Three South African companies that lost billions overseas
Three large South African companies—Sasol, Woolworths, and Brait—have lost billions in overseas ventures, illustrating the risks associated with international expansions.
Many local companies have strong ambitions to expand internationally. Launching global operations is an attractive option for expanding their markets and diversifying their revenue streams.
For example, Investec has grown into an established brand in South Africa and in the UK, with over 7,000 employees.
Another example is Nando’s, which started as one restaurant in Rosettenville, Johannesburg, but now has over 1,100 restaurants in more than 20 countries.
Bidvest grew into a leading industrial group with over 250 individual businesses in South Africa, the UK, Ireland, Spain, Australia and Singapore.
However, it does not always work out well for companies looking to expand overseas and failing can be very costly.
Sasol, Woolworths and Brait are great examples of the consequences of failed overseas ventures.
All three companies have strong brands locally and have proven their business acumen in their South African operations.
However, strategic missteps and counterproductive external factors prevented these companies from finding success overseas and cost them billions in the process.
The three companies suffered catastrophic losses totalling over R160 billion in their ill-fated overseas ventures. Their substantial losses underscore the immense risks associated with international expansion.
Sasol’s foray into the global chemicals market resulted in a R120 billion write-down, while Woolworths’ attempts to conquer the Australian retail landscape led to R27 billion in losses.
Brait, the investment holding company that owns Virgin Active, also incurred significant setbacks. At least R14 billion was invested, but there is little to show for it.
These failures have far-reaching consequences for the South African economy, including job cuts, reduced tax revenue, and eroded investor confidence.
Companies like Investec, Nando’s, and Bidvest have demonstrated the potential for South African businesses to thrive globally.
However, the examples of Sasol, Woolworths, and Brait serve as stark reminders that international expansion is fraught with challenges.
Below is an overview of what went wrong for these three companies.
Sasol
Sasol’s failed overseas venture centres around its Lake Charles site in Louisiana in the United States.
The oil and chemicals giant announced in 2014 that it received final approval to invest $8.1 billion in an ethane cracker and derivatives complex at its Lake Charles site.
At the time, this translated to a R85 billion investment, and Sasol called the expansion the ‘Lake Charles Chemical Project’ (LCCP).
“The LCCP consists of a world-scale 1.5 million ton per year ethane cracker and six downstream chemical units and is currently under construction near Lake Charles, Louisiana in the USA, adjacent to Sasol’s existing chemical operations,” the company announced in 2017.
“Once commissioned, this world-scale petrochemicals complex will roughly triple Sasol’s chemical production capacity in the United States, enabling Sasol to further strengthen its position in a growing global chemicals market.”
Sasol stated that once completed, the LCCP would deliver an additional $1 billion in annual EBITDA.
However, the project did not meet expectations and was one of South Africa’s biggest corporate failures.
Over six years and several inefficiencies, Sasol had to massively increase its capital allocation toward the LCCP from $8.1 billion to $13 billion.
By 2020, Sasol had invested around R181 billion in capital expenditure on the LCCP – more than double what it planned on spending in 2014.
Over the same period, while Sasol was pouring money into the LCCP, it reported R99.4 billion in asset write-downs directly related to the LCCP.
At the 2020 year-end, Sasol reported, instead of a $1 billion improvement in EBITDA, a R2.6 billion loss from the LCCP
In 2020, Sasol sold 50% of the LCCP for only R30 billion, valuing the entire project at only R60 billion. This means that Sasol lost R120 billion to the LCCP.
However, it seems the oil giant has not given up on the project.
In its 2023 results presentation, Fleetwood Grobler, then CEO, said, “In the US, we believe the Lake Charles site provides multiple attractive opportunities for enhancing value through co-location and for expansion as a sustainability hub with partners.”
“We continue to progress studies to advance these opportunities.”
Woolworths
Woolworths’ venture overseas centred on David Jones, a luxury Australian department store.
The retailer acquired David Jones in 2015 for a steep R21.4 billion as part of its strategy to increase its international footprint.
The purchase price was 25.4% higher than the share price David Jones traded at on the day before Woolworths’ acquisition announcement.
After the acquisition, Woolworths invested an additional R7.2 billion in capital expenditure on improving and revamping David Jones stores.
While Woolworths spent a substantial sum of money improving its new venture, David Jones was performing worse by the year.
Woolworths expected David Jones to deliver at least R1.4 billion in EBIT five years from acquisition.
Instead, David Jones’ EBIT fell from R1.1 billion in 2014 to only R204 million in 2022, just before it was announced that it would be sold.
David Jones’ poor performance forced Woolworths’ auditors to impair R11.5 billion in the investment between 2018 and 2019, a major blow to the company.
In December 2022, Woolworths announced that it would sell its entire David Jones shareholding to Anchorage Capital Partners.
Woolworths never disclosed how much it received for David Jones, and when asked by Daily Investor, Woolworths preferred not to answer.
However, citing people familiar with the matter, Bloomberg reported that Woolworths sold David Jones for around R1.6 billion.
This means Woolworths lost at least R27 billion on its David Jones adventure.
Brait
Investment holding company Brait – which owns Virgin Active and Premier – made a massive loss with its investment in UK fashion retailer New Look.
Brait first invested in New Look in 2015, when it announced that it would acquire a 90% stake in the retailer for £780 million (R14.4 billion).
When Brait purchased New Look it was generating net profits of R960 million. However, in the first year after the acquisition, New Look reported a net loss of R678 million.
Despite the loss, Brait made a fair value adjustment on New Look from R14.4 billion to R35 billion.
A year later, in 2017, New Look reported a net loss of R343 million and suffered a massive fair value loss. This brought its net asset value down from R35 billion to only R7 billion.
In 2018, New Look reported a colossal R3.7 billion net loss, causing Brait to completely write down the investment to zero.
Early in 2019, Brait underwent a debt restructuring transaction on New Look, where debt holders had to forfeit a significant portion of their debt in return for around 72% equity stake in the company.
This reduced Brait’s shareholding in New Look to 17.4% with 18.3% convertible debt.
However, the investment did regain some value after debt restructuring, and New Look’s total value is currently £81 million, meaning Brait’s equity exposure is £43 million.
In a business update released on 3 June 2024, Brait said that “despite the continued competitive dynamics in the UK retail market, New Look’s management team has focused on overall business optimization and profitability”.
“A combination of higher average selling prices offset by slightly lower overall volumes resulted in a slight reduction in revenue,” it said.
“Management has focused on margin retention, which reduced the overall impact on profitability, which is likely to be in line with last year’s EBITDA.”
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