The value destruction at investment house Brait after its ill-fated 2015 acquisition of UK fashion retailer New Look shows the grass is not always greener on the other side. At the time, Brait and many other SA investors rushed to find alternative homes for their capital as they feared a total corruption meltdown in SA.
This rush offshore peaked at the height of the looting frenzy facilitated by former president Jacob Zuma’s government.
Only it didn’t work out so well. After paying R14.2bn for 90% of New Look, Brait has now agreed to shrink its stake to between 18% and 30% of the company.
It’s yet another blow for Brait, which, after having paid so much to buy New Look, wrote the entire investment down to zero in 2017. But it was out of options. In March New Look staved off a potential collapse when British creditors and landlords approved a plan for the company to close 60 UK stores.
It still has 550 stores open in the UK, and another 300 elsewhere.
New Look is not the only UK retailer in such a dire state. Bloomberg reports that more than 20 UK retailers have been seeking debt restructuring deals since late 2018. Others, including chains HMV Group and Halfords Group, have either filed for insolvency or have issued profit warnings.
The Brexit vote was the single most damaging political decision for investor confidence in UK companies – much like the rampant corruption of the Zuma regime back in SA.
The ordeal has inflicted serious damage on Brait’s share price. Before the New Look acquisition, Brait shares were valued at just under R80, before soaring to R180 late in 2015. This was the market giving a resounding stamp of approval to what seemed like a well-thought-out diversification strategy.
At the time of writing, Brait’s stock was R25.50, having plummeted 21% on a single day. It turns out that running away from bad political decisions at home doesn’t provide much safety for your capital.
There is more to Brait’s disastrous offshore gamble. When it invested in New Look, Brait was looking for somewhere to put the R14.2bn it got from selling its Pepkor stake to Steinhoff, Markus Jooste’s company, which then sought a listing in Frankfurt.
One could argue that perhaps Brait’s largest investor, Christo Wiese, was packing up in search of better climes. He was also, at that point, the largest investor in Steinhoff, which he then attempted to merge with his other asset, retailer Shoprite. Fortunately for Shoprite’s investors, the merger failed.
Steinhoff tripped up on its own corruption, as its foray into Germany exposed many of its shenanigans.
It’s clear that investing offshore is no magic formula. In the wake of US President Donald Trump’s belligerent stand-off with China, and the ascension to power of other anti-establishment leaders globally, the safe space for investors will continue to shrink.
Where then must companies go to find enabling investment environments? That may be a matter best left to investment professionals. All I can advise is that investors get off the fence and get their hands dirty: fight corruption and bad governance in their home markets, in their governments and in the boardrooms.
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