Steinhoff-JD Group deal neutral for ratings: Fitch

Steinhoff is rated national long-term "A-(zaf)" and national short-term "F2(zaf)". The outlook for the long-term rating is "stable".

The company is a medium-sized diversified retail and manufacturing company with activities across continental Europe, the UK, the Pacific Rim and southern Africa. Its business segments include retailing of household goods, manufacturing and sourcing and logistics.

The Steinhoff/JD Group transaction includes the sale of Steinhoff's South African retail assets, namely its auto retail and building materials operations, for a total consideration of 3.169 billion rand to JD Group.

The parties have agreed that the deal would be settled through a mixture of cash and shares by JD Group, and this is expected to comprise a cash payment of about 702 million rand and the issue of JD Group shares for the remaining 2.467 billion rand.

The deal also includes the proposed sale, subject to the approval of the Polish Competition Authorities, of JD Group's 100% interest in its Polish furniture retail business, Abra Spolka Akcyjna (Abra) to an associate of Steinhoff for a cash consideration of 134.1 million rand.

"Fitch notes that the new developments, along with the Conforama transaction, will further boost Steinhoff's European presence, and considers them part of Steinhoff management's ongoing efforts to re-profile the group's business and strategic mix," said Raymond Hill, senior director and Fitch's head of emerging markets' corporates.

Furthermore, Fitch said that the sale of Steinhoff's domestic retail assets were not expected to materially benefit the group's current leverage profile as only a small portion of the sale proceeds would be received in cash.

The agency expects that after finalisation of both the Conforama Holdings transaction and the JD Group sale and asset swap, Steinhoff's adjusted net leverage will peak at about 3.7 times in 2011.

"Thereafter leverage is expected to moderate to levels more consistent with the assigned ratings," it said.

However, the ratings agency said that the European furniture industry continued to consolidate, and it believed that Steinhoff could continue to actively participate in this process, through further M&A opportunities.

"As such, Fitch will continue to assess the impact of large debt-funded acquisitions on Steinhoff's ratings on an event-driven basis.

"Given the sale of Steinhoff's low margin South African retail assets to JD Group, Fitch anticipates that this is likely to have a positive impact on Steinhoff's consolidated operating margins over the medium term," said Fitch.