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Furniture retailer Ellerine, concerned that it is losing its customer loans business to banking players, has given its conditional support to a R9.85 billion buyout offer from microlender African Bank Investments Limited (Abil).

 August 21, 2007 By Tom Robbins Cape Town – Furniture retailer Ellerine, concerned that it is losing its customer loans business to banking players, has given its conditional support to a R9.85 billion buyout offer from microlender African Bank Investments Limited (Abil). Yesterday’s offer came as furniture retailers, with the exception of Lewis, scrambled to protect profits generated from customer loans, arguing that they were staring down the barrel of cheaper loans from big banks and microlenders. The bid came less than two weeks after rival JD Group said it would build a separate consumer finance house to win back a loans business that is being eroded by competitors such as Abil and banks. Ellerine, which owns chains such as Ellerines and Beares, said it was “highly concerned about the ongoing loss of its traditional credit business to the banking sector”. Exactly how concerned Ellerine might be was highlighted by Abil’s estimation that up to 70 percent of profit at the retailer was earned from financial services, with only 30 percent earned from retail. Abil said it believed that more efficient use of the Ellerine balance sheet would enable it to offer cheaper loans, as the new National Credit Act ushered in a more competitive lending environment. It would do this over time by funding Ellerine’s R2 billion surplus capital through debt. In recent years the big banks and microlenders have been aggressively lending money to furniture chain customers, offering credit that is not tied to any particular chain. Nedcor Securities retail analyst Syd Vianello has questioned furniture retailers’ reliance on store cards, noting that US customers used credit cards to shop anywhere. Jeanine van Zyl, a retail analyst at Old Mutual Investment Group South Africa, said the deal appeared to be “the perfect match”. Van Zyl said Abil would get hold of Ellerine’s client base and that Ellerine would gain Abil’s other financial products, including revolving credit. The two firms said the transaction would double the credit client base, giving a total of “more than 2 million active credit clients”. The share swap offer, worth R85 a share at Friday’s close, came as the market closed yesterday. Ellerine rose 4.31 percent to R60.50. The general retailers’ sector added 2 percent. Abil rose 1.76 percent to R29.51. Van Zyl said with the markets “down and out”, an offer worth R85 a share was likely to go down well with Ellerine shareholders. The offer is still an expression of interest and subject to due diligence. Ellerine investors will get 265 Abil shares for every 100 Ellerine shares.