Why the Mr Price deal sucks

You can also listen to this podcast on iono.fm here.

Welcome to the Supernatural Stocks podcast on Moneyweb, with your host The Finance Ghost – your weekly fix of local and international insights for investors and traders.

Below R172. That’s how low Mr Price went in response to the news of probably the most tone-deaf acquisition this side of 2015 by any JSE-listed company. The NKD acquisition reads like a classic example of a South African group that is out of ideas and looking for offshore opportunities that they are willing to bet the farm on.

Read: Mr Price slumps amid concern over value of NKD retail purchase

A decade ago, the market would’ve probably loved and celebrated the deal. Institutional investors would’ve been lining up in the hope of a capital raise, ready to throw equity at the problem while telling their investors that the money would be going as far away from the Zuma government as possible.

But that was 2015 and this is 2025.

The share price was trading at over R211 before the news broke. This means that the drawdown over a couple of days was around 18.5% in response to the deal.

If you do the maths, this means that the market just about wrote the deal off as worthless – a complete waste of money that should be valued at zero immediately.

Now, this is an extreme view, but it tells you something about how sentiment has changed towards offshore deals.

There are two main reasons for this, one of which will appeal to the proud South Africans. The other one is mainly just a depressing history lesson.

Read: Mr Price leaves Australia [May 2019]

Let’s deal with these reasons before moving onto exactly why this deal sucks.

Local is more lekker these days

Unless you’ve been living under a rock in 2025, you’ll be aware that the JSE has had a watershed year. Sure, this was mainly thanks to gold stocks and then platinum in the latter parts of the year, but there were big contributions from telcos and the likes of Prosus and Richemont as well.

The JSE mid-caps are even starting to awaken from their slumber, with some inspiring turnaround stories that are giving South Africans hope.

The sun is shining. We’re off the grey list. We recently got a credit ratings upgrade. South African 10-year bond yields are better than we’ve seen in years. All of this supports higher valuations of South African assets. Heck, even the Springboks can’t lose at this point!

Listen/read: Capital rotations: Defence and technology

Sentiment towards local exposure has improved substantially, not least of all because the US is feeling more weird by the day. Concerns over an AI bubble are weighing on sentiment towards that market, while Europe is struggling to find much growth beyond one or two key sectors like defence stocks.

South Africa is sticking its hand up as an attractive emerging market, and people are paying attention.

Well, most people are paying attention. Mr Price has been focusing on Eastern Europe instead, for reasons that are very hard to understand when they’ve had a good run of local deals.

Read:
Mr Price grows profit despite a squeezed consumer
Digging into Mr Price’s ‘free cash flow to EV yield’ metric
Mr Price has a price

The mention of ‘deals’ brings us neatly to the more important reason why the market absolutely hated this announcement: a track record in the clothing sector that not even a mother could love.

A graveyard for South African capital

I’m not going to rehash what you already know – at least, not in detail. Local retailers have a shocking history of international deals.

Woolworths always gets a special mention for the disaster that was David Jones in Australia. Spar is still reeling from the horrors of Poland and then Switzerland. When you basically have to pay someone to drag a business away, you know it’s bad.

The Foschini Group (TFG) is another cautionary tale, with very negative local sentiment despite the company hosting a flashy Capital Markets Day in which they tried to convince investors of the substantial local growth opportunity.

Just months after that event, the company released horrible numbers that were disappointing in South Africa and downright awful in the UK and Australia.

Listen/read:
Could Woolworths’s fashion turnaround strategy finally be taking shape? [Jan 2023]
David Jones an important chapter to close – Woolworths CEO [Aug 2023]
The Foschini Group has ambitions abroad – but isn’t local more lekker?
Spar’s European flop is now a thing of the past

Again, the market pointed to the offshore exposure and highlighted the clear risks of trying to be successful in faraway lands. And despite this, TFG has been doubling down on the UK with more acquisitions.

All of the best turnaround stories on the JSE right now are of companies that are unwinding old deals and getting out of non-core assets.

The market is rewarding focus, not ‘diworsification’ in the pursuit of diversification.

We can diversify our exposure ourselves as investors by buying different companies and making specific allocations as we see fit. The very last thing that anyone wants to see is corporate management teams trying to do that on behalf of shareholders.

Announcing such a large offshore deal in this environment tells me that the Mr Price executive team is completely tone deaf.

They clearly have little or no understanding of capital market cycles and what investors are actually looking for. They’ve now lost the trust of local investors when it comes to capital allocation decisions, something that will affect the valuation for as long as this management team is still there.

But wait, there’s more!

Even if people wanted offshore deals, this one sucks

Let’s start with the first problem: Mr Price is buying 100% of NKD Group from a private equity seller. Now, a business in private equity ownership is built to be sold. That’s simply how their model works.

There are some exceptions when it comes to ‘permanent capital’ vehicles as they are known, but most private equity houses want to own assets for seven to 10 years, and then sell them so they can return capital to investors.

This certainly doesn’t mean that every private equity asset shouldn’t be touched.

But it does mean that Mr Price is dancing with wolves here when it comes to the valuation and the asset being dressed up for sale.

It’s not even remotely like negotiating with a founder who has a long-term legacy mindset.

The other benefit of buying from a founder is that you can typically get a pathway to control instead of buying 100% right off the bat. This allows you to put up a smaller amount of money to get a board seat and really learn the business alongside the founder or whoever owns the company at the moment.

Read:
Cohen and Chiappini reflect as Mr Price turns 40
How are our other discretionary listed retailers looking?

If there’s a desire to exercise an option for control down the line, then a truly informed decision can then be made. And if the founders or current owners want to retain a small minority stake for dividend income into the future, then no harm no foul.

Listed company investors don’t really care about holding 100% of an underlying asset unless there are obvious synergies with existing assets that you can only unlock through 100% ownership. When it comes to an offshore retailer, there are no synergies with the rest of Mr Price’s business and so it doesn’t matter.

They don’t need to own 100%, they just need to control the asset – and that’s only 51%! In fact, it would be preferable to have alignment with local owners by not having 100%.

But alas, Mr Price isn’t doing this. They are taking 100% straight away, with absolutely zero experience in running this business.

Hilariously, they include a note in the analyst presentation that part of the appeal is “limited distraction for both management teams” – sure. I’ve heard that one before.

The second problem is the sheer size of this deal in the group context.

Mr Price has indicated that when all is said and done, NKD will be 25% of group sales. Yes, a quarter of the Mr Price group that you know and understand will now be an Eastern European retail group that is a complete unknown to local investors and frankly even to Mr Price execs. Tell me again about how that won’t be a distraction?

Now for the valuation. This is really where it goes from bad to worse.

In their infinite wisdom, Mr Price is coughing up over R9.6 billion for a business that generated profit after tax in 2024 of around R261 million.

That’s a price-to-earnings multiple of 37x, or more than Microsoft is currently trading at! Lovely, isn’t it?

Having been under private equity ownership, it’s very possible that NKD is heavily indebted and that interest costs are squashing the profits.

Unfortunately, Mr Price has given really basic financial disclosure about what they are buying, relying on the fact that it’s a Category 2 transaction that doesn’t need a shareholder vote or a circular.

Listen/read: Why local retailers are turning to beauty for its higher margins

This makes it really difficult to assess whether the multiple really is that ridiculous or not.

Some shareholder activism by 36One Asset Management, including an excellent letter to the board, highlights this fact and asks for a significant amount of additional information – frankly, information that Mr Price should’ve released without being asked.

The only other thing we can reliably work off is a sales multiple of 0.7x based on the 2024 numbers. This still feels like it’s on the high side, but isn’t completely nuts.

Listen: Mr Price selloff: Bargain or red flag?

Top clothing retailers tend to trade at between 1x and 1.2x sales, although there are some outliers at much higher numbers like Inditex, owner of Zara. Without having detailed financials to work with though, it’s hard to assess the details of this deal for NKD.

And that is perhaps the biggest issue of all: the hubris of management to announce a deal of this magnitude and so far outside of what anyone is asking for, while giving minimum additional disclosure around the target company.

Even if this does somehow end up being a success for Mr Price over the long term, the damage has been done to the company’s reputation in the market.

Let this be a cautionary tale to other local management teams: the days of doing high-risk offshore deals and expecting the market to fawn over you are long gone.

Follow Moneyweb’s in-depth finance and business news on WhatsApp here.