Steinhoff, a furniture retailer targeting budget-conscious shoppers in southern Africa and Europe, said it will pay R62.8bn ($5.7bn) for the stake in Pepkor, which owns the Pep brand that sells everything from school uniforms to household goods to mobile phones.
The deal will see Steinhoff buy Pepkor from private equity firm Brait [JSE:BAT] and entities controlled by Christo Wiese, one of South Africa's best known businessmen and the top investor in African retail giant Shoprite.
While 68% of Pepkor's revenue comes from Africa, the company is also a major retailer in Poland and has been growing in eastern Europe, so the deal will allow Steinhoff to accelerate its own European expansion.
"Strategically it does make sense," said Nic Norman-Smith, Chief Investment Officer of Lentus Asset Management, which owns shares in Steinhoff.
"It certainly will provide scale benefits and scale is one of the few areas where you can generate a competitive advantage in retail."
However, at a price of nearly twice Pepkor's annual sales, the deal was also "quite expensive", Norman-Smith said.
Steinhoff said it will buy Wiese's 52.47% stake for 609.1 million shares at a price of R57 each and Brait's 37.06% for R15bn in cash and 200 million shares. It will also buy 2.81% from Pepkor's management giving it a 92.34% stake overall.
Steinhoff said it will fund the cash portion through existing cash resources.
The deal will give entities controlled by Wiese, who is a director of Steinhoff, about 20% of the furniture company and will therefore require endorsement by an outside expert as to its "fairness", Steinhoff said.
Half of its shareholders have already approved the deal.
Shares of Steinhoff were up 1.6% at R56.85 at 10:55, while Brait's shares plunged nearly 20%.