Mr Price facing shareholder pressure over European expansion through NKD acquisition

The Mr Price Group is getting shareholder pushback over its plan to acquire the NKD Group, a German-based clothing discount store chain.

Benguela Global Fund Managers is calling on Mr Price to stop the deal, and Moneyweb reports that it's written to the Johannesburg Stock Exchange (JSE) to intervene.

It's understood the nature of the deal means that the South African operations will be subsidising a loss-making European subsidiary for the foreseeable future, which will impact the group’s overall ROE (return on equity).

According to Benguela this should be classed as a Tier 1 transaction where shareholders get the opportunity to approve the deal: "The JSE ought to review and aggregate all acquisitions undertaken by Mr Price since 2021, including the planned NKD deal, into a single Category 1 transaction."

In conversation with Stephen Grootes, Victor Seanie, Head of Research at Benguela, likens the proposed transaction to a scenario where the manager running a highly profitable clothing store for the owner, appoints a committee to decide on how his bonus will be paid.

"The biggest factor driving that bonus is simply revenue growth in profit, so he takes the hard-earned money from the store, and goes and buys another business. What that does in financial engineering terms, is it immediately grows the revenue of the total enterprise and the profit - and purely based on just that transaction, he's able to earn a sign bonus. However the business he buys is v poor with the return he's getting on Day 1 at about 3%. At the same time he's paying so much for that new business, that he borrows six times as much cash as your business already has... whereas you could have earned about 6% after tax in the bank."

This is the problem they are seeing at Mr Price, Seanie contends, where shareholders or the principals, appoint an agent or the managing team to look after their interest, but management appears to instead prioritise their own personal goal.

Is the investment management firm essentially accusing Mr Price Group CEO Mark Blair of doing this to get a big bonus? asks Grootes.

Seanie responds that this IS what they think is happening at Mr Price because "all the metrics of this transaction look very unattractive".

He reports now that the JSE has not supported Benguela's categorisation request, and the matter has now been escalated to the regulator of the bourse to reconsider the decision.

For more detail on this highly technical matter from the perspective of Benguela Global Fund Managers, take a listen to the interview audio at the top of the article