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JD Group to buy Steinhoff's SA retail assets

JD Group on Monday, 14 March 2011, announced the proposed acquisition of Unitrans Automotive, one of the four largest motor vehicle retailers in SA, and Steinbuild, owners of the Timbercity and Pennypinchers building supplies and DIY businesses.
The seller, Steinhoff Africa Holdings Limited, will acquire a 26% stake in JD Group in exchange for these businesses.

Since 2008, JD Group has been restructuring to create an independent financial services business, separate from its furniture and cash retail operations.

Financial services

This was successfully completed in 2010, but in order to maximise the benefits the financial services business requires critical mass.

This transaction has the potential to substantially grow financial services in the JD Group.

David Sussman, executive chairman, explains the group's strategy.

"The JD Group knows, understands and serves the mass middle market," he said.

"We also understand the credit risk involved.

"60% of applicants for finance for entry-level vehicles rejected by the banking sector are consumers in our target market, which are our customers.

"We have carried out in-depth research, which indicates that about 25% of those rejected would qualify for finance from the JD Group.

"Ownership of a substantial motor dealership business now provides us with a channel to access this market."

Existing financing arrangements via the banking sector would remain intact, but JD Group intended launching a unique financing product to provide finance for entry-level vehicles on an affordable basis to its customer base.

"We are not competing with the banks," Sussman added, "we are going to provide an entirely new group of people, our customers, with the ultimate freedom only vehicle ownership can provide. We are going to change the face of entry-level vehicle finance forever."

Motoring to DIY

Unitrans Motors, valued at R3 billion, is the number one dealer in Toyota and GM in SA, and the number three dealer in VW/Audi.

It has 82 retail outlets and offers a complete range of new and used vehicle sales, parts, accessories and services and financial services. It also owns Hertz Car Rental in SA.

The acquisition of the Steinbuild businesses would also expand JD Group's footprint in the home market.

"The Pennypinchers and Timbercity brands are well established with a combined 59 stores situated around SA.

"A large percentage of sales are to building professionals, with approximately 70% being on credit. This too fits within the group's financial services vision," Sussman said.

Additional platform

However, the strategic fit went beyond that as Steinbuild would form part of JD Group's plan to extend its retail offering and provide fresh concepts and products in household goods and furniture to its target market.

"We currently have over 1 000 stores in our traditional and cash retail businesses, supplying furniture, appliances and electronics to our customers," says Grattan Kirk, JD Group CEO.

"Steinbuild will provide an additional platform for DIY supplies, homewares and interior décor to our urban and rural customers, along with the support of consumer finance.

"We also envision the development of 'Destination Stores' in urban metro areas supplying our full product range."

The inclusion of Steinhoff as a strategic shareholder would bring additional benefits to the group.

Commercial agreement

JD Group and Steinhoff said they had entered into a commercial agreement whereby Steinhoff would provide JD Group with access to its sourcing capability and international expertise.

Sussman was at pains to stress that this arrangement would not impinge on its local manufacturers and supply chain, but would enhance its offering to customers and would allow the group to improve its merchandising skills.

"We are also going to use Steinhoff's experience to market a 'big-box home lifestyle' retail concept," said Sussman.

"This is an exciting new development that we will aggressively pursue in SA."

JD Group would be selling its Polish furniture retail business, Abra, to a Steinhoff associate, as it more closely fitted with Steinhoff's international structure and was JD Group's only non-southern African investment.

Financial implications

The financial implications for JD Group were significant.

"The issuing of new shares to Steinhoff substantially increases JD Groups capitalisation, strengthening its balance sheet and thus increasing its borrowing capacity, with net asset value per share increasing 18% on a pro forma basis."

The effect on headline earnings would initially be neutral, however significant earnings were expected to flow in the second year, not only from the additional finance-related business, but from the benefits of the international sourcing.

"Overall," said Sussman, "this is a natural evolution in our group's development.

"From a single store business 28 years ago, the entire dimension of the JD Group has changed and we are now a highly diversified retail and consumer finance group serving the middle mass market."


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