Retail chain Deacons has suspended its plans to list at the Nairobi Securities Exchange after the company underwent a major dilution in the key clothing business.
The firm had in March last year announced it was to list at the NSE by introduction, but has now indefinitely suspended the plan.
This came after Deacons transferred its mainstay Woolworths brand to a new company in which it took a 49 per cent stake while the franchise owner Woolworths SA took a 51 per cent shareholding.
Formation of the joint venture, dubbed Woolworths Kenya Proprietary Limited, has effectively diluted Deacon’s earnings from the profitable franchise and hurt the case for its listing at the Nairobi bourse.
“Woolworths used to contribute 49 per cent of the group’s revenues. The new arrangement means the size of Deacons as a business has changed and we have decided to defer the company’s listing,” said Muchiri Wahome, Deacon’s chief executive officer.
A smaller Deacons operation means the company’s valuation and earnings prospects have changed materially since the listing plan was first announced, with implications on the stock’s pricing.
The joint venture was completed on April 1, ending an arrangement where Deacons would previously only pay franchise fees to the South African firm and keep all the profits.
The deal is the latest move by Woolworths to launch direct operations in more African countries. The giant retailer signed a deal with Tanzanian businessman and former franchisee Ali Mufuruki for a 51 per cent stake in Uganda and Tanzania.
In Kenya, its majority stake will give the South African retailer an opportunity to widen its product range to include food, loans and credit cards that it already offers in South Africa.
Woolworths has historically preferred trading under the franchise model where it would sell products to partner firms with limited involvement in the business. In September, 2010, the firm stopped using this model, arguing that it needed to acquire more control that would enable it standardise marketing and in-store experiences in the multiple markets it operates.
Mr Wahome said Deacons is running the new outfit for which it will be earning management fees. Analysts say the negative impact of the joint venture is likely to be felt immediately.
“The company could suffer from a decline in (the year ending December) sales following the agreement,” Standard Investment Bank said in a statement.
The outlook comes after Deacons made a net loss of Sh38 million in the year ended December 2012 compared to a net profit of Sh112.6 million the year before. The loss was driven by higher operating expenses as sales remained flat at Sh2.4 billion, hurting its gross margins that fell to 40.4 per cent from 43.3 per cent.