Woolworths and its woes down under

 

Germien du Plessis, Bravura’s corporate finance principal, Sydney

South African companies expanding into Australia are again making headlines, this time with Woolworths announcing that it faces an impairment charge for David Jones of A$712.5 million (R7 billion). Woolworths acquired David Jones for R23.3 billion in April 2014, concluding the largest Australian deal at that time by a South African retailer. Now, with the Woolworths share price eroding by 39% from its high in November 2015, it seems that the company underestimated the “tough and unprecedented trading conditions, a cyclical downturn and structural changes that have impacted performance across the Australian retail sector”, the reasons cited for poor performance.

Woolworths is not the only leading retailer that has been amassing an Australian retail portfolio. Others include The Foschini Group with a A$300 million acquisition of Australia’s Retail Apparel Group in mid-2017, Pepkor, Clicks, Pick n Pay, Steinhoff, and Mr Price. “Australia’s retail conditions have been tough for a while, and Amazon’s entry into the Australian market adds to the pressure. This is no secret. Yet South African retailers continue to pursue Australian deals”, says Germien du Plessis, Bravura’s corporate finance principal based in Sydney.

“Australia shares a similar lifestyle and seasons with South Africa, and there are opportunities to capitalise on Australia’s proximity to manufacturing hubs in the East”.  Retailers have accordingly been some of the earliest movers into Australia.

“Unfortunately, a number of these transactions produced less than stellar results, notably early forays by Truworths, Clicks and Pick n Pay. And now Woolworths.”

Du Plessis adds: “The  perception arose in some quarters that Australia is a ‘difficult’ investment destination across the board. We believe this perception is simply not accurate. There certainly have been hard lessons learnt, but there have also been many successful Australian acquisitions by South African corporates.

“Retailers Metro Cash n Carry turned Davids from a loss-making business into a market-leader. Bidfood Australia is ranked in Australia’s top 200 companies. Nando’s now operates more than 250 Australian stores. In financial services, Youi (owned by Rand Merchant Investment Holdings) has made big strides in the insurance sector. In the ICT sector, Dimension Data and Datatec have completed numerous successful acquisitions, and Murray & Roberts has led the way in mining services through their acquisition of Clough.”

Du Plessis says that Australia offers investors hard-currency earnings and diversification. “While Africa offers super-profits in some areas, the African expansion story is also often fraught with regulatory, political and logistical difficulties. The UK remains uncertain due to Brexit, and America, as a vast market with enormous competition, offers its own set of challenges.”

Australia has been recession free for 26 years, with average GDP growth of 3.3% per annum since 1992, and the forecast Australian economic growth rate to 2020 is the highest amongst major advanced economies. The Australian economy is underpinned by an open and transparent business market, supported by a highly educated workforce and progressive labour laws, as well as strong population growth.  Australia maintains a triple-A rating from S&P, Moody’s and Fitch and has close ties to the fastest growing markets in Asia.

“However, Australia doesn’t offer strong growth across the board and potential investment pitfalls need to be considered,” cautions du Plessis.

“The Australian market is not as similar to South Africa as one would think.  While we share a lifestyle and English as a business language, the Australian psyche differs significantly from South Africa, and the structure of the market is different. In addition, political dysfunction is leading to a governance stalemate, household debt is at record-high levels and wages are stagnant.”

In looking at Australian opportunities, du Plessis says South African businesses tend to misjudge the labour market and regulatory environment.  “Australia is an egalitarian society, with a unionised labour market and significantly higher wages than South Africa; the minimum wage is currently at $18.29 / ZAR175 per hour. Australian regulation is also extensive, which creates a barrier-to-entry benefit when acquiring a business in a regulated industry, but also results in compliance obligations and associated costs.”

South African businesses have also shown over-confidence in their turn-around abilities, leading to additional cost, she adds. “Whilst South Africans have a good turn-around track record on home soil, it becomes significantly harder to attain the same results in a foreign environment, with a foreign workforce characterised by significant cultural diversity. South African management styles can be perceived as very direct, to the point of aggressive or arrogant. The retention of Australian management is therefore critical to business continuity.”

When it comes to costs, commercial property is more expensive than in South Africa and rentals are significantly higher, she points out. Finally, having financial rather than strategic goals, including chasing ZAR diversification and dollar income at all costs – and over-paying in the process, can lead to transaction failure.

“An acquisition needs to be more than just a Dollar income stream.”

With the above in mind, du Plessis believes that the choice of sector is key when looking at Australian investment. “We believe that Australia offers a particularly good fit for South African ICT and financial services businesses, as well as industries that rely on technology, have a high degree of automation or have inputs that are import-related. In ICT and financial services specifically, a technology-savvy and solutions-driven customer base makes Australia a hub for innovation, and there are significant opportunities for investment.”

Du Plessis, as part of the Bravura Group, has advised several South African businesses with regard to their entry into the Australian market.

“For investors planning to establish or expand business operations in Australia as part of a diversification strategy, there are opportunities in the right sectors.  But to maximise long-term value, companies should ensure that they receive informed, local advice with an understanding of the South African investor perspective, so as to navigate the complexities.”



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