‘This Is Not A Lehman-Like Moment’: How Will Brexit Affect African Mergers, Trade Relations?

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Written by Dana Sanchez

South Africa-based Steinhoff, the second-largest furniture retailer in the world, was in the midst of a takeover bid for U.K. retailer Poundland when the Brexit referendum results announced a split from the E.U.

The day after the referendum, Steinhoff said Poundland had rejected an offer, which most likely came as a relief, BusinessDayLive reported. But Steinhoff already owns 23 percent of in the firm, which in rand terms is worth 10 percent less post referendum.

A family trust belonging to Christo Wiese, South Africa’s second-richest man, is the largest shareholder in Steinhoff, Forbes reported. Steinhoff owns U.K. retailers Harvey’s and Bensons for Beds, which don’t account for much in its large portfolio of retail and manufacturing businesses. Investors cut 5.4 percent from its share price on Friday.

Brexit will tarnish the U.K.’s appeal for Steinhoff, which failed to buy Home Retail Group (the owner of Argos) in March, AcquisitionsDaily reported. It is possible Steinhoff will make a higher offer for Poundland before July 13. The fall in sterling presents opportunities to take advantages of currency moves.

Brait

Fashion retailers are at risk from a Brexit fallout as they buy significant volumes of goods overseas and pay in dollars, Telegraph reported. They’ll be hammered by increased import costs from the falling value of the pound.

Wiese also controls Brait, another South African firm heavily exposed by Brexit. The company has been buying retailers aggressively in the U.K. including Virgin Health Clubs and fashion chain New Look. Those now account for the majority of its portfolio. Brait share price lost 5 percent on Friday.

U.K. consumer stocks are particularly vulnerable post the referendum, being heavily exposed to the domestic sector which now faces severe uncertainty. The FTSE 100 index of larger companies fell 3.2 percent, with many protected by a large proportion of earnings from outside the U.K. The FTSE 250, which fell 7.2 percent, is a better exposure indicator for Steinhoff and Brait, which are mostly exposed to the domestic market, BusinessDayLive reported.

SABMiller

Other companies to watch include the SABMiller/Anheuser-Busch InBev merger, which has been complicated by the confusing U.K.-Europe relationship.

The 44-pound-per-share offer for SABMiller by Anheuser-Busch InBev (AB InBev) became less attractive for shareholders after sterling was battered in the chaotic aftermath of the U.K. referendum, BusinessDayLive reported.

In London, the SABMiller share price changed little on Friday, closing at £42.75, just 0.3 percent down from its opening level. On the JSE, SABMiller closed almost 5 percent lower at 871.88 rand, reflecting the strengthening rand against sterling.

The slump in sterling against all currencies means the deal is less compelling than six months ago. Since the Nov. 11 offer, sterling slid 12 percent against the dollar. In dollar terms, the offer is now worth $95 billion compared with November’s $108.6 billion.

Old Mutual

U.K.-based South African firm Old Mutual is an international investment, savings, insurance, and banking group with more than 16 million customers.

Britain’s phased-in departure from the E.U. is unlikely to have much long-term effect on the markets, or to change the outlook for the global economy, according to financial services giant Old Mutual, The Citizen reported.

“It is an event that matters hugely for the U.K… However, it is unlikely to have an economic fallout in the U.S. or China, the largest economies in the world,” said Old Mutual managers Dave Mohr and Izak Odendaal in a statement Friday.

“The U.K. economy accounts for around 15 percent of the E.U.’s economy but only around 2.3 percent of the global economy,” they said. “This is not a Lehman-like moment since credit markets won’t seize up and the Bank of England (and other central banks) are ready to provide liquidity if needed.

“There is no redenomination risk from leaving the E.U. (unlike the feared exit of Greece from the eurozone a few years ago) since U.K. debt and assets are still denominated in pounds. The pound is just weaker (which should benefit U.K.-based exporters and some London-listed multinationals).”

For South Africa, the impact will mainly come through the financial markets. If the rand weakens further it could push interest rates and inflation higher, Old Mutual managers said.

“Our very important trade relationship with Europe is not in danger but given that the U.K. will have to increasingly look outside Europe to do business our trade relationship might even improve. Investors should focus on their long-term plans.”

Market moves of 5 percent or more are scary but common, they said. Long term, they’re small blips that are often good buying opportunities and bad times to sell out.

“Markets typically overreact to such events and are likely to be volatile while the outcome and its implications are digested. Brexit is not an event that requires South Africans to change their financial plans.

“Financial plans and investment strategies should be built around life events and life goals, not changes in market volatility. A diversified portfolio remains the best way to manage the inherent uncertainty in investing instead of a fearful concentrated portfolio of gold or cash,” the statement said.