Australia has again hit the news as a South African investment destination of choice, with The Foschini Group’s A$300 million acquisition of Australia’s Retail Apparel Group in mid-2017. Foschini joins other South African stalwarts Pepkor, Steinhoff, Mr Price and Woolworths, in amassing an Australian retail portfolio. Woolworths acquired David Jones for R23.3 billion in April 2014, thereby concluding the largest Australian deal to date by a South African retailer.
“South African retailers’ interest in Australia is understandable”, says Germien du Plessis, Bravura’s corporate finance principal based in Sydney. “Australia shares a similar lifestyle and seasons with South Africa, and offers a large and growing middle class, which drives retail spend.” Retailers have accordingly been some of the earliest movers in to Australia. “Unfortunately, a number of these transactions produced less than stellar results, notably early forays by Truworths, Clicks and Pick ‘n Pay. Of late, Woolworths’ share price has also been impacted negatively by long turnaround times and significant spend on David Jones. And this is before Amazon’s imminent entry into the Australian market is absorbed.”
“The perception arose in some quarters that Australia is a “difficult” investment destination”, says du Plessis. “We don’t believe this perception is accurate. There certainly have been hard lessons learnt, but there have also been many successful Australian acquisitions by South African corporates”. Retailers Metro Cash ‘n Carry turned Davids from a loss-making business into a market-leader. Bidfood Australia is ranked in Australia’s top 200 companies. Steinhoff has a market-leading position built on the back of acquisitions and Nando’s now operates more than 250 Australian stores. In financial services, Youi (owned by Rand Merchant Investment Holdings) has made big strides in the insurance sector. In the ICT sector, Dimension Data and Datatec have completed numerous successful acquisitions, and Murray & Roberts has led the way in mining services through their acquisition of Clough.
“South African companies are looking to Australia for hard-currency earnings and diversification,” says du Plessis. “While Africa offers super-profits in some areas, the African expansion story is also often fraught with regulatory, political and logistical difficulties. The UK remains uncertain due to Brexit, and America, as a vast market with enormous competition, offers its own set of challenges. Whilst certain commentators believe Australia is headed for a recession, we do expect a strong trend to continue for South African corporates looking to Australia for opportunities.”
Australia has been recession free for 26 years, with average GDP growth of 3.3% per annum since 1992, and the forecast Australian economic growth rate to 2020 is the highest amongst major advanced economies. The Australian economy is underpinned by an open and transparent business market supported by a highly educated workforce and progressive labour laws, and strong population growth. Australia maintains a triple-A rating from S&P, Moody’s and Fitch and has close ties to the fastest growing markets in Asia.
However, Australia doesn’t offer strong growth across the board and potential investment pitfalls need to be considered, cautions du Plessis.
“The Australian market is not as similar to South Africa as one would think. While we share a lifestyle and English as a business language, the Australian psyche differs significantly from South Africa, and the structure of the market is different. In addition, political dysfunction is leading to a governance stalemate, household debt is at record-high levels and wages are stagnant.”
In looking at Australian opportunities, du Plessis says South African businesses tend to misjudge the labour market and regulatory environment. “Australia is an egalitarian society, with a unionised labour market and significantly higher wages than South Africa; the minimum wage is currently at $18.29 / ZAR200 per hour. Australian regulation is also extensive, which creates a barrier-to-entry benefit when acquiring a business in a regulated industry, but also results in compliance obligations and associated costs.”
South African businesses have also shown over-confidence in their turn-around abilities, leading to additional cost. “Whilst South Africans have a good turn-around track record on home soil, it becomes significantly harder to attain the same results in a foreign environment, with a foreign workforce characterised by significant cultural diversity. South African management styles can be perceived as very direct, to the point of aggressive or arrogant. The retention of Australian management is therefore critical to business continuity.”
When it comes to costs, commercial property is more expensive than in South Africa and rentals are significantly higher. Finally, having financial rather than strategic goals, including chasing ZAR diversification and dollar income at all costs – and over-paying in the process, can lead to transaction failure, says du Plessis. “An acquisition needs to be more than just a Dollar income stream.”
With the above in mind, Du Plessis believes that the choice of sector is key when looking at Australian investment. “We believe that Australia offers a particularly good fit for South African ICT and financial services businesses, as well as industries that rely on technology, have a high degree of automation or have inputs that are import-related. In ICT and financial services specifically, a technology-savvy and solutions-driven customer base makes Australia a hub for innovation, and there are significant opportunities for investment”.
Du Plessis, as part of the Bravura Group, has advised several South African businesses with regard to their entry into the Australian market. “For investors planning to establish or expand business operations in Australia as part of a diversification strategy, there are opportunities in the right sectors. But to maximise long term value, companies should ensure that they receive informed, local advice with an understanding of the South African investor perspective, so as to navigate the complexities.”
Published: 21 November 2017
