Ellerines and African Bank: A Toxic Acquisition Recipe (B)

Abstract

At the end of the third quarter of 2007, Leon Kirkinis, chief executive officer (CEO) of African Bank Investments Limited (ABIL), unexpectedly arrived at the head office of Ellerine Holdings Limited (EHL), a South African furniture retail group, with a proposal to purchase EHL. For some time, EHL, which derived a substantial portion of its profit from loans provided to customers wishing to buy furniture, had been looking to enter into a deal with a bank as a means of growing its business. Up until the ABIL offer, EHL had been seriously considering a joint venture with Capitec Bank. Now, EHL’s CEO, Peter Squires, and the EHL board had to decide which route to choose.

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

Resources

Exhibit 1: African Bank Investments Limited Organogram

Figure

Source: African Bank Investments Limited (n.d.), “Reviewed Annual Results for the Financial Year Ended 30 September 2013”, available at: http://africanbank.investoreports.com/downloads/2013/new/African-Bank-IAS-bk-9Nov-2013.pdf (accessed 25 April 2015).

Exhibit 2: Gross Domestic Product Annual Growth 2007–2013: Global, Euro Area, United States and South Africa

Figure

Source: The World Bank (n.d.), “Gross Domestic Product”, available at: http://search.worldbank.org/all?qterm=Gross+Domestic+product (accessed 4 May 2015).

Exhibit 3: South African Prime and Repo Rates: 2007–2014

Figure

Source: South African Reserve Bank (n.d.), “Interest Rates”, available at: www.resbank.co.za/Research/Rates/Pages/Repo%20Rate.aspx and www.resbank.co.za/Research/Rates/Pages/Rates-Home.aspx (accessed 20 February 2015).

Exhibit 4: Brands and Market Segments Served

Brand

LSM

Kept after 2008 restructure

Brand after business rescue

Original Ellerine Group

Ellerines

2–6

Town Talk

2–6

FurnCity

4–7

Wetherlys

6–10+

Osiers

6–10+

Original Relyant

Dial-a-Bed

6–10

Furniture City

4–7

Beares

6–9

Geen & Richards

6–9

Lubners

5–7

Mattress Factory

4–9

Source: African Bank Investments Limited (2008), “EHL Investor Presentation August 2008”, available at: www.africanbank.investoreports.com/downloads/resultsreportspresentations/results/2008/EHLpresentationfinal.pdf; and African Bank Investments Limited (2013), “Annual Report 2013”, available at: http://africanbank.investoreports.com/downloads/2013/new/African-Bank-IAS-bk-9Nov-2013.pdf (accessed 20 February 2015).

Exhibit 5: Selected Financial Information for EHL: 2008–2013

Ellerine Holdings Limited

2008

9 months

2009

2010

2010

2011

2012

2012 restated

2013

Abridged income statement

Sales

Rm

3 092

4 196

4 487

4 487

4 710

4 792

4 034

Cash

Rm

1 723

1 881

1 817

1 817

1 682

1 773

1 592

Credit

Rm

1 369

2 315

2 670

2 670

3 028

3 019

2 442

Advances

Rm

2 177

2 451

Gross margin on sales

Rm

1 313

1 791

1 974

1 974

2 083

2 134

Interest income from advances

Rm

962

1 192

1 073

83

110

96

105

Net assurance income

Rm

854

838

602

460

430

427

436

Non-interest income – retail division

Rm

303

296

296

379

428

479

384

Non-interest income – financial services division

Rm

221

364

430

Charge for bad and doubtful debts

Rm

495

582

493

59

Other interest income

Rm

84

78

57

33

46

74

71

Interest expense

Rm

180

248

303

53

48

84

105

Operating costs

Rm

2 536

3 246

3 070

2 553

2 656

2 716

2 727

2 929

Retail division

Rm

1 861

2 314

Financial services division

Rm

675

932

Headline earnings

Rm

368

285

385

130

190

257

249

− 284

Retail division

Rm

− 252

− 185

Financial services division

Rm

620

470

Attributable earnings

Rm

360

278

401

146

190

248

240

− 328

Retail division

Rm

− 252

− 192

Financial services division

Rm

612

470

Non-furniture credit sales

1 729

3 561

2 722

Performance ratios

Gross margin

%

42.5

42.7

44.0

44.0

44.2

44.5

44.5

43.9

Operating costs as a percentage of sales

%

60.2

55.1

46.3

66.2

65.7

56.7

62.7

60.5

Return on sales

%

− 8.2

− 4.4

2.8

2.9

4.0

5.4

1.0

Stock turn

X

3.6

2.9

3.1

3.1

3.1

3.2

2.9

Number of stores

1 161

1 028

1 028

1 028

1 059

1 041

1 040

South Africa

952

981

964

963

Foreign

76

78

77

77

Sales per store

Rm

4 253

4 083

4 364

4 364

4 446

4 792

4 605

3 879

Number of employees

15 876

13 454

11 992

11 992

10 303

8 053

9 248

7 950

Sales per employee

R 0000

317

312

374

457

374

647

518

507

Return on equity

%

10.9

6.6

9.6

6.9

4.8

9.2

−10.1

Total income yield on average advances

%

51.6

45.3

41.0

Bad debt expense to average advances

%

12.0

11.0

27.3

Return on assets

%

18.9

10.7

5.2

Return on equity

%

25.5

16.1

10.2

Number of active accounts

000

1 390

1 241

1 373

Sales

3 092

4 196

4 487

4 710

4 393

3 747

Ellerines

Rm

1 220

1 836

1 927

2 191

2 108

1 788

Beares

Rm

648

879

944

994

794

670

Furniture City

Rm

364

445

472

401

412

308

Geen & Richards

Rm

278

408

518

513

501

414

Dial-a-Bed

Rm

203

237

300

300

299

263

Wetherlys

Rm

327

354

326

311

279

227

Rest of Africa

77

Early Bird – sold during FY 2009

Rm

52

37

Percentage of sales

100.00

100.00

100.00

100.00

100.00

100.00

Ellerines

%

39.46

43.76

42.95

46.52

47.99

47.72

Beares

%

20.96

20.95

21.04

21.10

18.07

17.88

Furniture City

%

11.77

10.61

10.52

8.51

9.38

8.22

Geen & Richards

%

8.99

9.72

11.54

10.89

11.40

11.05

Dial-a-Bed

%

6.57

5.65

6.69

6.37

6.81

7.02

Wetherlys

%

10.58

8.44

7.27

6.60

6.35

6.06

Rest of Africa

2.05

Early Bird

%

1.68

0.88

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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