Would You Rather Have $1 or Own Truworths Zimbabwe?

A case study on $1 deals including Shoprite and Spar.

Last month Truworths filed for corporate rescue as the company was in financial distress.

Now we have some details about Truworths’ situation. Newsday reports:

"Truworths’ total liabilities as of August 7, 2024, stood at US$2 534 691, significantly outweighing its total assets of US$1 540 370. This left the company with a net liability of US$994 321, effectively rendering it insolvent.

Based on those numbers, you could buy Truworths for $1, provided you were willing to take on the company’s liabilities.

Buying a business for $1 can work out well or be disastrous. Here are some examples.

Shoprite Holdings, Africa’s largest retail chain, famously purchased OK Bazaars for R1 in 1997.

The previous owners South African Breweries, wanted to get rid of the company that had eaten up R1 billion in capital in only a few years. Shoprite on the other hand was looking to expand.

Buying OK Bazaars meant taking on a loss-making business with a lot of debt, but it would also add 157 supermarkets and 146 furniture stores to Shoprite.

It was a risk but one that paid off handsomely for Shoprite.

As stated in Shoprite’s 1998 Annual Report, OK Bazars had “a more rapid return to profitability” than expected after the acquisition

Extract from Shoprite Holdings’ 1998 Annual Report

To make the turnaround sweeter, Shoprite also paid lower taxes due to the tax losses inherited from OK Bazaars.

The business that had cost R1 was now making millions in profit and has since gone on to make billions.

However, things can also go in the other direction, even in the same industry.

On 1 October 2019, the Spar Group, which competes with Shoprite in certain markets, acquired a majority holding in the Piotr i Paweł (PiP) group from Poland for €1.

This deal added over 200 stores in Poland to the Spar group if you also include the franchises.

Spar Group 2020 Interim Results Presentation

At the time, Spar saw an opportunity to gain market share in a country that was seen to have weathered CoVID 19 better than others and had a favourable macro environment.

The expectations were high.

Spar forecasted that revenue would grow from €160m in FY20 to €400m by FY23.

Spar Group 2020 Interim Presentation

Well as they say, every forecast looks good in a PowerPoint.

What happened was that revenue remained at about the same level as 2020, reaching R2.9 billion (~€150m) in 2023. However, this revenue also came with astronomical losses of over R900 million.

The situation was so bad that Spar recently sold Poland operations as Business Day Reports:

“Spar has offloaded its loss-making operations in Poland to local retailer Specjal for R185m, marking the end of a costly venture that has drained the group’s resources since 2019.

The sale will see Spar settle the firm’s funding debt, amounting to an estimated R2.7bn.”

Just so you don’t miss the detail, Spar had to effectively pay R2.7 billion to get rid of the Poland business.

Based on the two examples of Shoprite and Spar, we see that sometimes a $1 or R1 business can be a great opportunity or a disaster waiting to happen.

Now, to Truworths Zimbabwe, would you rather have $1 or own Truworths Zimbabwe?

Well, the deals that work out well are typically those in which the issues that led to the company's failure were mostly internal.

This was the case with OK Bazaars. Issues included poor financial controls, a high-cost structure, lax management, and low productivity, among others. Otherwise, the overall retail market healthy as shown by Shoprite’s growth between 1993 and 1997 that saw revenues nearly double.

With its experience, Shoprite could address these issues, and as soon as it did, the business became profitable.

With Truworths, there certainly are internal issues that need to be addressed; however, external market forces can't be discounted.

The rise of informal traders and, perhaps more importantly, currency stability and policies around the USD will all affect Truworths.

So would you rather have $1 or own Truworths Zimbabwe?

I leave it for you to decide.

If you are actually interested in purchasing Truworths, I'm happy to discuss in more detail how one could turn around the business.

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