Boxer leaves Pick n Pay in the dust

Pick n Pay is listing its prize asset, Boxer, on the JSE this week in hopes of fixing its financial crisis – with the retailer expected to be valued at more than R2 billion above its parent company.

Pick n Pay released the final figures for the listing on Monday, which revealed that Boxer is expected to be valued at R24.7 billion on the JSE when it lists on Thursday.

This is more than R2 billion above Pick n Pay’s current market capitalisation.

Retail analyst Finance Ghost explained on the Kaya Biz podcast that the decision to unbundle Boxer is based on Pick n Pay’s problems.

This is similar to the situation with Transaction Capital’s unbundling of WeBuyCars earlier this year. In that case, there was also “one great business in the group, and they needed to raise some money”.

Pick n Pay is still in much more trouble than a lot of people really understand, he said.

Following the retailer’s technical insolvency, it embarked on a turnaround plan to improve its financial position, address its heavy debt burden, and enable reinvestment in the business.

This plan includes a rights offer, closing stores, and unbundling and listing Boxer on the JSE.

“I think people underestimate how hard that turnaround is really going to be,” the Finance Ghost said.

He added that given how differently the two companies have performed financially, it is critical that Boxer, a wonderful asset, be removed from its parent company.

“Let it go off and fly without the overhang of being part of this other messy group. Raise some money in the process, go and use that to try and fix things and hope that it works.”

The funds raised through Boxer’s Initial Public Offering (IPO) are expected to help Pick n Pay tackle its financial troubles.

He said Pick n Pay “priced this IPO for success”. It was priced conservatively to attract significant interest from investors, which resulted in the offering being heavily oversubscribed.

The pricing implies a mid-to-upper teens price-to-earnings (P/E) ratio, which is relatively modest compared to other top retailers on the JSE. For example, Mr Price is currently trading at a P/E ratio of about 22.

Interestingly, Boxer is currently expected to be valued at around R2 billion more than Pick n Pay’s market cap once it is listed.

“It is quite extraordinary that it does come out at a higher valuation than where Pick n Pay is currently trading,” Ghost said. “That kind of tells you everything.”

He said another notable example of a company in a similar situation is MultiChoice.

When you compare the value of MultiChoice South Africa to the MultiChoice Group, which is being dragged down by the rest of Africa, it’s arguable that the underlying South African entity is worth more than the group.

This also happens when companies have a lot of debt at the holding company level but not at the subsidiary level, making the subsidiary a lot more valuable as a result.

In the case of Boxer and Pick n Pay, the group’s pricing is affected by the state of Pick n Pay’s balance sheet and Boxer’s growth prospects, which are much better than Pick n Pay’s.

“All of those things do play a role, and that’s why you see this kind of weird valuation outcome,” the Finance Ghost said.

“Of course, the benefit for Pick n Pay is they haven’t sold out of Boxer entirely.” At roughly two-thirds, they still retain a large stake.

“That means that as Boxer grows over time, hopefully, then Pick n Pay’s stake will grow in value with it.”

However, he explained that Pick Pay will take a long time to solve its problems, which means this likely will not be the last time the company sells its shares in Boxer.

“I think there’s a pretty good chance that over time they will drip-feed some more shares into the market at nice juicy valuations and then use that money to try and fix the very broken story at Pick n Pay.”

While retaining partial ownership of Boxer is a smart move for Pick n Pay since it will allow the company to inject Boxer’s capital into the struggling Pick n Pay business, it also comes with risks.

According to the Finance Ghost, selling off a profitable asset – the “crown jewel” – to save parts of the business that simply aren’t working is a common corporate pitfall.

If the reinvestment is poorly managed, it can lead to even more losses.

For instance, companies like Prosus sold portions of their valuable Tencent stake but reinvested the money into weaker, overvalued assets, ultimately eroding shareholder value.

Pick n Pay must carefully balance this approach to avoid wasting Boxer’s gains on efforts to fix parts of the business that may no longer be viable. The company needs to refine its strategy and streamline its operations significantly.

In fact, in many ways, the company would benefit from being more like Boxer, he explained.

“They’ve kept it simple. They’ve grown into a niche they fully understand, and they’ve just delivered consistently. That’s why Boxer has worked, and that’s why Pick n Pay has not worked.”