Mr Price has been on the acquisition trail with a vengeance. The latest deal is for Studio 88 Group, a substantial retail group that operates several fashion chain stores.
Mr Price will buy a 70% stake in the company from RMB Ventures and the current management of Studio 88, so this is a classic private equity exit. RMB Ventures will sell out completely and the management team will sell half of their interests. Importantly, the seven senior management team members who are shareholders will retain their positions and will remain as shareholders, ensuring alignment with Mr Price.
This is a significant deal for Mr Price with a transaction value of R3.3 billion, or around 6% of the company’s market capitalisation. Mr Price has been cash-flush and has made it clear to the market that deals are the way forward, so the acquisition is funded entirely through existing cash resources.
This creates a lower-risk deal (as the banks won’t come knocking if it starts going wrong), which is a good thing as every acquisition is always a risky move and Mr Price has been doing more deals recently than some private equity funds!
With revenue in the last financial year of R5.6 billion, Studio 88 Group is the largest independent retailer of branded leisure, lifestyle and sporting apparel and footwear in South Africa. Retail outlets include Studio 88, SideStep, Skipper Bar, John Craig and other chains. There are over 700 stores targeting aspirational customers, so this is different to the usual Mr Price value proposition.
This acquisition has helped me realise that I’m truly on the wrong side of 30, as I don’t know most of these brands. I can confirm that aspirational fashion takes a backseat when a chunk of monthly income is going into buying nappies for Toddler Ghost.
Where Studio 88 does have overlap with Mr Price’s model is in the focus on cash sales. Studio 88 is exclusively cash-based (vs. selling on credit), so the money is being made on gross profit margin rather than interest on a debtors book.
Studio 88 will become the group’s second largest trading division. With this footprint included, Mr Price Group would have over 2,400 stores and employ over 25,000 people.
The enterprise value is R4.7 billion and EBITDA for the year ended September 2021 was R630 million, so the EV/EBITDA multiple is 7.5x which is reasonable in my view. On a last twelve months basis to February 2022, EBITDA was R765 million, so there is strong underlying growth (and the multiple is actually just over 6x). I’m pleased to see that these numbers are on a sensible pre-IFRS 16 basis, which means EBITDA is net of rent payments. This may sound ridiculous to you (it certainly does to me), but current accounting rules push lease payments below the operating profit line and into the interest paid line.
If you read my weekly Ghost Mail publication earlier this week, you would know my feelings around current accounting rules.
Mr Price’s stated vision is to become the most valuable retailer in Africa. This isn’t possible without moving outside of the core value proposition, so Mr Price sees this acquisition as a way to plug a gap in the group. Aspirational (i.e. brand-conscious) customers aren’t currently being serviced by Mr Price. Studio 88 has achieved a compound annual growth rate (CAGR) of over 20% in both revenue and operating profit for the last 10 years, so the management team clearly knows what it is doing.
This is a Category 2 deal for Mr Price, so shareholders will not be asked to vote on it. Regulatory approvals (like the Competition Commission) will need to be obtained by no later than 31 October 2022.
Mr Price closed 6.9% higher, so that’s as close to a “shareholder vote” as the deal will get.
