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Why the market should celebrate the investment deals

OPTIMISTS would probably say the past fortnight produced some refreshing reports for the economy in general and the stock market in particular.

First was the information that some mining houses in the country are seriously considering having a primary or secondary listing in Zimbabwe as a means to indigenising their ownership. New listings are always a plus for any market as it means more options for the investor. Then came a circular about Innscor Africa’s proposed unbundling of its crocodile skins producer, formerly called Niloticus but now renamed Padenga. As a standalone business, Padenga is expected to pursue other growth initiatives outside crocodile farming and create more value for the shareholders.
Meikles Ltd also delivered what is probably the best news its shareholders have been given in recent times after more than two years of unsavoury publicity over Kingdom. On October 27, Pick ‘n Pay, one of the leading retailers in South Africa signed an agreement to increase its stake in TM Supermarkets, the market was told, from 25% to 49%.  Speculation in the media says that Pick ‘n Pay could pay US$13 million for the 24% stake.
The announcement that government had sold its 54% shareholding in Ziscosteel to Essar Africa is arguably one of the best developments in the economy since dollarization. Investments of the magnitude cited in the Ziscosteel deal are critical in attracting more capital into the country. The revival of Ziscosteel will have positive spin-offs to the economy in terms of improved availability of cheaper steel and will also boost downstream firms. Currently, most of the steel used in this country is imported from South Africa and China which is more costly and companies wait longer before receiving the product.
This column though would like to focus on Pick ‘n Pay’s additional investment in TM Supermarkets because the market has been anticipating that transaction for some time. TM Supermarkets was the only remaining big player in the retail sector still to recapitalise after OK Zimbabwe successful raised funds earlier this year. The SPAR franchises were among the first group of retailers to recapitalise and fully stock-up through their arrangements with the SPAR Distributors in South Africa.
Should the deal be approved by the regulators in both South Africa and Zimbabwe, as is largely expected, TM Supermarkets will, without doubt, benefit from Pick ‘n Pay’s centralised distribution of dry groceries. With more shareholding, Pick ‘n Pay is likely to be more involved in running the shops than before and this should result in more skills transfer to the local managers.
The Pick ‘n Pay/Meikles deal is the second high profile transaction by a foreign investor in the retail sector. In March this year Investec advanced OK Zimbabwe a convertible loan of US$5 million. They also underwrote and took up non-allocated rights at a cost of US$4,4 million. This means that Investec in total funded almost 50% of the US$20 million raised by OK.
In other economies such developments would send the markets rallying as they are viewed as a vote of confidence by investors. Inbound investment also tends to result in the strengthening of a local currency as its demand increases. For instance, the recently mooted US$7,3 billion bid by HSBC for Old Mutual’s 52% stake in Nedbank had a temporary positive effect on the rand. The same effect was felt when US retailing giant, Walmart made a US$4 billion bid for South African general merchandising retailer, Massmart.
Back to TM Supermarkets, it is interesting that the decision by Pick ‘n Pay to increase its investment comes hardly a year after Shoprite, South Africa’s biggest retail chain, turned down a chance to invest in OK citing unfavourable socio-economic conditions and political uncertainty. That the investment is being done when the “hostile” conditions are still there shows the difference in risk assessment by difficult investors. By investing now Pick ‘n Pay must believe that Zimbabwe is on a recovery path while its competitor might in future rue the missed opportunity.
For the local market it is certain that the arrival of Pick ‘n Pay — some TM stores will be rebranded to Pick ‘n Pay — will further intensify competition among retailers. Competition is already stiff with players in the sector reporting falling operating margins because the disposable incomes have not grown as fast as retail shops while “shrinkage” has been on the rise. The number of retailers increased over the past few years with supermarket chains like Gutsai, Afrofoods, Food World and Savemore joining the fray. The new players did a good job of slicing off market share from traditional players such as OK, SPAR and TM. The suspension of duty on basic commodities also encouraged the proliferation of more retail shops as anyone who could raise foreign currency imported products for resale.
The likes of TM Supermarkets have not fully recovered from the effects of the June 2007 price blitz as they, along with others, lost huge stocks. Pick ‘n Pay is able to help TM Supermarkets regain some of its market share though it is unlikely to enjoy quite  the lion’s share it had before.
The sale price of US$13 million for a 24% shareholding values TM supermarkets at US$54 million. With OK supermarkets valued at US$98 million, either TM is undervalued or the former is overvalued. TM has always been bigger than OK in terms of number of stores although the latter’s shops tend to be in better locations. The difference though is that OK has recently recapitalised and the operations could be much better than TM’s, which is yet to recapitalise. But TM has one added advantage in that while OK got only money from Investec, they will get technical assistance and access to the centralised distribution from Pick ‘n Pay.
If the Pick ‘n Pay/Meikles deal goes ahead, retail in Zimbabwe should hopefully change for the better. And who knows-after Pick ‘n Pay, there is the distinct possibility that Shoprite may come, cap in hand, looking for its previously abandoned opportunities in the country.

 

Ranga Makwata

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