Pepkor to buy Brazilian retailer Avenida

Sees potential for significant expansion in Brazil.
Image: Bloomberg

South African value clothing and furniture retailer Pepkor has bought a majority stake in Brazilian retailer Grupo Avenida S.A. from its private equity and family owners, marking its first foray into South America.

Pepkor, majority owned by Steinhoff International, did not give an exact price for the 87% stake in Avenida it is buying from Kinea Private Equity and the founding Caseli family.

However, it said it would pay a cash amount equating to less than 4% of its own market capitalisation which, at the current level of about R88 billion, would suggest an outlay of less than R3.5 billion.

Brazil, with a population of 212 million, provides an attractive opportunity for Pepkor as one of the world’s top ten apparel markets, with a $25.6 billion clothing, footwear and home market and an untapped rural market.

The owner of Pep, Ackermans and Incredible Connection, with more than 5 400 stores across Africa, said the deal could open the way to significantly expand the 130-store Avenida across Brazil over a number of years.

According to Pepkor, Brazil has a highly fragmented apparel retail market with only 14% of it linked to formal outlets.

“With approximately 85% of the population being in the lower and middle income bracket, it provides potential for Avenida to exponentially increase its store base and revenue into more traditional and rural geographies,” it added.

Avenida, a 42-year old value clothing retailer, had a preliminary turnover of 773 million reais ($147 million) last year.

SBG Securities research analyst Ya’eesh Patel estimated in a note that Avenida would initially contribute about 2.8% to Pepkor’s group revenue and about 3% to trading profit.

“In our view the group is not risking the house and the acquisition does provide optionality with an additional growth vector beyond the group’s Pep and Ackermans runway,” Patel added.

Listen/Read: CEO of Pepkor Leon Lourens explains the deal with Grupo Avenida S.A and the mechanics behind it.

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