Thread by @iamkoshiek

The Mr Price // YuppieChef deal will make the headlines today... but it triggers much more fascinating story about deal making by SA companies [Thread]

Think of an acquisition as a marriage. A scary number of marriages fail, just like deals. Sometimes the person you date is different to the one you marry (poor due diligence). Both marriages and deals fail when the future isn't what you expected it to be.

Back in 2003, Mr Price tried something different. They dated a South American expansion. They had a couple of test stores in Chile. It failed & they shut it down.

In 2008, Sun International (SUI) tried dating in South America. They started out very slow.. then it went really bad

Sun International bought a casino called the Monticello in Chile in 2008. In a couple of years it was generating 10% of its total profits, so they doubled down.

Next stop? Panama and Colombia

Both casinos flopped... but Sun International wasn't done, they kept on buying casinos

Like a gambling addict, Sun International kept racking up debt to cover their losses and taking bigger bets. The deck of cards started to collapse, gambling licenses weren't awarded, write-downs started adding up

Naturally their SA business was hit

CEO Anthony Leeming said this

Around the time Sun International decided to double down in South America... SA companies started flirting with offshore opportunities. The main reason was to hedge out ZAR exposure as the rand weakened.

The next stop? Australia

I was an analyst looking at outbound M&A when the wave happened & we scoured EVERY single Australian opportunity. The appetite for Aussie businesses was insatiable.

No other deal captured the hunger like Woolie's appetite for David Jones. It was "deal of the year" at the time..

By now you know how Woolies/ David Jones ended... in tears.

Like Sun International, Woolies believed they could turn the ship around.

Not knowing when to pull out will ruin your life.

Lesson 1: Egos and a saviour complex ruin great businesses.

In 2015 Mr Price decided to roll the dice on Australia. One thing nobody really talks about is how many South Africans used their companies as vehicles to emigrate

We saw it happen many times,it wasn't about the business, it was about the person

Lesson 2: Never make it personal

Mr Price was taking hits in Australia, to their credit it was also a test store rollout. So they decided to roll the dice again in 2018, this time it was Poland.

But Mr. Price had a lesson staring them in the face - they chose not to see it.

A few years before Mr. Price decided on a Polish adventure - Life Healthcare bought a company in Poland called ScanMed (late 2016)

This business hurt them. They were taking rounds of impairments each year.

The Polish party saw Spar, Growthpoint, Redefine, Pepkor making moves. The less said about JSE listed REITs across the last 5 years, the better.

Metair did really well with their European expansion but many others weren't as lucky.

Lesson 3: Following the crowd can hurt you

Of course the one country we haven't touched on which claimed SA company souls - Nigeria

Tiger Brands
Mr Price
Shoprite
MTN also took heavy hits

"Africa is all the same" is an attitude I saw MANY execs adopt until the impairments hit

Lesson 4: Respect countries you operate in

So how the fuck do you do execute a great deal?

By essence of the way deals are structured, acquirers inevitably overpay for assets, overestimate synergies and underestimate post integration costs

Overlay massive boardroom egos... you're in trouble

Another massive problem companies have is too much cash. Yes, too much cash is a problem. Mr Price pre-emptively raised capital. They have always been a company with little leverage - seeing a wave of M&A is no surprise

A few months ago they bought an Irish retailer, Star Buys

The problem of too much cash is perfectly illustrated through the wave of SPACs. Because you have a blank cheque & a time limit it's like playing PacMan... so you acquire everything you can until time runs out.

Lesson 5: Never be forced to buy stuff

Another terrible incentive to do deals lies with the way compensation packages are aligned. Many execs get rewarded for inorganic growth and higher EPS irrespective of whether a deal is value accretive.

Bigger is not better. Oftentimes, it's less efficient.

Maybe the answer all along is not chasing the sexy, foreign territories but understanding pockets of value right in front of you. Maybe it's putting aside your ego before you sink the company

Or maybe we should stop painting dealmaking as sexy & reward old school value creation

Additional Read #1: Doing deals in Africa

https://twitter.com/iamkoshiek/status/1290180539778031617?s=20

Additional Read #2: How bad deals ruin good businesses

https://twitter.com/iamkoshiek/status/1255244738229346305?s=20

Additional Read #3: Behind the Kylie cosmetics deal

https://twitter.com/iamkoshiek/status/1266426138739474432?s=20

If you made it to the end, shout-out