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Shoprite remained a prime private equity target, investment bank UBS said after the R15.2 billion bid to acquire the retailer was called off in a major victory for minority shareholders.

May 17, 2007

By Tom Robbins

Cape Town – Shoprite remained a prime private equity target, investment bank UBS said after the R15.2 billion bid to acquire the retailer was called off in a major victory for minority shareholders.

Brait Private Equity executive director John Gnodde said yesterday that paying more than the upwardly revised offer of R28 a share would make it impossible for Brait to achieve targeted returns.

But UBS analyst Darren Cohn said private equity investors could offer to pay up to R38.61 a share for the grocer and still generate an internal rate of return on equity of 30 percent a year over five years.

Shoprite’s share price rose 4.3 percent on the news, closing at R32.55, while the food and drug retailers sectors gained 2.51 percent.

Cohn said that given Shoprite’s exposure to a lower target market than both Pick ‘n Pay Stores and Spar, it was more likely to benefit from public sector investment programmes.

It was less affected by competition from Woolworths’ food business and was “poised to reap the rewards of major investments in distribution systems, as well as in Africa”.

Shoprite chairman Christo Wiese said: “We have had no other direct approaches but if a party thinks they can do a deal, they can put it on the table.”

Meanwhile, Abri du Plessis, Gryphon Asset Management’s chief investment officer, described the withdrawal of the buyers as “a victory for shareholders, especially minority shareholders.

“It would have been a sad day for corporate South Africa had the transaction been allowed to go through in its proposed form, where shareholders’ rights were being prejudiced,” said du Plessis.

Asset managers had objected, arguing that Wiese, as a related party, should not be allowed to vote. The Securities Regulation Panel had been due to hold a hearing on this.

Wiese controversially intended to use both his normal shares and voting shares in the deal, with no economic value to drive the takeover home.

Apart from this move, Brait and Wiese intended to garner 50 percent plus one share, ahead of planned changes to the Company’s Act that would lift the requirement to 75 percent.

Wiese said the opinion given to him by “top legal advisers” was that he would have been able to use all his votes. Shareholder support for the deal, including Wiese’s unlisted shares, was 81.1 percent.

On the prospects of a further private equity bid, Andrew Kingston, a Sanlam Investment Management equity analyst, concurred with UBS that Shoprite remained a prime target. He also agreed it could be done at R38.61 a share.

But Mark Ansley, a portfolio manager at Cadiz African Harvest, questioned whether Shoprite management would be comfortable taking on the higher risk that would accompany a higher private equity offer.

Private equity deals are financed with up to 80 percent debt and require existing management support.

Wiese holds 15.4 percent in ordinary shares as well as 27.9 percent in voting shares.