Massmart

The team at Walmart’s head office in Bentonville, Arkansas, must feel a huge sense of gratitude to the South African regulators who indicated they shouldn’t aim to acquire more than 51% of Massmart back in 2012.

Thanks to that restriction Walmart only had to burn a whopping $2.4 billion (R36.7 billion) on one of South Africa’s least attractive retail groups. Although perhaps if Walmart had been able to buy 100% it would have been able to work its magic on a retail conglomerate that had been cobbled together through a long drawn-out no-expenses-spared acquisition strategy dating back to the 1990s.

Of course the sad reality is that Walmart’s magic doesn’t appear to work too well outside the US; it has struggled in China, India, Japan and Germany.

The original Massmart deal was struck in November 2010 after a due diligence that took just eight weeks.

Andy Bond, the Walmart executive responsible for African operations (who now heads up Poundland for Pepco), said at the time that the due diligence “has underlined our confidence that this is a compelling combination that will create significant value for both companies.”

It quite quickly became apparent that the deal wasn’t as compelling as it might have initially looked.

Read: Will Walmart ditch Massmart as things go from bad to worse?

Certainly value was created, but it was entirely for those shareholders who sold out at R148 a share.

Cambridge and Rhino

Hopefully the sale of Cambridge Foods and Rhino will see those businesses back in good operational hands.

The two retailers were among the last to be acquired by Massmart ahead of the Walmart deal; they were well-run profitable businesses at the time.

Read:

According to the Massmart annual report for the year to end-December 2020, the combined net asset value for Cambridge and Rhino was R988.4 million and the trading loss, before interest and tax, was R363.5 million. Massfresh, which is also part of the deal, has a net asset value of R229.4 million and a trading loss (pre-interest and pre-tax) of R136 million.

Walmart did well to get almost full net asset value out of Shoprite; perhaps the latter’s negotiating skills have blunted a little since it acquired OK Bazars from South African Breweries in 1997 for R1.

The competition authorities, whom Walmart will have gotten to know very well between 2010 and 2012, are expected to give the go-ahead.

However, regrettably, these days it’s impossible to anticipate which way these authorities will jump on any deal.

It is likely that Shoprite will have to close or sell any stores where there is a geographic overlap with its own USave outlets. Presumably the final price will be adjusted for any such sales.

Burger King

On the subject of the competition authorities and the seeming whimsical way in which they sometimes operate, last week’s news that the Competition Commission is no longer blocking Grand Parade Investment’s sale of Burger King is both good news and shocking news.

What is particularly shocking is the secrecy that surrounds whatever new arrangement was agreed with the authorities.

It smacks of horse-trading, which is never a good look for a major economy’s industrial policy.

The commission had initially rejected the deal on the grounds that the BEE shareholding would drop to 5% from 68%.

It was allowed to do this in terms of a new provision added to the Competition Act by Minister of Trade, Industry and Competition Ebrahim Patel Patel back in 2017 when he was minister of economic development. It was a provision that seemed designed to curry favour with the nationalist camp in the ANC.

Even with the best of intentions it would be difficult, if not impossible, to apply the provision consistently. Of course that very uncertainty does give Patel a stronger bargaining position.

Listen as Fifi Peters chats to Bakhe Majenge, chief legal counsel at the Competition Commission (or read the transcript here):

Retailers and banks upbeat 

Results and trading updates from retailers and banks generally continued to be upbeat last week, which is encouraging news.

Hopefully our institutional shareholders will be alert to the implications of this bounceback on executive remuneration.

That may be an unrealistic hope. Even the Institute of Directors reckons we may have a problem with shareholder apathy on this front.

Read:

York Timber

A2 Investment and Peresec Prime Brokers can certainly not be accused of being apathetic. After building up a significant stake in York Timber they called for a meeting of shareholders in a bid to get two A2 executives, Adrian Zetler and André van der Veen, appointed to the board.

That a meeting was called suggests someone on that board was not happy about the proposed new appointments.

But last week York Timber announced that Zetler had been appointed a non-executive director and Van der Veen as an alternate to Zetler, and that the meeting had been called off. It looks like a compromise of sorts.

Net1 UEPS

Meanwhile Net1 UEPS continues to beef up its board – with the appointment of Kuben Pillay (as chair) and Nonkululeko Gobodo – presumably in the hope of distancing itself from the controversial days when it was dominated by Serge Belamant.

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