Massmart is offloading its loss-making fresh-food assets to Shoprite for R1.36bn in a deal that will free up the Walmart-owned company to strengthen its balance sheet and focus on its far more successful building materials and general merchandising retail brands.
The cash deal, which includes the sale of Massmart’s Cambridge Food, Rhino and Massfresh brands, as well as 12 Cash & Carry stores, is also a win for Shoprite, with Protea Capital Management analyst Richard Cheesman saying on Friday it “looks like Shoprite is getting a good deal acquiring these assets for net asset value”.
Cheesman said that while the sales price “may be a bit low” for Massmart, it ultimately was a “net positive for Massmart because these were loss-making businesses and it gives the company much-needed capital”.
But he said getting competition approval could be challenging as Shoprite is the “largest food retailer in the country and it is a relatively concentrated industry”, and that Shoprite may have to make concessions such as preserving jobs.
What would be in Shoprite’s favour, he said, is its history of turning around businesses “going back to when it acquired OK Bazaars”.
“Shoprite has been good at making astute acquisitions of troubled assets. This is a volume game and Shoprite has scale benefits. If you have to bet on someone being able to run these assets, well, you would bet on Shoprite.
“This could be an argument that Shoprite will make before the competition authorities, that no-one else will be able to take on these businesses and make it sustainable.”
FNB portfolio manager Wayne McCurrie said he was “sure it [the deal] would be approved by competition authorities” but that it would include the “normal caveat of no retrenchment of staff” for a set period.
“There are plenty of big retailers around, so this won’t cause competition issues. Also, Massmart or Shoprite would never make an announcement like this unless they had had their lawyers poring over this, their Competition Commission specialists poring over this, to make sure everything is in order.”
McCurrie added that the deal was good news for Massmart as it would “get them some cash” and help the group focus on its “Builders DIY type of business, which is doing phenomenally well”, as well as its wholesale Makro division. He said Massmart’s Game brand was also effectively being reconfigured into a “mini Makro”.
“They are going to focus on what they are good at.”
He said the transaction would help increase Shoprite’s footprint and the stores would be easily integrated into the retailer’s large distribution and buying networks.
Massmart said in a statement on Friday it had previously flagged to the market that it intended exiting the assets to prioritise “investment in high-returning trading assets”.
Shoprite said in a Sens statement that the Cambridge and Rhino businesses comprise 56 grocery stores, including 43 adjacent liquor outlets.
Massfresh, which includes the Fruitspot business and Massfresh Meat business, consists of four facilities.
Massmart said the proceeds of the deal, which is expected to be concluded early in the first quarter of 2022, would be used to “to pay down drawn bank facilities, invest in e-commerce, and also in merchandise areas in which Massmart is the market leader, namely general merchandise, DIY and wholesale food and liquor”.
“The sale marks another step in the group’s portfolio optimisation process and will, amongst other benefits, free up management time to enable increased focus on leveraging Massmart’s core merchandise and market strengths,” Massmart Group CEO Mitch Slape said in a statement.
Massmart also said the sale would be dealt with in terms of section 197 of the Labour Relations Act, in that “affected staff members will therefore continue to be employed by the new owner on terms and conditions that are, on the whole, not less favourable than their existing employment contracts”.
Shoprite said in a statement that the acquisition gave it the “ideal opportunity to utilise its operational capabilities to benefit these businesses and the group’s customers, staff, suppliers and shareholders”.
It also said the turnover of the “target businesses” for the 52 weeks ended December 27 was about R10.8bn, and that the transaction “has been structured in a manner that ensures the sustainability of jobs in the target businesses” with “applicable staff” set to become members of the Shoprite group.
In the same statement, Shoprite CEO Pieter Engelbrecht said: “We are focused on our low-price leadership position and furthering our reach in terms of getting closer to more of our customers. Our plans in this regard incorporate both organic and acquisitive growth.
“The rationale for this transaction is not just premised on the fact that, as a result of our operational expertise, we believe we can profitably run these operations; it also gives us immediate access to opportunities that were on our medium-term to-do list.”
Engelbrecht said Shoprite was in a good position to “integrate and grow these businesses”, adding that it could “ensure the sustainability of employment of the staff within these businesses”.
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