As it turns out, the situations facing transactional capital and pick-and-pay have more similarities than you might think.
The market capitalizations of the two companies are not that big, at R7 billion and R11 billion respectively. Both are trading well off their 52-week highs, and both are in dire need of cash. Lenders don't have infinite patience.
advertisement
Continue reading below
Is there a solution to solve both of their predicaments? While retaining a majority stake, the business's valuable assets are carved out and listed on the JSE to raise capital.
In the case of Transaction Capital, that is WeBuyCars (the separate listing and capital increase importantly also eliminates the cross-default trigger within the existing Transaction Capital holding company structure).
And for Pick n Pay, it's Boxer.
Read: Transaction capital soars with WeBuyCars' individual listing plan
However, Pick n Pay requires significantly (!) more cash than Transaction Capital (only about R1 billion can be raised through the split).
The company's net debt was R7.2 billion, almost double the R3.8 billion at the end of August. Although it improved in February, it remains too high, especially for a group that will report a deficit for the full year to the end of February.
To remedy this, the group hopes to raise (up to) R4 billion in a takeover offer mid-year. Following this, Boxer is scheduled to be listed in the second half of 2024. The Ackerman family, as controlling shareholders, has “expressed their principled support for this…plan.” (Ah, I can't believe the board's deliberations were off the mark!)
Read: Pick n Pay plan R4bn rights issue, discounter Boxer lists
The family has a big decision to make – either they (the bankers) have to round up the R1 billion (they own 25% of the common stock) or it gets diluted. A raft.
big question
The R1 billion question is how much money Pick n Pay could raise by listing Boxer.
Boxers now account for about a third of Pick n Pay's sales and are growing rapidly, while Pick n Pay business (even including clothing) is not. In his first six months of this financial year, Pick n Pay reported revenues of R34.6 billion in his SA, while Boxer reported revenues of R17.4 billion. The group revealed that Boxer is “very” profitable (in stark contrast to PnP).
Read: Why is Pick n Pay losing money on grocery sales?
Now, on to the evaluation…
Overall, the market says the group is worth R10.7 billion. Is the boxer worth R4 billion on his own? more? The market has discounted a significant amount of the value of its core business, so it has the option of continuing to invest (at a discount) and betting on CEO Sean Summers and his team's ability to turn things around.
Read: Give Pick and Pay two years to turn around – Summers
Summers, and the Ackerman family, clearly don't want to leave any money on the table. The group needs to extract the highest possible valuation when it goes public. Could you raise R1 billion by selling, say, 25% of your Boxer shares?
advertisement
Continue reading below
Forced manually?
The board certainly isn't keen to take Boxer public and sell its shares. That hand is forced. R4 billion is probably the very upper limit of what could be raised through a rights issue. If the family complies with that right, and there is a big question mark whether they will, the maximum amount they could put aside would probably be R1 billion. They are arguably investing more in this rebuild than anyone else, considering that nearly all of their wealth is tied up in this business.
Of course, Allan Gray currently owns 10% of Pick n Pay on behalf of his clients, so there is a significant investment in the business. The same goes for the Public Investment Corporation, which held 20% at the end of the previous fiscal year.
If the family still retains control of the group (and the boxers) through a dual class share structure, will all other institutional investors put in cash? i doubt it.
language speaks
The words used in Thursday's announcement speak for themselves.
The company now claims that it “fired Peter Boon and appointed Mr Summers in October to urgently address the poor performance of its Pick n Pay supermarket business.” and to assess how the group can extract shareholder value from Pick n Pay's wider business.” (author's emphasis).
This may have been the case six months ago, but the word (or even the concept) of “unlocking” does not appear at all in Summers' announcement of his appointment. Thursday's announcement specifically and intentionally referred to “unlocking value” in four separate parts.
Read: Why Sean Summers could turn pick-and-pay around
Why is the company trying to portray Boxer's listing as part of a grand plan to unlock all billions of rands of “trapped” value within the group? It's the same reason why transaction capital is spinning a similar thread. A fire sale at exactly the wrong point in the interest rate cycle is not the best sales pitch to investors…
Listen to the MoneywebNOW podcast with Simon Brown.
You can also listen to this podcast at iono.fm.
