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DIS-CHEM PHARMACIES LIMITED - Voluntary Announcement Relating To The Acquisition Of Baby City

Release Date: 15/05/2020 07:05
Code(s): DCP     PDF:  
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Voluntary Announcement Relating To The Acquisition Of Baby City

Dis-Chem Pharmacies Limited
(Incorporated in the Republic of South Africa)
(Registration number 2005/009766/06)
JSE share code: DCP
ISIN: ZAE000227831
(“Dis-Chem” or “the Group”)

VOLUNTARY ANNOUNCEMENT RELATING TO THE ACQUISITION OF BABY CITY


1. Introduction and Salient Terms
    Dis-Chem is pleased to announce that on 11 May 2020 it entered into inter-conditional
    agreements (the “Agreements”) in terms of which it will acquire 100% of the issued share
    capital in and shareholder claims of:

          •   Fairy Tales Boutiques (Proprietary) Limited (“Fairy Tales”); and
          •   Somerset Baby Hyper (Proprietary) Limited (“Somerset”),

    which, in aggregate, comprise the well-known baby care products retailer Baby City (“Baby
    City”), from the Baby City’s founder shareholders, the Aronoff family (“the Transaction”).
    Michel Aronoff, who conceptualised and strategised Baby City’s direction, will continue to
    serve as managing director of Baby City following closure of the Transaction and current
    staff will be retained. Dis-Chem will pay a purchase consideration of R430 million upon
    closure. The Transaction contains both a shareholder loan and a net working capital
    guarantee which ensures that Baby City’s position upon closure resembles the pre-COVID
    19 level, while incremental earnings accrue to Dis-Chem. The Transaction remains subject
    to suspensive conditions, including approval from competition authorities.
    In terms of the Listings Requirements of the JSE Limited, the Transaction is not deemed
    to be a categorised transaction.


2. Information on Baby City
    Baby City is a specialist destination baby retailer who operates a network of 33 stores
    across South Africa. It sells a comprehensive range of branded baby products at
    reasonable “Everyday Low Prices”. The brand's focus is primarily on first-time parents and
    caters for moms and babies’ every need. Baby City offers a complete baby shopping
    experience to its customers and prides itself on its consumer-centric entrepreneurial
    approach in a resilient market. It lives by the slogan “We know you care”.

    For the 12 months to February 2020, Baby City generated revenue of R855 million. It has
    continued to trade well relative to the COVID-19 lockdown environment demonstrating
    both the resilient nature of the industry and the inherent brand equity of the retailer.

3. Rationale
    Dis-Chem recognises that the characteristics of the baby product sector align with the
    those of the pharmacy sector. Both sectors are extremely resilient with perpetual new
    entrants - the baby sector sees approximately 900 000 new babies annually. Dis-Chem’s
    current offering is very focused on the FMCG and basic essentials categories which are                                                                                   
extremely sensitive to price and promotion. To deliver both a destination baby experience
to the first time parent and allow growth into the more specialised baby categories such
as Baby gear (prams, car seats, swings, bouncers and other nursery equipment), clothing,
developmental toys, amongst other categories, Dis-Chem required a standalone baby
destination store network whose brand positioning aligned with its own brand.

Both brands share destination store status, consumer-driven offerings underpinned by an
“Everyday Low Price” strategy and unmatched stock range, service focussed customer
experience and were both built around an entrepreneurial culture.

Both management teams believe that the similarities of the brands and their positioning in
their respective sectors will allow the identified synergies to be extracted quickly and
efficiently.

The most value-enhancing of these are:

   •   The Baby City retail stores will be integrated into Dis-Chem’s current supply chain
       and serviced by CJ Distribution. Dis-Chem’s recent, focussed Return on Invested
       Capital (“ROIC”) strategy has unlocked additional supplier terms which will
       enhance the commercial return of these incremental supply chain volumes. The
       additional volumes should be operating margin accretive to the CJ Distribution
       business.
   •   The inclusion of a Dis-Chem branded clinic will enhance baby City retail stores.
       The clinic will offer ante and post-natal clinic services aimed at babies and toddlers.
       These services will enhance the destination store status of the brand and in turn
       allow the Dis-Chem clinic infrastructure within its own stores, which currently offer
       these services, to handle the growth it is seeing in primary care clinics services
       volume.
   •   Currently, Baby City does not have a loyalty offering. Extending the Dis-Chem
       loyalty and partner offering, currently comprising of 4,5 million members and
       numerous value-enhancing partners, to Baby City customers will drive increased
       shopper frequency and bigger customer baskets. The combined loyalty offering will
       also ensure the ability to successfully capture the transition of the first time parent
       in the Baby City environment to the baby maintenance shopper in the Dis-Chem
       environment.
   •   The ability for Dis-Chem to extend private label brands into the Baby City stores,
       opens up the opportunity for gross margin expansion in the Baby City business.
   •   As part of the due diligence, a white space exercise was concluded based on the
       relationship between geographic baby density and baby retail store density. The
       exercise identified the potential for approximately another 30 sites for well traded
       Baby City outlets.

Dis-Chem’s CFO Rui Morais said: “There are clear opportunities to harness synergies
across both brands. The brands and industries have very similar characteristics allowing
for efficient synergy extraction. Baby City benefits from very strong brand equity amongst
South African consumers, specifically from first-time parents which is core to our vision of
creating a further enhanced baby destination store and experience. We are excited about
the return enhancing nature of the transaction.”

    “The acquisition is a great cultural fit and has been a target of ours for many years. The
    brands and businesses were built with similar philosophies, ensuring management team
    alignment as we take steps to unlock the value we see in the Baby City brand” says Ivan
    Saltzman , Dis- Chem’s CEO.

    Michel Aronoff, managing director of Baby City, says both organisations share the same
    ethos and passion inherent in entrepreneurially run businesses. “Our trajectory echoes
    Dis-Chem’s history and growth, and we are confident that our shared philosophy of
    customer-focused quality and service will translate into solid growth for Baby City as part
    of the Dis-Chem stable.”

4. Conditions Precedent
    The Baby City acquisition is subject to the fulfilment of the following conditions precedent
    by 31 October 2020, or later date as may be agreed to in writing (“Longstop Date”):

       •   obtaining the required approval in terms of the Competition Act for the
           implementation of the Transaction either unconditionally or subject to such
           conditions as the parties may agree in writing;
       •   delivery to all parties of the required resolutions by the directors of the purchaser
           and seller approving the Transaction;*
       •   Seller 1 (Michel Aronoff) having concluded a written two-year fixed-term
           employment agreement with Fairy Tales, including restraints reasonably
           necessary to protect Fairy Tales, Somerset and Dis-Chem; **
       •   individuals identified by Dis-Chem in its due diligence exercise as key employees
           of Fairy Tales having concluded a new written employment agreement with Fairy
           Tales, including restraints reasonably necessary to protect the economic interests
           of Fairy Tales and Dis-Chem; and **
       •   Fairy Tales and the landlord of its head office premises having concluded a new
           lease agreement, on terms and conditions approved by Dis-Chem in writing. **

   ** These conditions precedent may be waived at any time prior to the Longstop
   Date by Dis-Chem.
   * These conditions precedent may be waived by written agreement between Dis-
   Chem and the Fairy Tales Sellers at any time prior to the Longstop Date.

5. Effective Date
    The effective date for the Transaction is expected to be the last day of the calendar month
    in which the last of the conditions precedent is fulfilled (or waived, as the case may be),
    provided that, to the extent that the date of fulfilment (or waiver, as the case may be) of
    the last of the conditions precedent occurs after the 25th day of the calendar month in
    question, then the effective date is expected to be the last day of the succeeding calendar
    month.

Johannesburg
15 May 2020

Advisers to Dis-Chem    Advisers to the Aronoff family     Competition advisers

Saltzman Attorneys       Transaction adviser: i capital    Nortons Inc
                                   advisers

                         Legal adviser: NSG Attorneys

                                  Sponsor
                       The Standard Bank of South Africa
                                   Limited

Date: 15-05-2020 07:05:00
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