Retailer finds ‘elegant solution' as Absa buys into troublesome unit

A leading analyst described the sale as a tacit admission that Woolworths was not able to manage its book, though it was a good decision.

The deal, announced yesterday, follows months of speculation after Woolworths (WHL) issued a cautionary last year. Woolworths would sell 50% and one share in its financial services division to Absa for R875m, to be paid for in cash.

Woolworths, which has 1,6 million active credit customers with R5,6bn in loans ranging from in-store cards to personal loans, said the deal would allow the division to grow faster as Absa brought credit risk expertise on board.

However, in the half-year to December, bad debt, notably in the Visa card division, took its toll on the company's results as net bad debts and the provision for bad debts increased. Rising interest rates hit Woolworths' typically upmarket customers hardest. Woolworths has more than 200 stores and a customer base of about 4,5-million.

CEO Simon Susman said the deal would free Woolworths to be a pure retail player, though it would benefit from the upside in the joint venture.

It would also allow credit offerings to be diversified, enabling more consumers to shop at Woolworths. In addition, Absa had expertise that Woolworths did not have.

Deal helps Absa to increase share of consumer finance market

Susman said the company had been working on the deal for some time and it was a way of giving room for the financial services aspect of the business to grow in future.

“Bringing in the additional financial services expertise will support our ongoing focus on our core retail business.”

Absa group executive director Louis von Zeuner said the stake gave Absa access to the unsecured retailer finance market, where financial services were originated at the point of purchase, which was not accessible through traditional banking channels. “The venture enables Absa to increase its share of the consumer finance market.”

Syd Vianello, an analyst at Nedcor securities, said Woolworths' sale of the division was a tacit admission that the company was not able to manage its book, but it was a good solution.

The deal gave Absa, with 9 million customers, access to a R5bn pool of loans and allowed it to leapfrog the expensive process of starting a similar venture from scratch.

A compelling deal

Woolworths would not have to provide any debt funding, but could be called on to provide equity funding depending on the speed at which the new company grew.

Doug Walker, Absa managing executive of the card division, said the deal was compelling, “even in these times”. Woolworths offers credit ranging from in-store cards to Visa cards and personal loans.

It has been seeking a platinum or premier card offering for the top income shoppers, which will now be supplied by Barclay Card. Absa was not prohibited from other similar deals, but the use of Barclay Card was exclusive to this joint venture, said Walker.

Woolworths would also be able to focus on the business of retail, such as getting the right apparel lines to customers at the right time, Vianello said.

Sam Ngumeni, the head of Woolworths Financial Services, has been appointed CEO-designate of the new entity.

Richard Inskip, executive director of financial services and operations, resigned as a director with effect from the end of next month.

The deal is subject to conditions such as competition board approval, but is expected to be wrapped up in the third quarter of this year.

Source: Business Day

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