Pepkor makes retail investment in Brazil in what experts call a good strategic move

JSE-listed Pepkor’s move into Brazil with the acquisition of an 87% interest in value retailer Avenida there has been welcomed by market analysts as a good strategic move that also retains the expertise of the founders of that business.

While the value of the deal was not disclosed, Pepkor said the acquisition of the group was less than 4% of its market capitalisation, which on Thursday was about R80bn. Avenida has a footprint of 130 outlets.

Pepkor — whose brands include Pep and Ackermans, among others — said it came “after more than two years of extensive research into emerging market opportunities and a thorough due diligence by management and various advisers”.

It said that the transaction enabled Pepkor to partner “Avenida’s founder-led management team in Brazil to unlock significant growth in the largest economy in Latin America”.

CEO Leon Lourens said the “combination of Avenida and Pepkor brings together the required capital, retail synergies and the collective know-how to bolster Avenida’s growth in years to come”.

Makwe Masilela, who leads Makwe Fund Managers, viewed the transaction as a “strategic move by Pepkor and very wise”.

“First, looking at Brazil itself, the country has the same dynamics more or less as our South African market and other African markets and we have seen how well Pepkor has managed in these types of markets,” he said.

He added that Pepkor and Avenida serviced more or less the same living standards measure (LSM) segment  and that it would help to diversify the South African company’s revenue streams.

“And Avenida has only 130 stores, so for Pepkor this will pay off if their whole intention is to expand into South America using this as a base.

“It’s good as well in that it’s not an outright buy. You still have the founders involved who understand the market much better. Pepkor will come in with their energy and expertise and then combine it with the local guys who understand the market better. That should be a win for Pepkor and it is a perfect match.”

Sanlam Private Wealth portfolio manager Nick Kunze said that in terms of scale it was “very small in Pepkor’s life”, so was a sensible textbook way of entering a new offshore market to expand as they were “not trying to eat the elephant too quickly”.

“Another thing is that Brazil is another emerging market. It’s not Australia or anywhere in Europe so there are clear synergies compared to the usual places South African companies want to step out to expand into,” said Kunze.

He said with Brazil’s GDP per capita about 20% higher than SA's and a small formalised retail market, there was “quite a long runway for Pepkor” in terms of expansion prospects.

All Weather Capital fund manager Chris Reddy said the acquisition seemed in line with “Pepkor’s strategy of being a global discount and value retailer”.

“We like the fact it is under 4% of Pepkor’s market cap, thereby limiting deal execution risk and group exposure. There are growth opportunities to increase the store footprint as well as increase the percentage of kids and baby sales (now 13.6% of Avenida's total sales), given Pepkor’s market leader status in the segment in SA.”​

Business Times