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JOHANNESBURG - South African fashion retailer Mr Price (MRPJ.J) has agreed to buy NKD Group, a German-based discount retailer, for up to 487 million euros ($568 million), marking its entry into the European market.
Mr Price shares were down 12.3% at 1212 GMT as investors questioned the price and weighed the major strategic shift.
Mr Price said NKD, a clothing and homeware retailer with 2,108 stores in seven Central and Eastern European countries, was a good fit.
Market data shows growth in value retail is outpacing the overall market, and accounts for about 22% of the European market.
"After meeting the NKD team, it was evident that this was the right business to pursue," CEO Mark Blair said. "Like us, they are value-retailers at heart and have a very clear understanding of who their customer is and how to best serve them."
The acquisition, from an entity owned by funds managed by TDR Capital LLP, includes all shares and income from shareholder loans. The deal will be funded through a mix of existing cash reserves and debt facilities, Mr Price said.
NKD will lift Mr Price's annual revenue to about 53 billion rand ($3.12 billion) from 40.9 billion rand and expand its store count to more than 5,000 from around 3,100.
But investors were cautious.
"Investors are wary of the numerous mishaps that South African companies have had going offshore," said Alec Abraham, senior equity analyst at Sasfin Wealth.
"Pretty much all the other retailers that's done it came back with their tails between their legs," added Casparus Treurnicht, portfolio manager at Gryphon Asset Management.
In recent years, Mr Price had taken a cautious approach to foreign markets, retreating from Nigeria, Australia and Poland.
Treurnicht also said the retailer was "overpaying" for the deal, which "looks like a 35 PE (price-to-earnings ratio) at best, (which is) very expensive".
The deal will add about 5 billion to 6 billion rand in borrowings to a current debt-free balance sheet, excluding leases.
($1 = 0.8581 euros)
($1 = 17.0122 rand)
