In the end, towards the latter part of 2020 once various approvals had been received, TFG Limited paid R385.3 million for Jet.
Crucially, because this was an “accelerated sale process” once Edcon had entered business rescue, TFG was able to cherry-pick exactly what parts of Jet it wanted, right down to the specific stores.
This is what made the deal so tremendously appealing, despite TFG CEO Anthony Thunström proclaiming publicly in June that year that it had “no interest in any of those businesses [Edcon, Edgars or Jet] that don’t fit strategically with us”. The transaction was announced in July.
TFG (or its investment bankers/advisors) knew it could negotiate hard. Although there were 15 “interested parties”, one would imagine very few of these were what the business rescue practitioners were after. They needed an experienced operator who could keep the business trading, inject capital, preserve jobs and grow it. In last year’s annual financials, TFG had to recognise an accounting profit of R709 million on this “bargain purchase”.
It bought a business ‘worth’ R1.1 billion for less than R400 million. This included over half a billion rand of inventory.
Now integrated and well-capitalised, Jet is unrecognisable from the business that was drifting along under business rescue (and which had been forced, in many ways, to carry the Edcon group since the 2007 private equity sale).
In the year ended 31 March, TFG says Jet recorded revenue of R5.3 billion. It originally expected this number to be R5.5 billion, but lost around R100 million in turnover due to the riots in July 2021.
Profit, on an earnings before interest and taxes (Ebit) basis, was R512 million – that’s 33% higher than the purchase price. Even at the ‘full’ accounting value of R1.1 billion, Ebit last year was 47% of the ‘value’. This is staggering. But this was a very unique deal, one not likely to be repeated in South African retail for quite some time to come.
Since it acquired the 425 Jet stores in South Africa and neighbouring countries, TFG has added just 18 outlets (4%). This was very much the plan – it needed to stabilise the brand and also roll out its homeware proposition (Jet Home). This offering is now in 380 Jet stores with a further 11 standalone ones opened in the last year.
The figures aren’t exactly that meaningful as the 2021 comparatives only cover the approximate six months from the acquisition date, but Jet revenue is up 127%.
One can, crudely, subtract 100% to account for the other half-year. That’s still very strong top line growth. The new home effort is growing (from a very small base) at nearly 300%. Over time, expect this to be a formidable competitor to Mr Price Home, Sheet Street and Pep Home.
TFG has been incredibly disciplined at getting the margins in Jet to levels where it wants/needs them to be. The margin in clothing is now around 40% from less than 35% in the year it bought the business. The trading profit margin for 2022 was 10.1% (from 6.6% in 2021).
TFG says over R700 million in credit turnover at Jet was driven by “cross shopping from other TFG brands”. This is remarkable within 18 months. It has also launched a “second-look” debtors’ book at Jet, and this already accounts for 20% of the unit’s credit sales.
For TFG shareholders, the acquisition and successful integration of Jet, plus its focus on the value segment in both Africa and Australia, means the overall business will become far more diversified.
Looking forward, there’s probably a bit more margin improvement to come from the base of Jet stores as TFG continues to optimise range, sourcing and pricing. This, though, is clearly one of the main growth engines for the group in the medium term (not to mention the pending deal to buy Tapestry, the holding company of Coricraft, Dial-a-Bed, The Bed Store and Volpes).
Thunström has previously said the group plans to add at least another 200 Jet stores over the medium term. That will add about 50% to its existing footprint. It has a three-year plan to add 1 000 stores across TFG.
Last week, it confirmed that more than 350 new stores are “under development” and that it expects R3.9 billion in turnover from these outlets. It says it will “continue to open in new retail nodes in which TFG has not traded before”. One can easily see a scenario where close to one hundred of those stores under development are Jet. With Jet, the canvas is a lot blanker than for most of its other brands …
What’s stupefying is that TFG actually ended up paying nearly R100 million less than the R480 million it had anticipated for Jet. Admittedly, there was less inventory than first estimated (this was a retailer being bought while it was busy trading), but there is no other description for this deal but a steal.