South Africa’s Steinhoff springs a surprise with $3.8bn US Mattress Firm deal
The deal will create the world’s largest mattress distributor and takes the $23 billion South African retailer across the Atlantic for the first time. Steinhoff will pay $64 per share, a 115 percent premium to Mattress Firm’s Friday close. The price includes $1.4 billion debt.
we think Steinhoff is paying a strategic premium to allow it to enter the US market with an industry leading partner
“On the one hand this looks like a full price for Steinhoff to pay,” said Richard Chamberlain, an analyst at RBC Europe in London. “However, we think Steinhoff is paying a strategic premium to allow it to enter the US market with an industry leading partner.”
Steinhoff, which sells beds and cupboards to less affluent shoppers, has been on an acquisition spree to offset exposure to a deteriorating home market with safer assets in markets such as Europe, where it already makes more than two-thirds of its 9.8 billion euros ($11 billion) of annual sales.
A month ago it agreed to buy Britain’s Poundland for $800 million following its failure to secure France’s Darty Plc and Britain’s Home Retail earlier this year.
Shares in Steinhoff, which moved its primary listing to Frankfurt in December to access deeper capital markets, closed up 1.6 percent in Frankfurt and 0.9 percent in Johannesburg.
Steinhoff, which counts South African retail veteran Christo Wiese as board member and shareholder, would pay 60 percent more than what Mattress Firm should be trading at based on its most likely earnings growth trajectory, according to Thomson Reuters StarMine.
StarMine’s intrinsic valuation model, which uses a blend of analysts estimates and its own models, rates Mattress Firm share price at around $40, based on an expected 7.7 percent five-year annual compounded growth.
“While this seems an excessive price, and it is, the Mattress Firm’s stock is trading today at the same price as in January 2012,” said Sasha Naryshkine, a fund manager at Vestact in Johannesburg, which own shares in Steinhoff.
Mattress Firm shares were up more than 114 percent at $63.70. They had lost more than 50 percent in value over the last 12 months as weak demand and changes related to amortization of its trade name weighed on its results.
The U.S. company has also been under pressure as the improving quality of mattresses encourage consumers to keep them for longer. But the Johannesburg-based company has a reputation for buying underperforming companies that can benefit from its wide global network to source goods at lower prices.
“Are they too aggressive? There’s a strong case for that but then again it makes all the commercial sense to move quickly and lock in financing deals at low interest rates,” said one top ten shareholder, who declined to be named.
Steinhoff, rated Baa3 with a stable outlook by ratings agency Moody’s, said it intended to finance the acquisition through a combination of bank and bridge loans.
Moody’s, which reckons Steinhoff has close to 2 billion euros in surplus cash, on Monday affirmed its rating and outlook on the company’s debt. “The affirmations with a stable outlook reflect our view that Steinhoff’s credit profile has the capacity to absorb Mattress Firm and associated acquisition debt,” said Douglas Rowlings, Moody’s lead analyst for the company.