Pick n Pay should know about discounts. For retailers, carefully pitching product lines attractively to snag market share growth and maintain a viable margin is key to sustainable growth in a tough consumer market.
The supermarket giant might not have got that equation completely right in recent years. But its discounting abilities are again being tested in a much-needed recapitalisation exercise. Last week Pick n Pay priced its R4bn rights issue at a discount of about a third to its recent share price. This is the first major step in its significant recapitalisation plan, which will be followed by a separate listing of Boxer later this year as it seeks to reduce debt and stabilise the business.
The offer was made at a deep discount to make it attractive as the proposed turnaround carries significant execution risk, says Sasfin senior equity analyst Alec Abraham.
Others were more puzzled. Evan Walker, portfolio manager at 36One Asset Management, says the price of the share offering is surprising. “It was a big discount, given the share price. The old theory is you had to attract shareholders with a discount, but the share price has effectively halved in the past year. I would have aimed for a higher price; I’m not sure if it’s offering a big discount on Pick n Pay and aiming for a more attractive price on Boxer. Either way, if you’re a shareholder and following your rights now, you probably want a first stab at buying Boxer.”
Walker says South African shares have seen a fairly big bounce since the elections. “The more shares you put in issue, the lower your earnings a share will be … This was quite a few more shares than I would have thought. I thought there might be a 10%-15% discount, but this is about 30%. It’s a big discount relative to where South African shares are trading.”
Casparus Treurnicht, portfolio manager at Gryphon Asset Management, says investors were well aware there would be a recapitalisation of Pick n Pay at some point. “Investors that have been invested in the share for so long don’t really have a choice but to take up and exercise their rights. I expect all investors to exercise their rights. I am a bit surprised at the low price, meaning more rights had to be issued and therefore more dilution.
“I suspect management will be using this as an opportunity to buy low into the business. The discount also indicates to me that there was quite a bit of shuffling behind the scenes in terms of getting everyone on board and getting big shareholders signed up.” Treurnicht adds that if you hold the view that Pick n Pay is going to come right, it’s a chance to buy in low.
I thought there might be a 10%-15% discount, but this is about 30%. It’s a big discount relative to where South African shares are trading
— Evan Walker
CEO Sean Summers says Pick n Pay is obviously pleased, as this is the first of two steps in the recapitalisation programme. “We’ve been very encouraged by the support we’ve received from the family and the major shareholders in terms of following their rights. This should see another hurdle cleared, and we will clear others as they present themselves.”
Rights offers are undertaken at discounts as an incentive for shareholders to follow their rights. “If you price it at a premium, shareholders would simply buy shares for a lower price on the stock market,” says Pick n Pay CFO Lerena Olivier.
The rights offer price is R15.86 a share, a 32.48% discount to the theoretical ex-rights price calculated using the Pick n Pay share price of R27.30 at market close on July 10. While it’s now trading at about R27.50, it had a 52-week low of R16.62. But only a year ago it was R40, and at one point even tipped in at R60.
While some have raised eyebrows at the discount, Olivier points out that it is in line with similar rights offers. She says the banks are underwriting the rights offer, taking up any shares not purchased by shareholders. This guarantees that the company will receive the full R4bn. “Underwriters are not natural holders of the share and in the unlikely event that shareholders don’t follow their rights and the underwriters are required to buy the shares, the discount provides them with sufficient headroom to sell the shares in the marketplace. They need to allow for uncertainty and market volatility.”
Of the shareholder base, 45% have given irrevocable undertakings to take up their shares. This equates to about R1.9bn of the R4bn the group has set as a capital-raising target. “That’s high and indicative of how strongly shareholders believe in the investment case and in the future of the company. We have worked hard with our advisers to make sure the rights offer is attractive and successful,” says Olivier.
The letters of allocation were to be listed out on Wednesday. The offer for participation ends on Monday July 22 and closes by Friday August 2, and with funds received by Pick n Pay on Monday August 5. Olivier says shareholders are also able to trade those letters of allocation on the market, and these instruments are likely to trade at a price close to the difference between the theoretical ex-rights price and the rights offer price.
Some recent recapitalisation rights offers (generally related to the impact of Covid) include budget hotel group City Lodge, which did a rights offer priced at a 34.7% discount to the theoretical ex-rights price in 2020, and fashion retailer TFG, which did a rights offer in August 2020 priced at a discount of 34.5%. Both these capital raises were underwritten by banks.
Meanwhile, in a separate announcement, Pick n Pay said Summers has been awarded shares worth R108m based on a deemed award price of R27 a share. Summers won’t get the shares straight away — and, in fact, might not receive all of them. It depends largely on the 70-year-old achieving financial performance targets, putting in place “effective leadership and operational structures” and implementing a succession plan.
Ackerman Investment Holdings, the holding company for the family of Pick n Pay founder Raymond Ackerman, has committed to following its rights up to R1.01bn. Other shareholders will take part in the offer and hold about 45% of the shares in issue. The offer is underwritten by Absa, Standard Bank and Rand Merchant Bank.
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