JD Group buyout seen as inevitable

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BR JD Group 81[1] Independent Newspapers Retail analysts say Steinhoff's offer to buy out JD Group will simplify group structures and cut costs. Photo: Simphiwe Mbokazi

Johannesburg - Steinhoff’s decision to take over JD Group did not come as a surprise to the market but rather as an inevitable event, retail analysts said yesterday. Steinhoff announced this week that it planned to acquire 98 percent of JD Group’s issued ordinary shares.

Steinhoff, which owns 56.8 percent already, said it had received commitments from several JD Group shareholders to accept the offer. It said it had made the move because JD Group, which owns the Russells, Morkels and Joshua Doore chains, was facing challenges in the furniture retail and finance business segments that would take some time and additional capital to overcome.

The increase of its stake in JD Group would enhance Steinhoff’s ability to support the group’s operations. JD Group shareholders accepting the offer will get one Steinhoff share for every 1.9 JD Group shares.

Local retailers are struggling amid high unemployment and as inflation hurts spending, with those that sell on credit particularly vulnerable.

Retail sales growth declined to 3.5 percent in December last year from 4.4 percent the previous month.

Last month, JD Group indicated that it would increase its impairment provision by R602 million to R1.6 billion for the six months to December. In addition, R495m of bad debt had been written off – up from R184m in December 2012.

It said it would also discontinue its loans division.

Steinhoff chief executive Markus Jooste had previously said it would take about four years to fix JD Group.

“In my experience and what I have seen before, is that the cycle takes three, four years to work itself out,” Jooste said.

Evan Walker, a portfolio manager at 36One Asset Management, said the only surprise was that instead of the proposed rights issue Steinhoff had decided to change its strategy and buy JD Group out.

“I think Steinhoff relooked at JD Group and figured out that they could do a lot more with it as a delisted operation.

This means JD Group will be a subsidiary of Steinhoff and will not carry the costs of being a listed business, such as reports and audit committees.

JD Group had faced difficulties coming from the tough consumer environment, which was made worse by the strikes and slow growth in the domestic economy, Walker said.

Ron Klipin at Cratos Wealth believed that JD Group needed to be restructured and recapitalised. Klipin said this would take more hard work as a lot needed to be done in terms of downsizing and consolidating the brands, as well as bringing about logistics efficiencies

He said this move would also enable JD Group to use the expertise of Steinhoff.

Klipin said the buyout would simplify Steinhoff’s structure and bring the furniture group under one wing.

Klipin thought that the JD Group’s provisions for bad debts had been inadequate over the past year. He added that underperformers at JD Group might face the heat.

Steinhoff shares fell 2.71 percent to R52 yesterday, while JD Group shares lost 1.1 percent to close at R27.90. - Business Report

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