Investors wary as Choppies seals 74thebe exit from SA
Mbongeni Mguni | Friday December 6, 2019 18:00
Kind Investments will take over the loss-making stores and has committed to investing an immediate ZAR100 million in the SA stores towards working capital and stock to take advantage of the Christmas-buying frenzy.
Under the deal, the buyer inherits claims against the SA stores and Choppies is released from guarantees it gave to creditors and suppliers for the SA stores. Choppies, however, has also committed to underwriting “negative equity value” in the deal up to R150 million and also covering a further R125 million in claims that the buyer could make for certain risks, which include a possible foreign exchange violation and certain “reportable irregularities”.
As news of the deal and its terms broke on Tuesday evening, investors began scrambling to understand the impact of the transaction. Choppies has been suspended from the Botswana Stock Exchange since September 2018 and investors have thus not been able to trade their shares. In addition, the absence of audited financials for about two years has meant the investors have no clue how the group’s books look, except that lenders asked for but could not get a letter from the group guaranteeing its solvency earlier this year.
“How did they come out with values in this deal when the 2018 group financials have not been finalised,” a long-time retail investor with Choppies told BusinessWeek. “We would have expected that Choppies would rather speed up the release of the audited results, then do the deal with everyone knowing the books, rather than do a deal when no one knows the company’s state. “If the audited results were out, we would be able to do our own valuation of the transaction but now, it’s only people with access to certain information.”
Without published results, investors say it will be unclear what impact the deal has on Choppies. It is not clear what impairment Choppies will carry as a result of selling off the stores, with the deal’s other terms and conditions around claims and underwriting guarantees further clouding this issue.
In the Tuesday announcement, directors said the Choppies group would remain “technically solvent” after accounting for the impairment of the investment and loans in the SA subsidiaries.
Besides potential negative effects on the as yet unpublished audited financial statements, investors are concerned that the SA exit means the preferential rates Choppies has been getting from South African suppliers for its stores in Botswana and the region will end, tightening margins locally.
In its last financials, representing the half-year to December 2017, Choppies said its South African operations contributed 36% of revenue. In this week’s statement, the group said the subsidiaries had been running at a loss for two years, with suppliers going unpaid and stores poorly stocked as a result. According to the terms of the deal, Choppies has assigned no value to the SA stores as their liabilities reportedly exceed their assets. In reaching this conclusion, Choppies cites “management accounts as at June 30, 2019”. In announcing the deal, Choppies said the BSE had categorised the transaction as “Category 2,” a classification which according to the Exchange’s listing rules means shareholders are not required to vote on the deal.
“Even if we were to vote on the deal, the current rules mean the directors can use their collective voting power and force the deal through,” said the retail shareholder. “We don’t even know the underlying shareholders in that company that is buying.”
BusinessWeek is informed that the buyer, Kind Investments was formed recently for the purposes of the transaction. Choppies’ statement alludes to the fact that Kind Investments has “a sole director”. Market speculation by press time was that vehicle auction businessmen were behind the buyer, conjecture which only added more mystery to the transaction. The SA exit will echo former Choppies chair, Festus Mogae’s concerns about Choppies presence in that country. Mogae, one of the country’s former presidents, was outspoken about the regional grocer leaving South Africa, telling investors in September that there was no value remaining in that market.
“Even over salaries in Botswana, we were subsidising South Africa but if you brought this up, it was a fight. “For me, that salary issue was political and I said I don’t want to subsidise salaries in South Africa and Zimbabwe. “All these attempts to make money from abroad have not worked.
“All they are doing is getting money from Botswana. They tried to replicate what happened in Botswana abroad, but it has been a disaster.
“It cannot be done,” he said at a stormy extraordinary general meeting where he handed in his resignation after 10 years at the helm.