Steinhoff International makes long-awaited acquisition

SteinhoffAfter months of actively shopping for further retail opportunities in Australia, South African retail giant, Steinhoff International, has made its move by acquiring furniture retailer, Fantastic Holdings.

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Steinhoff International has expanded its footprint in the Australian furniture market with the acquisition of Fantastic Furniture in a $361 million deal.

The South African-based retailer with deep pockets and an insatiable appetite for growth, has been actively shopping for further retail opportunities in Australia for the past six months.

Steinhoff International owns Freedom, Snooze, Bay Leather Republic, Best & Less and Harris Scarfe and sounded out both The Good Guys and Woolworths’ Big W about further acquisitions.

Steinhoff International also has a large format home concept, Poco, with two locations in Sydney and is opening Debenhams stores in prime locations under a license to the British department store group.

The Fantastic Furniture acquisition has been backed by Fantastic’s major shareholders, including Julian Tertini, who holds a 40 per cent stake in the business.

The Steinhoff International deal locks out Quadrant Private Equity and Ironbridge Capital, who have mulled over an offer for Fantastic Furniture in recent months with an eye to merging the business with their Super A-mart investment.

The problem for the two private equity firms was how to extract value from a merger deal, given Fantastic Furniture was already listed on the Australian Stock Exchange.

With Fantastic Furniture now out of play, the private equity partners now have to decide how they can beef up Super A-Mart for a public float, possibly in the second half of 2017.

Ironbridge Capital acquired Super A-Mart from its founder John van Lieshout in 2006 for $500 million, bringing in Quadrant buying in 2012.

The investors had hoped to float the chain, which currently has 52 stores, for around $600 million, a sum that could never have been extracted from a merger with Fantastic Furniture – and arguably also a figure well north of what investors were likely to shell out.

The Steinhoff International acquisition of Fantastic Furniture will no doubt dent the potential float price further, as investors factor in competitive risks in the category, which also includes Harvey Norman, the expanding IKEA and the listed Nick Scali Furniture.

Steinhoff International is a $30 billion furniture and electrical goliath listed on the Johannesburg and Frankfurt Stock Exchanges that has a global network of manufacturing and retail operations.

In Australia, the South African retailer already has an established presence in the furniture category with its Freedom Furniture and Snooze bedding chains.

It had planned to roll out a national network of Poco warehouse style stores that sell furniture, bedding, flooring, electrical goods, lighting, homewares, kitchens and DIY products.

Fantastic FurnitureThe Poco concept was launched in 2013 but has had limited success, prompting Steinhoff International to sound out The Good Guys as an acquisition target when the Muir family was pursuing a public float.

JB Hi-Fi was also negotiating with the Muir family on The Good Guys and concluded an $870 million deal last month.

Steinhoff International also sounded out the downsizing Woolworths on its interest in offloading Big W, but, at least for now, the discount department store chain is not for sale.

With either of The Good Guys and Big W chains, Steinhoff International could have expanded its furniture and electrical business through established store networks, a much faster market capture option than building Poco from the ground up.

Fantastic frustration

Fantastic Furniture is the third largest furniture retailer in Australia by sales volume and the largest vertically integrated furniture group with lounge and mattress manufacturing plants.

Fantastic Furniture has 125 stores trading under the Fantastic Furniture, Plush and Original Mattress Factory brands and aligns with the Steinhoff International market positioning towards value-conscious consumer segments.

Before this acquisition, Steinhoff International had almost 500 stores across six retail brands in Australasia, including the Harris Scarfe and Best & Less chains, and is set to roll out standalone flagship Debenhams stores under a licence agreement with the British department store retailer.

Fantastic Furniture posted a 9.4 per cent increase in sales to $543.7 million for the 2016 financial year and net earnings of $11.4 million, with the bottom line result impacted adversely by the Le Cornu store in Adelaide which is closing in the current half of the financial year.

However, despite its strong results, Fantastic Furniture has frustrated investors with the sudden and unexplained departure of former CEO, Stephen Heath and CFO George Saoud in January, prompting questions about Tertini’s future plans for the group.

Heath, who is now trying to breathe life into the struggling online retailer, Temple & Webster, was replaced by a former Woolworths and Dick Smith executive, Debra Singh.

Announcing its 2016 financial year results, Tertini said the retailer would open 15 new stores across its three brands in FY17 and would introduce new product ranges and expand its online channel.

Steinhoff International will review the store rollouts and product ranges as well as the manufacturing operations, which could potentially now supply its brands in other countries if it can get the pricing right.

Fantastic Furniture manufactures products in China and Vietnam as well as in Australia.

A compelling proposal

Steinhoff International is offering Fantastic Furniture shareholders $3.50 cash per share, which represented a 43 per cent premium on the $2.45 share price the day before the takeover offer was announced.

The offer has been unanimously recommended by the directors of Fantastic Furniture and the major shareholders, including Tertini, have indicated support for the scheme of arrangement, which is a mechanism to delist the furniture retailer from the Australian Stock Exchange.

Tertini described the Steinhoff International offer as a compelling proposal that provides shareholders with the opportunity to realise a significant premium reflecting the “underlying strength of our brands, operations and people”.

Tertini said the South African company shares the current board and management’s vision for the growth and expansion of Fantastic Furniture.

Tim Schaafsma, director of Steinhoff Asia Pacific

Tim Schaafsma, director of Steinhoff Asia Pacific

Tim Schaafsma, director of Steinhoff Asia Pacific, said Fantastic Furniture is a complementary business in terms of market segments, customer base and vertical integration and would accelerate the growth of the company in Australasia.

The scheme of arrangement documentation will be lodged with the Australian Investments and Securities Commission and is expected to be sent out to shareholders in November, allowing the takeover to be finalised by December.

Steinhoff International is one of the fastest growing retail companies in the world with more than 40 retail brands in value segments in Europe, Africa, the United States and Australasia.

Trading in 30 countries, the company is vertically integrated with manufacturing plants producing furniture, household goods and general merchandise.

In Europe, which currently accounts for 61 per cent of its revenues, Steinhoff International brands include ABRA, Conforama, Emmezeta, LIPO and POCO as well as Bensons for Beds and Harveys in the United Kingdom.

In Africa, the company owns Hardware Warehouse, Hi Fi Corp, Incredible Connection, JD furniture brands, POCO, Pennypinchers, The Tile House and Timbercity.

Africa generates 32 per cent of Steinhoff International’s revenue while Australasia chips in 7 percent of its global sales. The profit split for the company in the 2016 financial year was 73 per cent from Europe, 25 per cent Africas and just two per cent from Australasia.

The acquisitive Steinhoff International is now also building a presence in the United States, in August buying Mattress Firm, a Houston Texas based retailer with more than 3500 stores in 48 states.

The company also unsuccessfully attempted to buy Home Retail Group which owns the Argos chain, with Sainsburys concluding a deal after Wesfarmers acquired Home Retail Group’s Homebase hardware chain which is being rebadged as Bunnings Warehouse.

Steinhoff International also failed to conclude a deal on the French electronics chain, Darty, which was acquired by Fnac.

However, it has expanded its European presence recently with the acquisition of the UK discount retailer, Poundland, which operates more than 900 stores across the UK, Ireland and Spain.

Ste9inhoff International’s sales in Australasia are more than $1 billion and remains interested in further acquisitions to build its market share in the categories in which it trades.

The Debenhams licence is a new initiative for the multi-brand retailer which involves both new standalone stores as well as product ranges in Harris Scarfe stores.

The first of an anticipated 10 standalone Debenhams stores will open with a 4000sqm footprint in the St Collins Lane complex in Collins street Melbourne in September 2017.

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