Foschini owner TFG has some serious firepower at its disposal - potentially R15bn in cash and borrowing facilities - to hunt for what CEO Anthony Thunström calls the "right acquisitions" across its different geographies and retail segments.
In an interview this week after the release of results for the year ended March 31 2021, Thunström said many assets were for sale in SA, Australia and the UK, where TFG operates, as many retailers had been struggling even before Covid-19 because of overexpansion and cannibalisation of markets due to the growth of online retail.
"For the most part the valuations have come down because of Covid and so if you have to look at it philosophically then now is the right time to be doing acquisitions, provided you pay the right price and you're obviously buying the right asset," he said.
"There were a lot of retailers around the world and in South Africa that weren't well capitalised and all it took was for Covid to come along and they were either going to fold or get bought out by somebody."
He said although the group gets approached every week with potential deals, "99% of the time" it gives a "polite no" because the transactions don't make sense.
For the group to consider a transaction it would have to "move the dial" in terms of size or, if small, be of strategic importance. A transaction that moved the dial was TFG's R385m cash acquisition of Jet from Edcon last year, which included R535m in stock.
Thunström said every investment bank has a list of potential acquisitions that they take around trying to find buyers for, but TFG for the most part tends "not to get too excited by those because they've been shopped around already and you end up with pricing pressure on them".
"What we far prefer is when we are approached directly by the owners, managers or shareholders of a business, and even more so if they have come to us through some personal or business network or connection."
But Thunström said acquisitions are a "part of TFG's DNA" so it will consider possible deals across retail - from the low to the top end of the market. Historically, the group has grown through buying strong brands such as Fabiani, Totalsports and Sportscene and then growing them, he said.
TFG decided it was "prudent" to hold back paying a final dividend when it released full-year results this week because of uncertainty about the trading environment in the face of the pandemic, but it is in a strong financial position, due in part to it undertaking a R3.95bn rights issue last year.
Together with its free cash flow of R3.8bn, this has helped slash net debt by 84% to R1.3bn, a fraction of its market capitalisation of about R50bn. It also has about R4.8bn cash on its balance sheet in SA and R1bn in Australia, as well as access to a potential R10bn in borrowing facilities.
This has helped the group keep its powder dry for potential deals.
As far as Jet is concerned, that acquisition is already paying off for the group with TFG reporting that for the year ended March 31 the contribution to revenue of the 425 profitable Jet stores it bought from Edcon was about R2.2bn. Thunström expects this to be about R6bn for a full year.
Chris Reddy, fund manager at All Weather Capital, said Jet had proven to be a "fantastic buy, with TFG targeting revenue of above R6bn and a trading margin of 14%, both ahead of market expectations".
He said Jet was projecting earnings before interest and tax of R840m next year.
Reddy said that TFG's business had "significantly de-geared over the period" and this, along with the cash flow it was expecting to generate, put it in a strong position to "fund both organic and M&A opportunities".
Investment analyst Chris Gilmour agrees TFG has ample firepower for acquisitions, having spent little from the rights issue last year. "If you think about it, Jet actually cost TFG nothing when you take into account the impact of the stock they took over when they bought it. It was very clever."
TFG has major plans for Jet, wanting to roll out a further 100 new Jet stores over the next couple of years. It will also be reviving the Jet Home brand, with Thunström saying this segment is estimated to be worth about R12bn in SA. He is confident Jet Home will be able to make serious inroads in this category.
As far as full-year results were concerned, TFG reported a 7.5% drop in group revenue to R35.6bn due to lost trading hours because of lockdown restrictions. Group retail turnover was down 6.7% overall, but rebounded strongly in the second half of the financial year with 11.2% growth for the last six months. Group gross profit overall fell 19.5% to R14.99bn from R18.623bn in the previous financial year.
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