Spar will acquire a business with the same model based in Ireland and south-west England.
The BWG Group services more than 1,100 stores, including 100 company-owned outlets. It also owns the Spar brand in Ireland and south-west England with approximately 700 Spar stores and an estimated 35 percent share of the Irish convenience store market.
Spar said the benefits of the transaction included a geographically diversified revenue stream, foreign currency diversification and critical mass. In terms of the agreement, Spar will subscribe for 80 percent of the issued share capital of TIL JV Limited, the holding company of the BWG Group, for R800 million.
The BWG Group will continue to be managed by the founding partners, who have signed service contracts ranging from five to eight years, in order to ensure continuity in the businesses. Spar said BWG had a strong operational management team, so it would not relocate any of its own management in the short term.
Spar chief executive Graham O’Connor said the international expansion of the group was an important strategic move and BWG provided an attractive entry into the food retail and wholesale industry in Ireland. He added that the transaction was taking place at a time when the European economy was showing great signs of recovery.
Spar in South Africa would benefit from the know-how in the innovative food retailing business in Ireland. The purchase consideration of R800 million had compelling long-term return expectations and the group was able to fund the deal with rand-denominated debt because of its un-geared balance sheet, O’Connor said.
O’Connor said Spar had always been cash flush and would fund the deal with a short-term loan, which would be repaid within a few months. “On a profit basis [the deal] equates to about 7 percent at this point, but we see this ramping up to the level of 20 percent going forward,” he said.
In future, Spar’s local house brands will feature in Spar stores in Ireland and south-west England. Other stores in the BWG Group trade under the Eurospar, Mace and XL brands, ranging from large format supermarkets to forecourt and convenience stores.
Chris Gilmour, an equity analyst at Absa Investment, said this was a good move by Spar, especially because it was moving into a developed market. “BWG is quite a decent sized operation and [is] in line with what Spar is good at – which is distribution and wholesaling,” he said.
Gilmour said the South African market was becoming saturated. “Companies are looking for growth and have to consider looking elsewhere.” Companies could look at the rest of Africa, as Massmart and Shoprite had done. However, this should be viewed as a long-term strategy.
“Like Woolworths, Spar decided to concentrate on what they are good at and played [to] their strength, which is distribution, particularly within a relatively First World environment,” he said. Gilmour believed that this would benefit Spar in the short term and would give the group an advantage when it came to currency diversification.
BWG’s group Chief Executive, Leo Crawford, said the deal was positive and an exciting development. “In Spar South Africa we have secured a major international retail player as a strategic partner and long-term investor.”