Storm brewing over Mr Price deal to buy European retailer for R9.7 billion
Mr Price has come under pressure from its shareholders, with Benguela Global Fund Managers calling for the retailer to halt its proposed purchase of NKD.
In December, Mr Price announced its plan to acquire 100% of the shares of Pegasus Group Holding GmbH, which trades as NKD Group’s retail business, in a deal valued at R9.66 billion.
The company operates in the European value apparel and homeware retail sector, with over 2,100 stores across Germany, Austria, Italy, Croatia, Slovenia, the Czech Republic, and Poland.
The company generated net sales of €684.57 million for the fiscal year ended December 31, 2024. The deal’s announcement caused Mr Price’s share price to plummet, declining by R6 billion.
Benguela Global Fund Managers is now calling on the South African retailer to stop the deal.
Benguela said the move carries an unacceptable risk profile, is overvalued, and repeats well-documented mistakes South African retailers make when expanding into the European “graveyard.”
The company urged the board to reconsider the allocation of capital, which it believes will result in long-term destruction of shareholder value.
Looking at NKD, Benguela said that the European retailer offers extremely low margins, likely in the region of 1% to 2%, even in benign trading conditions. This is far lower than Mr Price’s typical 9% to 14%.
It added that Mr Price’s current return on equity (ROE) is 27% compared to NKD’s approximately 13%.
“Based on NKD’s 2024 profit after tax and the midpoint of Mr Price’s proposed acquisition consideration, the earnings yield or return on investment is 2.9%,” said Benguela.
“Acquiring a structurally low-return business at scale dilutes group returns, even before execution risk is considered.”
The acquisition also implies a purchase price-earnings (PE) multiple of up to 37 times NKD’s 2024 earnings, which is far higher than the best-in-class apparel retailers trade at.
Moreover, the deal is set to raise R6 billion in debt for Mr Price. At current interest rates, the annual interest charge of over R400 million will likely exceed the profit generated from NKD.
The South African operations will thus be subsidising a loss-making European subsidiary for the foreseeable future, which will impact the group’s overall ROE.
International Graveyard
The investment management company also warned that several other South African retailers had attempted to establish offshore operations, which ultimately ended in disaster.
This includes Woolworths’ purchase of David Jones in 2014 for R21 billion, which eventually resulted in over R20 billion in impairments.
Another example is Famous Brands, which acquired Gourmet Burger Kitchen for R1.8 billion, but saw impairments of R2.8 billion following the deal, amounting to 153% of the total purchase consideration.
Other areas of concern include intense competition in Europe, the significant capital expenditure required for NKD, and unproven assumptions regarding turnaround and value creation.
Benguala is not the only company to highlight the issues at Mr Price, with 36One also noting concerns about NKD’s poor historical financial performance, including an over R500 million loss in 2023.
Escalated to the JSE
Benguela has also written to the JSE to request that Mr Price’s takeover of NKD be deemed a Category 1 transaction, along with several other acquisitions the group has made since 2021.
Category 1 transactions account for over 30% of a company’s market cap and need shareholder approval.
Since 2021, Mr Price has acquired Studio 88, Yuppiechef and Power Fashion. Along with NKD, the investments total R17.6 billion and would add over 3,000 stores to its network.
“Individual announcements may have classified these as Category 2 or smaller, but aggregation reveals a transformative impact, warranting full shareholder scrutiny to assess risks, synergies, and alignment with fiduciary duties,” it said.
Benguela requested that the JSE aggregate all the Mr Price acquisitions as a Category 1 transaction.
It also requested that Mr Price be required to seek shareholder approval for the NKD acquisition through a general meeting and circular, which would include pro forma financial effects, fairness opinions, and risk assessments.
While the JSE rejected the request, the matter has now been taken to the Financial Services Tribunal of the JSE.
In response to BusinessTech, Mr Price said that he will make written submissions to the tribunal as part of the formal process.
“We have signed the acquisition agreements and are contractually obliged to comply with the terms,” said Mr Price.
“We remain committed to this strategic acquisition and look forward to being able to share more information as soon as we can.
This article has been amended following comments from Mr Price and Benguela.
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