| Mon 28 May 2001, 0:00 | | Pick 'n Pay Confirms Australia Negotiations "at Fi |
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Company reorganises to gear for growth
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PICK 'N PAY CONFIRMS AUSTRALIA NEGOTIATIONS "AT FINAL STAGES"
Company reorganises to gear for growth
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ÝCape Town, 28 May 2001¨ Pick 'n Pay today confirmed that it was in the
process of finalising negotiations and a due diligence to purchase
approximately 60 Franklins "No Frills" stores as well as the 20-store Fresco
chain (to be rebranded as Franklins) in the metro Sydney area.
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This will result in the total turnover of approximately AU$900-million per
annum (about R3.6-billion), about 25% of Pick 'n Pay's current turnover.
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Pick 'n Pay CEO Sean Summers said: "negotiating transactions such as these
against the speculation and rumour that inevitably results in the market
when the company is unable to disclose its intentions more fully, adds to
the complexity.
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"Despite market assumptions, Pick 'n Pay has had the right to pick the
stores that it wished to purchase outside of the large Franklins Big Fresh
stores: all stores selected by Pick 'n Pay in the purchase package are
profitable at branch operating level."
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The purchase is still subject to finalisation pending the conclusion of the
negotiations for the number of stores, documentation and lease assignment.
The total investment envisaged to pay for the chain, together with
additional infrastructural costs and working capital, will be in the order
of AU$125-million or R500-million. The purchase will be funded from existing
cash reserves.
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Summers said that it was the consensus of opinion in Australia that the
demise of the Franklins Group - owned by Hong Kong-based Dairy Farm - was
that during the past few years, Franklins had moved away from its position
as leading 'No Frills' discount retailer', to a "Big Fresh" position which
had put the company into direct opposition with other leading retailers,
Coles and Woolworths on similar formats.
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"They had invested heavily in their "Big Fresh" brand which had not achieved
turnovers adequate to offset vastly increased capital and labour
infrastructure.
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"The opportunity was identified that within the Franklins group, the "No
Frills" stores were still profitable and achieving good levels of consumer
acceptance despite the overall demise of the total chain. The 80 stores we
have purchased are all trading extremely strongly and are cash positive. We
have extensive experience in running a "no-frills" hard discount operation
through our success in Score and believe that the similar formulas will
allow us to show real growth in a short space of time."
The agreement will see Pick 'n Pay purchase the stores and related fixed
assets, along with the Franklins trademark and Franklins "No Frills" brand
for the continent of Australia. The initial purchase is in metro Sydney and
New South Wales. Any Franklins-branded store outside this area will lose its
name once it has been sold.
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In parallel to these negotiations, Summers has concluded a strategic
alliance with Davids Australia (Metcash) to provide logistical and
distribution functions, allowing the new Franklins team to focus all their
energies on the retail operation. The Fresco support office will be used as
a base and Pick 'n Pay systems will be used as a basis to take the business
over.
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Only one South African executive will be seconded to Australia, with the
operation being manned by Australians, backed up by IT and systems from Pick
'n Pay in South Africa.
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"We are aware that the South African market is circumspect about the track
record of South African retailers abroad, and particularly in Australia,"
said Summers.
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"However, this is not the case with all South African investments in
Australia. Although there have been some failures, Clicks have succeeded
through Priceline and Metcash have done a very good job of turning around
the old Davids operation which in the last week has reported a much improved
profit. Another problem South African companies have experienced overseas
was overpaying for the underlying assets as well as complex financial
structures.
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"In our case, we are purchasing close to a A$1-billion turnover
(approximately R4-billion) business with a leading brand name in its target
market, plus fixed assets, for an investment of only R500-million.
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"This is an extremely reasonable price and given our experience in the
discount retail environment, we believe that we will achieve success in a
relatively short space of time. Certain start-up costs will be incurred in
the first year, although we do not foresee any material impact on Pick 'n
Pay's results for the financial year.
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"While the purchase will be funded by existing cash reserves and will
therefore affect interest income depending on when the transaction is
finalised, Pick 'n Pay generates between R200- and R300-million in cash per
annum which means that we should have replaced this investment inside of
about 18 months. Despite this expense, Pick 'n Pay's cash position will
remain extremely strong.
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"In making a foreign investment, there was no need to 'bet the house'. This
purchase presents an excellent opportunity for entry into this competitive
market, at a very reasonable cost of investment.
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"As with all ventures of this nature, we are well aware of the task that
lies ahead of us. However, we believe that in purchasing the pre-eminent
discount retail brand for the whole of the continent of Australia, there is
enormous potential to grow this business.
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"We are asked consistently how the company can continue to grow and more
specifically, where growth will be coming from. The evolution of Pick 'n Pay
illustrates that we create our own growth and our own opportunities. This
investment in Australia represents one such opportunity, but we believe very
strongly that there are still significant growth opportunities in South
Africa, particularly in Franchising, Score and Hypermarkets.
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"We will be opening the first three of five Score supermarkets in Dar es
Salaam in June. We believe that this format will prove successful and will
provide us with further growth opportunities in sub-Saharan Africa. We are
also developing home shopping, and the market can expect yet another major
announcement in the second half of the calendar year."
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At the same time, Pick 'n Pay has also announced that it would streamline
its structure to allow for more focus on the core business, growing business
and the foreign investment.
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Three divisions will be created, each with its own managing director. They
are Retail, Group Enterprises and Australia. This will effectively mean that
as CEO, Summers will have four direct reports including the financial
director, as opposed to the current 29, resulting in more focused
management. Current Western Cape Retail GM, Nick Badminton will be MD of
Retail, Marketing Director, Martin Rosen will be MD of Group Enterprises,
while Aubrey Zelinsky will take over as MD of Australia.
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Speaking from Cape Town, chairman Raymond Ackerman said that in creating
three focused divisions, Sean would be able to apply his energy and
considerable retail skills to growing the core business, focusing on new
business, the two divisions (Retail and Enterprises) in Africa, and adding
huge value to the new Australian investment, given his experience and
familiarity with the Australian retail environment having worked in Pick 'n
Pay's Hypermarket in Australia in 1985.
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"This is a very positive step for Pick 'n Pay. After meticulous attention to
the future needs of the company, we achieved a major milestone in 1999 with
the appointment of Sean as Chief Executive Officer, with my remaining as
full-time hands-on chairman. This significant step, placing us in the
forefront of transitions taking place world wide, was taken in order to
change a family owned and managed business into one managed by professionals
while still owned by the Ackerman Family. Sean and I work extremely well as
a team and the decisions taken two years ago have borne fruit for all of
us."
ENDS
For further information, please contact Tamra Veley on (021) 426 1233 or 083
251 3658 or Alice Jenner on 083 448 2650
FACT SHEET
PICK 'N PAY'S INVESTMENT IN AUSTRALIA
MAY 2001
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* Rare once-off opportunity occasioned by managed sell down of Franklins.
* Acquisition of 60 Franklins "No Frills" stores.
* Acquisition of Fresco chain (20 stores - will be rebranded to Franklins).
* Experienced management with infrastructure.
* Acquiring rights to the Franklins trademark and Franklins "No Frills"
brand nationally. Franklins remains the strongest "Low Cost" brand in
Australia.
* All stores within 100km of metropolitan Sydney.
* Purchase price A$110-million includes all store assets. (Fresco purchased
with equity in New Venture).
* Total investment A$125-million (balance for cash flow requirements and
some infrastructure costs).
* Will be comfortably financed from existing cash resources.
* Current turnover of purchased stores A$900-million (about R3.6-billion).
* All stores profitable at store contribution level (BOPDA).
* Outsourcing logistics requirements - Metcash.
* Should be cash flow positive after 12 months and profitable midway through
Year 2.
* Purchase still subject to finalising negotiations (lease assignment,
documentation, due diligence).
* Exceptionally good growth opportunities.
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