JOHANNESBURG South African retail magnate Christo Wiese sought to create an African retail giant on Wednesday with the proposed takeover of Steinhoff's (SHFFp.J) (SNHG.DE) African assets by Africa's biggest grocery retailer Shoprite (SHPJ.J).
Wiese owns 16 percent of Shoprite and 23 percent of Steinhoff, the owner of UK's Poundland and U.S.-based Mattress Firm, which said on Wednesday they were in talks about an all-share deal that would create a no-frills retailer with $15 billion in annual sales spanning food, furniture and clothes.
The deal, which was initiated by Wiese, would give Steinhoff, which is dubbed Africa's IKEA[IKEA.UL] and vies with the Swedish firm for global market share, a major interest in Shoprite, a 110 billion rand ($8 billion) company operating in countries including South Africa, Nigeria and Angola.
Wiese, also a top shareholder and board member in Brait (BATJ.J), which owns British clothing retailer New Look and gym chain Virgin Active, told Reuters in September a Shoprite and Steinhoff merger would be a "natural development".
But investors were not immediately convinced by the proposed tie-up, which one banker said could value the merged entity at around $15 billion, sending shares in both companies between 4 percent and 8 percent lower as analysts questioned its merits.
Shoprite fell 6.6 percent to 180 rand, on course for its biggest daily percentage decline in nearly a decade, while Steinhoff slumped 7 percent in Johannesburg and Frankfurt, where it took its primary listing a year ago to raise its profile and access deeper capital markets.
"I see no logic in this deal...Both have operated independently well on their own for last 20 years and they've never needed each other," Evan Walker, an analyst at 36One Asset Management in Johannesburg.
"The overlap is so miniscule that it doesn't make a difference."
Under the proposal, Shoprite would issue shares to Steinhoff in exchange for its assets on the continent that include clothes discounter Pepkor and furniture business JD Group.
For Shoprite, the deal allows it to branch out of grocery retail into clothing, electronics, shoes and furniture while Steinhoff, through its "significant" stake in Shoprite, would add groceries to its sprawling four continent empire.
Steinhoff has also agreed in principle to buy Wiese's 1 billion rand stake in Shoprite and that of the Public Investment Corporation, a South African government employee pension fund that owns 11 percent.
In addition, the two companies said Steinhoff may be required to extend a mandatory offer it plans to make to the two biggest shareholders to other investors on the same terms, a move that could lead to a full takeover of Shoprite.
"If this is the case, such offer will be in the form of a Steinhoff share-for-Shoprite share exchange," they said.
The potential tie-up excludes Steinhoff's European, Asian and U.S. assets. It extends Steinhoff's deal-making binge that has taken the company across the Atlantic for first time with the $3.8 billion rand acquisition of U.S-based Mattress Firm.
Steinhoff, which targets budget-conscious consumers with t-shirts, cup-boards and mattresses in Asia-Pacific, Europe and the U.S., also acquired Britain's Poundland earlier this year in an $800 deal after failing to secure the U.K.'s Home Retail and France's Darty Plc.
(Additional reporting by Tanisha Heiberg and Nqobile Dludla; Editing by Keith Weir and Alexander Smith)