Grohe deal an 'enormous opportunity' for Dawn‚ says CEO

CEO of Dawn‚ Derek Tod. (Image extracted from the Business Day TV website - watch the video here

BUSINESS DAY TV: It's become increasingly rare‚ as we said‚ to report on a significant inward investment‚ so imagine our delight today at the news that European sanitary fittings group Grohe is to take a 51% stake in Dawn's local manufacturing businesses for R880m in cash. Joining me now on News Leader is the CEO of Dawn‚ Derek Tod.

Derek ... as I said nice to report on a good news story for a change. What is the significance of this deal to Dawn? ... Why is it such an important deal that you have sought to secure?

DEREK TOD: One of the objectives has always been to gain a technology partner ... those people who can afford an investment in R&D (research and development) and at the same time to broaden our local product range with their products and distribute through their distribution channels globally.

We refer to it as a 'poor man's globalisation'. This is actually what we're busy with and certainly from our point of view it's something that we've wanted to do for at least 10 years. We built the package‚ got the package together because today you cannot just sell one single product ... you have to deliver a package and we certainly believe we've put that package together and it's now time for us to leverage in the best way we can ... extra volume and recoveries out of our factories.

BDTV: So when you talk about the package‚ you mean the brands that you've got in this suite of businesses that Grohe is now going to take a 51% share in ... and you did this intentionally ... from 10 years ago did you think this was what you ultimately wanted to see happen?

DT: No‚ without any doubt ... in fact we nearly concluded prior to the financial crisis but obviously the Europeans also felt the difficulties of the crisis so everyone had to rationalise their positions and now they've started to come out. In fact‚ even the competitor to Grohe that approached us in 2006 has been talking to us again‚ just prior to this conclusion. They were actually told today...

BDTV: Okay‚ so why did you go with Grohe rather than a competitor?

DT: First and foremost‚ Grohe was about to do an IPO (initial public offering) and they had acquired 78% of the equity of the largest Chinese player‚ both from an outlet ... they have about 5‚000 outlets in China‚ plus manufacturing that supports that.

So Grohe had acquired the 78%. During that IPO process a company ... the leading player in Japan called Lixil actually acquired Grohe. So fundamentally today‚ the leading Japanese player and the leading German player and the leading Chinese player are now our partners.

BDTV : That's fantastic...

DT: ...so we have an enormous opportunity going forward.

BDTV: Does that mean that Dawn is not only the distribution and manufacturing mechanism for Grohe into South Africa and southern Africa but that they are your distribution partners for your own products ... so it works both ways?

DT: It works both ways‚ absolutely. There are many products that we have‚ technical differences and specifications that they have markets for‚ globally ... and they see those as big opportunities ... right across that suite of products.

BDTV: If I understand it then‚ it benefits the business in two ways ... it pushes volumes through your factories so you get good capacity mutualisation and you also presumably get a global market for your products and therefore‚ higher sales ... is that it in a nutshell?

DT: Absolutely and most importantly Dawn has always been a company that believes in local job creation. We were basically a 95% locally sourced company and this gives us the opportunity to create more jobs and certainly retain and sustain those that we have created to date. So we think it's the right thing for the country as well.

BDTV: In your conversations with Grohe‚ did they voice any concerns about the South African market and labour environment‚ or did they rather look at Dawn in isolation and say this is a company that we would like to invest in and we're not going to let what's happening in the greater South African economy worry us too much...

DT: They have been doing ... or individuals involved in this company have been doing some form of distance due diligence for about eight or 10 years‚ and certainly‚ from their point of view‚ if you look at the nature of the deal‚ the first opportunity they can actually call on further equity is in 10 years' time.

These players are big players with long-term objectives. They're not going to watch a small process or incident that takes place within one year and be deterred from their global strategies.

BDTV: So they are your partners for at least the next decade...?

DT: A minimum of 10 years‚ yes.

BDTV: How is the joint venture going to work ... will you have the same management teams‚ are you bringing in new management ... can you give us an idea of how it's going to function?

DT: There will be one gentleman coming from the Grohe side‚ who will be the chief executive of what we refer to as the joint venture company. We will obviously sit with him and our management will remain in place and we look forward to it. I think they are happy with what they've seen and we certainly believe it's going to be a very nice opportunity for both parties.

BDTV: And of course then you get that cash injection of R880m‚ which you've said in the statement that you released today‚ you will use to repay debts and look at other acquisitions and core competencies ... so can you give us any idea of where in the business you would look to make acquisitions.

DT: Firstly Dawn wants to become what we refer to as a master distributor supported by very good logistics and we have investments in manufacturing business.

So essentially‚ in most of these cases‚ we're a big player as a trading distributor of the product‚ so we feel that to bring in partners that even though they have control‚ you don't need control for control's sake as long as the fundamentals are right‚ and we believe those fundamentals are right.

So from an acquisition point of view we will go through a process of reviewing exactly where we want to take the business. It may even be certain elements of manufacturing again‚ but the core of Dawn will be 100% trading‚ and 49% investments in manufacturing ... again just brand packages that are aligned with what we're doing.

BDTV: Does that then suggest that you would look to possibly bulk up your logistics business by acquiring other logistics firms ... is that an option?

DT: The possibility will exist‚ yes.

BDTV: Because there are quite a lot of logistics businesses in South Africa ... I suppose I'm fishing to see if you might mention a name or two...

DT: Our strategic principle will be 100% trading and 49% manufacturing‚ and attracting global partners.

BDTV: Your shares jumped on the news ... you must have been quite gratified to see that?

DT: Well I'm glad that people are seeing it in a positive light‚ under difficult circumstances that people are reading in this country right now. I don't think all is nearly as bad as people suggest. We're going through one of our‚ let's call it‚ muddling processes that we've been known to come through every time...