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The Finance Ghost: The market lowdown on grocery groups, Invicta and Spear

The Finance Ghost: The market lowdown on grocery groups, Invicta and Spear
(Photo: Justin Sullivan / Getty Images)

A group either needs to make acquisitions in a familiar market, but in new industry verticals (so as to appease regulators), or acquisition targets must be found in familiar industry verticals in new markets.

If you’ve been paying attention to Shoprite’s strategy in recent years, you would have noticed the group experimenting with new retail formats. 

Some have drawn a fair share of attention, like clothing chain Uniq, and others have been operating under the radar, like Checkers Outdoor.

At battered and bruised Pick n Pay, we find that Pick n Pay Clothing has been the silver lining among the dark clouds. 

Clearly, there’s merit in grocery groups looking at specialist store formats and winning market share from other retail groups that wouldn’t normally be competitors.

Woolworths has largely stayed out of this fight. There hasn’t really been a need to add on a specialist chain, but this has changed with the acquisition of Absolute Pets.

People spend a fortune on their pets and there’s a gap between the supermarket aisle range and the specialist stuff found at your vet. 

It is an opportunity that Woolworths has grabbed with both paws through a deal to acquire 93.45% of Absolute Pets. The latest update is that the deal has closed after meeting all suspensive conditions.

Of course, the difference here is that Shoprite has been starting new formats from scratch, whereas Woolworths has acquired an existing business. Although the latter approach is a lot faster, I wouldn’t write off the possibility of Checkers Pets (or similar) coming to a mall near you.

Invicta looks to the UK for growth

Invicta is so big in the South African market that acquisitive growth becomes difficult because competition regulators won’t approve deals that create a market that is too concentrated. 

This forces the group to rely on broader economic growth as a source of further increases in earnings. Sadly, SA is a bit light on that at the moment.

This is where major strategic decisions have to be made. 

A group either needs to make acquisitions in a familiar market, but in new industry verticals (so as to appease regulators), or acquisition targets must be found in familiar industry verticals in new markets. With its latest deal, Invicta has taken the latter approach.

With the acquisition of 100% of Nationwide Bearing Company in the UK, Invicta is acquiring a business that has a track record of 32 years and a network of outsourced manufacturing partners in multiple jurisdictions. 

Perhaps best of all, the company earns profits in British pounds.

Invicta is paying up for this deal – the purchase price is £12.4-million (R292.3-million). 

The disclosure in the announcement isn’t great, to be honest. It sounds like the net asset value (NAV) at the time of completion is expected to be £10.2-million, so this is a significant premium to the NAV. 

Profit for the year ended March 2023 was nearly £1.4-million, but that number is obviously a year out of date.

If nothing else, the deal signals Invicta’s strategic intent and willingness to pay relatively higher prices for quality global assets.

Spear gets sharper

Spear REIT is an excellent example of a strongly focused strategy. The property fund is only interested in the Western Cape, which is the best growth area in SA now.

Even then, it’s still not easy out there, as group metrics like office vacancies can confirm. 

In an operational update, Spear has noted that distributable income per share increased by between 0.75% and 1.5% for the year ended February 2024 versus the comparable year. 

That’s certainly not going to light anyone’s pants on fire, but it’s also a lot better than many other South African portfolios have done over the same period.

When it comes to acquisitions, buying properties for the sake of growth is not a good idea. 

Hyprop is a case in point right now, as I think it overpaid for Table Bay Mall based on the expected growth in that area in years to come. 

I appreciate a strategic acquisition and how patience is required, but it’s still annoying when the dividend disappears and it gives a weak excuse about being worried about Pick n Pay.

Spear has managed to negotiate a deal for a substantial portfolio of Western Cape properties at a price that looks reasonable – a net operating income yield of 9.46% excluding a one-off income amount that Spear receives as a deal sweetener. The seller is listed peer Emira, which needs to recycle capital and bring debt down.

Spear’s balance sheet is in a different position, hence the deal to acquire an impressive 13 Western Cape properties for R1.15-billion. DM

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R29.

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