Clothing and household goods retailer Deacons Kenya is finalising a joint venture agreement with South Africa’s Woolworths, ending their franchise partnership.
According to the Kenyan retailer, the two have signed a head of terms agreement, a document describing the main terms between parties of a commercial transaction, in anticipation of a successful deal.
A joint venture would see Deacons, which also handles other top franchises like Mr Price, Truworths and Angelo, cede some control of its local activities and earnings to the South African retailer.
“The directors of Deacons Kenya wish to inform the shareholders that it is currently in the advanced stages of finalising the terms of its future business and trading relationship with Woolworths,” said Peter Njoka, Deacons chairman.
“In this regard, Deacons and Woolworths have signed a heads of terms to enter into a joint venture with regard to the Woolworths retailing business in Kenya.” However, the two firms remained guarded on the finer details of the ongoing negotiations such as the stake ratios that have been proposed or already agreed on, if any.
Woolworths has over the past two years bought out over 20 of its franchise outlets in South Africa as it sought to simplify its structure, consolidate its business and also increase its earnings.
The South African firm decided to cease franchising in September 2010 , noting that it had become increasingly “more complex and expensive to operate a separate franchise business model with its own systems and processes”.
Despite not to securing a similar buyout locally, analysts reckon that Woolworths could have tried to do so arguing that the firm prefers a takeover as opposed to entering joint venture agreements, with the former being advantageous when it comes to decision-making.
“It is possible that Woolworths attempted to buy out Deacons Kenya but failed to convince them into this, forcing them to settle on a joint venture,” said Brenda Kithinji, an analyst with Standard Investment Bank (SIB).
“Deacons have built considerable brand loyalty locally and they are keen on protecting this.”A report released by Citigroup in May offered the first hint of a possible deal in the works, but indicated that Deacons “wants to maintain franchises but may go the joint venture route but not buyout”.
Under a joint venture, Woolworths will be well poised to grow its earnings from the Kenyan market since its products contribute the highest profit margin for Deacons locally.
As of last year, Woolworth’s sales contribution to Deacons stood at 31.4 per cent coming second only to Mr Price (40.4 per cent) and ahead of Truworths, which contributed 8.8 per cent. “South African brands continue to dominate sales contribution for Deacons, with Mr Price and Woolworths being its main contributors,” noted the Citigroup Global Markets report.
“Whilst Mr Price is the best trader, the highest profits are earned out of Woolworths, due to more loyal customer base and higher pricing points and margin.”
For Deacons, a successful deal would see it bring on board fresh ideas to boost its business especially because their internal brand 4u2 established in 2004, and Truworths, a franchise deal entered in 1999, are both underperforming according to the Citi report.
The joint venture deal is also set to affect the retailer’s plans to list at the Nairobi Securities Exchange (NSE), where it had set a target of third-quarter 2012.
“The proposed listing of the company’s shares on the Nairobi Securities Exchange is now likely to occur only after the above matter is finalised and all relevant approvals including regulatory approvals are obtained,” noted Mr Njoka.
