Why Whitey quit

Picture: Financial Mail

What it means: To Wiese, it would be natural for Steinhoff to take over Shoprite. But will Shoprite’s remaining 84% of shareholders agree?

It was one of those era-defining announcements that you see coming a mile away but which still come as a shock when the words are finally uttered. On Monday, the 70-year-old Whitey Basson produced just such a reaction when investors and journalists at Shoprite’s AGM in Parow were told he would be retiring as CEO just after Christmas.

It seemed a bit unreal.

For decades, Basson has seemed like the living, beating heart of SA retail, his virtuoso performances at Shoprite’s presentations the stuff of legend. (Memorably, after buying OK Bazaars for R1, Basson chided himself for not knocking the price down to 99c.)

At this week’s AGM, he appeared somewhat uncertain about what lay ahead — which must have been a strange sensation for someone who has planned every step of Shoprite’s conquest of African retail.

Speaking to the Financial Mail, he said he was weary and had had enough of all the "nitty gritty stuff" in the way of Shoprite’s growth. "I’m constantly fighting on several fronts ... I’m gatvol of it all now. You need to be young," he declared.

Basson seemed like a man who had woken up and realised he had been working flat-out for 45 years and now wanted out.

Renowned though he is, Basson’s departure will suit those who believed he was always the obstacle to the masterplan of SA’s richest man, Christo Wiese — that is, the merger of the two retail behemoths, Shoprite and Steinhoff. Wiese owns 16% of Shoprite, and 18% of Steinhoff.

Picture: Financial Mail

It’s potentially a mega-deal, and was first touted in 2006. But analysts say Basson saw no commercial value in it and remained the impediment to a tie-up. Recently, when asked about the merger, he said: "No, I don’t know if it’s a good idea," adding for good measure: "What would you benefit by putting Anglo American and Toyota together?"

Now the odds of a tie-up have narrowed dramatically, which is why Shoprite’s share price jumped 5.5% immediately after the news of Basson’s retirement broke.

"Basson’s departure means we’re one step closer to that deal being done," says retail analyst Syd Vianello.

This week, Investec Securities published a research report saying that such a deal was now "not only likely but could happen in the near term".

The reason is that even though Wiese holds only 16% of Shoprite, he controls 50.9% of the retailer’s voting rights through 291m "deferred shares" — but it’s set to fall below 50% in April next year.

Investec says this means there is a "strong possibility" that such a deal will be struck in the next six months.

Of course, as Wiese owns both companies, Shoprite investors who believe they may get a juicy premium for their stock may be disappointed. It’s unlikely to be more than 10% above Shoprite’s current value.

Whether this would offer the kind of "commercial value" Basson apparently wanted is unclear. And whether a mooted merger hastened his departure is equally unclear.

Either way, there were certainly clues that Basson’s departure was imminent.

Shoprite’s annual report provided a great big hint by awarding Basson a one-off R50m discretionary bonus as part of his R100m package this year — a reward, the board said, for his 45 years of unstinting loyalty.

But the sense of disbelief that he had finally called time on his career tells you how much he has become part of the framework of SA business. In the retail sector, he made such an indelible mark that it’s difficult to imagine the place without him.

Basson will be replaced by chief operating officer Pieter Engelbrecht, who spent years as Basson’s personal assistant and will have immense shoes to fill. As Wiese told shareholders at the AGM: "I told Pieter he mustn’t aspire to being a second Whitey Basson but he should aspire to being the best Pieter Engelbrecht he can be."

Engelbrecht, who was two years old when Basson first went into business with Wiese in 1979, should not need the advice.

Basson is the archetypal larger-than-life character, a bruiser who took few prisoners and whose life story is full of the sort of derring-do that becomes the stuff of legend.

"Without doubt the greatest retailer in SA’s history," is how Shane Watkins of All Weather Capital describes the outgoing Shoprite CEO.

Shoprite timeline.

Picture: Financial Mail

It’s a fitting tribute to a businessman who, in 1980, took eight stores worth a mere R1m and went on to build Africa’s largest retailer, with more than 2,200 stores, worth R152bn.

Basson, says Watkins, changed the face of retail in Africa in two critical ways.

First, he was the pioneer in committing to centralised distribution (which dramatically lowered costs); and second, he built the first truly pan-African retailer which, outside SA, now has 300 stores in 14 countries, from Nigeria to Mauritius.

Today, centralised distribution is a no-brainer, but Shoprite was panned for it at the time. Yet it remains the reason why Shoprite’s margins are much better than other food retailers, despite having the lowest prices. (Shoprite’s trading margin is 5.6%, compared with Pick n Pay’s 2.1% or Spar’s 3.1%.)

Watkins points out that Basson led the charge north in 1990, at a time when Africa was still recovering from civil wars in countries such as Angola and Mozambique.

Today, Shoprite has 30 stores in Angola and 20 in Nigeria — probably the largest profit opportunities outside North Africa.

In all, Shoprite’s African operations outside SA now account for R22bn in annual sales. And while SA’s growth is anaemic, those stores up north grew sales 35.1% in the three months to September.

Even critics (of which there are more than a few) grudgingly respect Basson.

At the AGM, fund manager Mehluli Ncube laid into Shoprite for the "downright reckless and irresponsible" R100m paid to Basson in the past year, which includes the R50m bonus. However, Ncube conceded that he was an outstanding executive, worthy of a very generous package indeed.

But it is the chemistry between Wiese and Basson that has driven Shoprite to its current position.

It’s a relationship that began in 1970 when, as an accountant for Brink Roos & Du Toit, Basson handled the audit for Wiese’s Pep Stores. The two clicked. In 1971 Basson jumped ship and joined Pep Stores as a financial manager.

The seeds of the modern Shoprite empire were sown in late 1979, when Basson began to negotiate the purchase of an eight-store Cape-based retailer from the Rogut family. Much of Shoprite’s early growth was achieved by swooping on dismally managed competitors.

In 1991, Shoprite picked up Checkers for R55m, a song even in those days, from Sanlam when a series of management teams failed to reverse a seemingly intractable nosedive.

Famously, in 1997, the floundering OK Bazaars was snapped up from SA Breweries for the princely sum of R1.

In December, Basson will leave Wiese with a company with turnover of more than R130bn, pre-tax profit of R6,8bn a year and a staff of 137,775 people.

Less impressive are reports that Shoprite’s employment conditions are the worst of the big retailers. It’s a charge that fails to stir either Basson or Wiese, who believe any job is better than none; they believe they make a bigger contribution to society by providing groceries at rock-bottom prices.

A few years back, commenting on the storm over how Basson had made R627m by cashing in shares, Wiese told the Financial Mail: "I would pay R1bn in the middle of the night for another Whitey."

At this week’s AGM, Wiese repeated his praise as testy investors tackled the company for the R100m paid to Basson this year. "I would have been happy to pay him much more," Wiese defiantly told them.

That’s not surprising, considering that Wiese has become one of the wealthiest men in Africa thanks to Basson’s herculean efforts over the years.

Wiese’s 16% of the grocery retailer is worth R17.8bn at today’s share price.

Basson himself still owns a tidy 1.6% of Shoprite, worth R1.77bn.

Wiese, of course, is remarkably polite, rarely revealing anything but a pleasantly engaged demeanour in public. This meant there was little sign of emotion at the AGM about the pending termination of their presumably close 45-year relationship.

Basson, more hot-headed by nature, seemed less dispassionate about the split.

Says Basson: "I’ve had a fantastic relationship with the board. It supported about 99% of my decisions. If I’d worked for a big institution it wouldn’t have been nearly as effective and Shoprite would have been half the size it is today."

He won’t be disappearing immediately. His contract requires 12 months’ notice, so for the next 10 or so months he will be on call for consulting work with Engelbrecht.

But whatever Basson says about his decision to quit being motivated by weariness with "all the nitty gritty", analysts are convinced it had more to do with his opposition to what’s regarded as Wiese’s ultimate plan — merging Shoprite with Steinhoff.

While Basson was wary of the commercial value, there was also the thorny matter of who would have been the boss: the older, more experienced Basson, or Steinhoff’s whiz kid, Markus Jooste.

Christo Wiese. Picture: Financial Mail

Wiese, who is using Frankfurt-listed Steinhoff to drive a European and US acquisition spree, boosted his holding in that company by an additional R24.3bn in late September.

Significantly, Wiese mused almost immediately that it would be a "natural development" for Steinhoff to take over Shoprite.

From Wiese’s perspective, perhaps it would be natural, as it pulls all his investments under one roof.

Whether Shoprite’s remaining 84% of shareholders will agree is another matter.

Experts are divided about the merits of such a deal. Some say Wiese and Jooste could pull off almost anything they set their minds to; others warn that selling groceries is a different game to selling mattresses.

In their analysis, Investec said Shoprite would add 47% to Steinhoff’s estimated revenue for its next financial year, and 27% to its operating profit.

But the devil would be in the structuring. Vianello says that constructing a deal in a way that Shoprite shareholders would find compelling would be difficult — even with Wiese’s near-legendary skills in this area.

Assuming Steinhoff could find the cash to buy out all the non-Wiese shareholders at Shoprite, investors might be reluctant to cash in an investment that has provided stellar returns.

Shoprite’s R114bn market cap is dwarfed by Steinhoff’s R305bn, and Jooste’s company has shown little compunction about issuing new shares to pay for assets.

A possible scenario is that Steinhoff would issue 1.42bn shares, and would buy 100% of Shoprite in an "all-share deal".

It’s hard to imagine Shoprite shareholders wanting to exchange their stock for Steinhoff shares. Having said that, Steinhoff has outperformed Shoprite over the past five years — its stock growing by 212%, compared with Shoprite’s 66% — if only because of the dizzying number of deals it has done.

But, says one analyst, if investors wanted Steinhoff shares they could swap their Shoprite stock now. Evidently they don’t.

Vianello reckons something will happen next year. He says the spike in the Shoprite share price after Basson’s announcement suggests the market is expecting Wiese to offer shareholders a premium to get the deal through. This may not happen.

However, Basson is keeping schtum on the possibility of a tie-up with Steinhoff.

For Engelbrecht, of course, any deal would have the attraction that if Shoprite delisted, comparisons with his much-vaunted predecessor would be far more difficult.