Saving Pick n Pay

Pick n Pay has released the details for its rights offer, one of the core components of saving the struggling retailer.

Pick n Pay’s financial results for the year that ended 25 February 2024 revealed that the company was technically insolvent.

This means that if all of Pick n Pay’s assets were sold at their audited values, it would not be able to cover all of its liabilities at their audited values.

To address this problem, Pick n Pay announced two ways to raise capital and strengthen its balance sheet.

• A rights offer to raise R4 billion from existing shareholders.

• List Boxer separately on the JSE. An initial public offering (IPO) to raise R6 billion and R8 billion is set for later in 2024.

Another intervention is that 112 Pick n Pay stores will either be closed or converted to Boxer franchised stores.

Pick n Pay CEO Sean Summers told investors that the company will close loss-making stores and convert Qualisave stores back to Pick n Pay stores.

They have identified many stores in critical condition due to factors like demographic changes or a problem with the shopping centre.

“These stores will be closed. We will close and get rid of the stores that have no future,” Summers said.

He added that they will not make the same mistake as in the past to convert these struggling stores into franchises.

“You merely end up with an extraordinary franchise debt and franchisees under too much pressure,” he explained.

However, he said they will still convert certain Pick n Pay stores to franchises where franchisees can deliver higher sustainable profits and growth.

They will also convert some Pick n Pay stores to Boxer stores, where the Boxer business is expected to serve the catchment areas better.

Rights issue

On Thursday, 11 July, Pick n Pay gave the market details of its looming rights offer through which it wants to raise R4 billion.

The rights offer will provide Pick n Pay with the relief it needs to cover some of its debt and ease the interest burden on the group.

It first announced plans to issue a rights offer on 22 February 2024. However, it has not provided any details.

It has now been revealed that 51.11 rights will be issued at R15.86 per share to every 100 Pick n Pay shares held.

This represents a 32.5% discount to the ex-rights share price as measured on the closing share price the day before the details were shared.

The share price has since fallen by around 1.75% throughout the day, narrowing the discount slightly to about 31.8% compared to the current ex-rights share price.

Since the first mention of the R4 billion rights offer was announced in February, the share price has increased by 23.9%.

As the details are now available, it is possible to calculate the ex-rights offer price in February.

The theoretical ex-rights offer share price increased from R19.73 to its current value of R23.17.

This value represents the share price after the right offer has taken place that would give an investor a return of 0% – in other words, no gains or losses.

It can be viewed as the breakeven share price calculated for any pre-rights offer share price.

It is valuable to analyse the change in the ex-rights offer share price from the date the rights offer details are announced.

If the ex-rights offer share price falls after the announcement, it shows that investors don’t believe they are getting a large enough discount.

It may also signal that they don’t believe that the rights offer will improve the company’s prospects.

The inverse, however, is also true. An increase in the ex-rights share price shows positive sentiment towards the capital raise.

Daily Investor analysed two hypothetical investors (A and B) who bought 100 shares on the day Pick n Pay first announced its R4 billion rights offer in February.

After the details of the rights offer are revealed, both investors are confronted with the decision to sell their 100 shares or participate in the rights offer in part. 

Investor A decides to take part in the rights offer and buys an additional 51.11 shares. His total input investment is, therefore, R2,981.60.

After the rights offer, the ex-rights share price is R 23.21, and his investment is worth R3,506.60, giving him a holding period return of 17.61%, a profit of R525.

Investor A	Shares	Share price	Value
First announcement	100	R21.71	R2,171.00
Rights issued	51.11	R15.86	R810.60
Input Investment	151.11	R19.73	R2,981.60
After rights offer	151.11	R23.21	R3,506.60

Investor B decides not to take part in the rights offer and sell his 100 shares at the current share price of R 27.04, giving him total proceeds of R2,704.00.

He bought his 100 shares in February at the same price as investor A for R 21.71 per share making his input investment R2,171.00.

He therefore realised a return of 24.55%, a profit of R533.

Investor A realised a return of 17.61% (R525), and Investor B realised a return of 24.55% (R533).

Investor B	Shares	Share price	Value
First anouncement	100	R 21.71	R2,171.00
Rights issued	0	R –	R-
Value realised	100	R27.04	R2,704.00