Diversified retail and manufacturing group, Sefalana Holdings will this year cash in a R250 million (P188.5 million) investment made in a South African retail consortium, opting out of converting the funds into equity, due to a negative market outlook in that country.
Sefalana invested R250 million in the Fast Moving Consumer Goods (FMCG) consortium in July 2017 with an agreement on fixed annual earnings and the option to convert the investment into a 30% equity stake after five years.
In a commentary accompanying the group’s recently released interim results, directors said a decision had been taken to cash out the investment and not pursue the conversion to equity.
“During the period, we received our fourth tranche of returns from our South African preference share investment (and) for the first time since we made this investment, that business has performed below expectation,” directors said. “This is largely as a result of the tough economic conditions currently being experienced in the country.”
In the 2020 Annual Report, directors said under the 2017 deal, Sefalana was due to earn a fixed annual return of R50 million for five years, with the option to convert to equity after five years. In 2020, the deal yielded P38 million in investment income for Sefalana, a figure that fell to P12.9 million for the six months ended October 2021.
The investment’s fair value lost R8 million (P6 million) during the same period.
“We have carefully monitored the performance of the business over the last 12 months and the likely forward-looking economic trends, and have concluded that it is in the group’s interest not to exercise our conversion option,” directors said.
The South African consortium aimed to acquire several existing chains and grow the store complement into a significant business within 10 years. In the 2020 Annual Report, Sefalana directors said the consortium was 'performing well' adding that almost three years into its operations, it was operating broadly in line with the plan.
At that point, the consortium owned 15 stores in that country described as being 'well-located' where there were strong populations to support trade. All the target chains acquired by then had improved their performances post-takeover.
However, even then, Sefalana noted warning signals on the horizon.
“The South African economy has been experiencing significant strain and this is expected to adversely impact trading conditions in the coming years,” the directors stated. “This preference share arrangement has therefore successfully sheltered our risk to the South African economy as we retain the ability to exit the South African investment on the completion of the five-year preference share period should the country not show signs of recovery.”
Sefalana also has operations in Zambia, Lesotho, Namibia and Australia.