Has Pick n Pay played its final card?

The debate around supermarket giant Pick n Pay is heating up. This isn’t because people think the core Pick n Pay business is going to turn a corner magically this year. No, it’s because the market hates Pick n Pay so much that the discount has become almost too big to ignore.

Almost.

Last week, Pick n Pay held approximately a two-thirds stake in Boxer. Thanks to another excellent update by Boxer, its market cap had jumped to more than R40bn. Pick n Pay’s stake in Boxer was then worth about R26.4bn before any adjustments for marketability discounts and tax.

On Monday Pick n Pay announced the sale of more Boxer shares in an accelerated book-build, looking to raise as much as R4.7bn in the process. By Tuesday morning the market learnt that the placement was achieved at R82 a share, or a 3.2% premium to the 30-day volume-weighted average price.

Investors are clearly still happy to pay up for Boxer, which suggests that Pick n Pay has executed the sale timeously. But what does this mean for the much-vaunted “value unlock” trade at Pick n Pay?

Before digging into the details, we need to consider the rest of Pick n Pay’s balance sheet briefly.

Based on the most recently available audited numbers (August 2025), Pick n Pay had net cash of R3.9bn. But August was a long time ago, and we know that Pick n Pay’s performance has deteriorated, so how much is left? Probably not much, given the need for the bookbuild.

The more important question is whether this latest update has changed the approach taken by value investors, who haven’t been overly worried about the cash balance anyway.

Their lack of concern stems from Pick n Pay’s market cap (before the latest news) being at a discount of nearly 45% to the look-through value of Boxer. Put differently, the Pick n Pay share price would jump by 76% just to close the gap — and that’s assuming cash had gone to zero!

The alternative is to find a buyer for the entire stake in Boxer. But that’s easier said than done

As you can see, the bull case around Pick n Pay focuses more on the theoretical value unlock opportunity than on the likelihood of the underlying turnaround being a success. That’s extremely risky in my view, as Pick n Pay is both willing and able to drip Boxer shares into the market and eat the proceeds in its own business.

Could today’s “value gap” simply be tomorrow’s negative cash flow in Pick n Pay?

Post this bookbuild, Pick n Pay now has a 53.1% stake in Boxer. This puts it perilously close to the point at which it would lose control of the goose that lays the golden eggs. If it dips below control, it will likely send another wave of panic through the Pick n Pay share price. In practice, this gives it roughly another 3% of Boxer to drip into the market.

The alternative is to find a buyer for the entire stake in Boxer. But that’s easier said than done, particularly as Boxer is already trading at a demanding valuation. Hoping that a buyer will pay a control premium on this price is surely a bridge too far, as it would trigger a mandatory offer to all Boxer shareholders at that premium price. In the real world, even if a buyer emerges, it would likely put immense pressure on Pick n Pay to sell at or near the market price.

Very few investors are talking about the tax risks. A tax-efficient unbundling of the entire Boxer stake to shareholders is the value unlock that Pick n Pay investors are begging for, but that does seem unlikely at this juncture. To take that route, Pick n Pay would basically be signing its own death warrant for its turnaround, as there would be no remaining value underpin in the group and no obvious source of additional capital.

Pick n Pay’s existing losses are no doubt a useful tax shield for smaller sales of Boxer shares, but a sale of the entire Boxer stake would come with a hefty capital gains tax bill. Pick n Pay acquired Boxer in 2002 for just R185m, so the base cost is almost irrelevant in the context of the current value. This is an adjustment that few people seem to be making when they consider the look-through economics of the Pick n Pay opportunity.

Value unlocks look easy on paper. Some of them even turn out to be extremely profitable. If Pick n Pay could sell down the Boxer stake and do share repurchases, it would be a huge win for the bull case and there would be a strong rally. Instead, it is selling shares and reinvesting in a turnaround that the value unlock enthusiasts barely even believe in. That sounds like a recipe for trouble.