The Foschini Group dials-a-bed

The Foschini Group (or TFG – they stole my listing ticker before I became big enough to be a listed company!) is making a significant acquisition in South Africa, which is always great to see. A few years ago, JSE corporates could only bring themselves to invest offshore. After many of them took a beating in markets like Australia and the UK, they are now looking closer to home.

TFG is buying Tapestry Home Brands, a group which owns businesses that you will immediately recognise: Coricraft, Volpes, Dial-a-bed and The Bed Store. The sticker price is R2.35 billion.

Locally manufactured products account for 47% of sales, with manufacturing facilities in Cape Town, Johannesburg and Gqeberha. The group employs approximately 2,500 people.

Tapestry has around 175 stores across South Africa, Namibia and Botswana. The stores are organised into three business segments that operate on a decentralised basis, so there’s an entrepreneurial culture underneath all this.

The sellers are Westbrooke Investments (a name you might recognise from Magic Markets as monthly guests on our show), funds managed by private equity house Actis and the current and previous management of Tapestry. This was a classic private equity structure.

The rationale for TFG is clear: this brings new products and categories into the group. It also brings a significant local manufacturing and distribution base, which TFG may be able to plug into its other stores. TFG is working to bring its supply chain closer to home, which would be a significant competitive advantage if it can be delivered. Given the current geopolitical nightmare in the world, deglobalisation is the next big thing.

TFG has a well-developed credit model which will be useful in boosting sales in the Tapestry businesses. There’s also plenty of experience in online shopping channels, another useful way for the groups to work together.

After this acquisition, TFG will have nine home consumer brands and four vertically integrated factories producing mattresses, upholstered furniture, household textiles, duvets and pillows.

The deal price was calculated based on normalised earnings before interest, taxes, depreciation and amortisation (EBITDA) of R360.9 million for the year ended February 2022. The EV/EBITDA multiple is 6.51x, which is typical for a deal like this in the South African market.

If EBITDA for this period comes in below R342 million (i.e. more than 5% lower than target), then the price is adjusted downwards based on that multiple.

The net asset value at 28 February 2021 (note: not directly comparable to the period referenced above) was R115 million. By January 2022, this had ramped up to R209 million. EBITDA in the 2021 financial year was R264 million (including a Covid-related claim of R86 million) and profit after tax was R34 million.

In the 11 months to January 2022, EBITDA was R329 million and profit after tax was R175 million. This gives an idea of what needed to be achieved in February to get the full selling price.

The non-management sellers will get their money when the deal closes. The sellers who are also part of management will have a portion of their payment delayed until the first and second anniversary of the deal as a retention tool.

The major hurdle to still jump over is the Competition Commission, although an acquisition like this should be ok as TFG doesn’t operate in the categories it is acquiring. Other conditions precedent relate to the Takeover Regulation Panel, consent from the lessors etc. A period of seven months has been set to achieve these conditions.

As this is a Category 2 transaction, TFG shareholders will not be asked to vote on the deal.

Strategically, I think this is a sensible move. A quick look on TIKR shows that Foschini is trading on an EV/EBITDA multiple above 12x, so this is an earnings accretive transaction. Most of all, I’m just happy to see investment in local supply chains, a key source of jobs in a country that desperately needs them.