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Deacons sale of shares raises the stakes in retail market

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Business Daily 18th November 2010

Clothing and household goods retailer Deacons Kenya has set in motion a regional expansion drive that will see it double its stores in the next five years and list shares at the Nairobi Stock Exchange by the end of next year.

The company kicked off a public share sale on Wednesday, hoping to broaden its shareholding structure and raise Sh800 million from investors, in what Muchiri Wahome, the firm’s chief executive, said was part of raising its profile ahead of the intended public listing.

Deacons is looking at increasing its stores to 54 by 2014 in Kenya and in Uganda, where it already has a store, as well as entering the Rwandan market.
The lifestyle retailer will be selling 12.8 million shares at Sh62.5 each to the public in a move targeting about 1,500 new investors, a broad ownership criteria essential for a company listing at the Nairobi Stock Exchange. It is presently owned by 18 investors.“We have intentions to list at the NSE and it can happen within the next 12 months from the closure of this offering,” said Mr Wahome. As matters stand, that would be the first listing at the NSE since that of the Co-operative Bank of Kenya in 2008.

Of the 12.8 million shares on offer, 45 per cent have been reserved for Qualified Institutional Investors (QII), 30 per cent for individuals and corporate investors, 20 per cent for existing shareholders while staff will get five per cent under the staff share save scheme. Standard Investment Bank and Kestrel Capital are the transaction advisors and selling agents.

The offer opened on Wednesday following an approval by the CMA last week and is expected to close on November 30th with the results of allocation to be announced on December 6th.

Deacons had a private placement in 2006 at an offer of Sh30 a share. It raised Sh118 million that was used to open 15 new stores, bringing its outlets in Kenya to 23. A store was opened in both Uganda and Tanzania as the company increased the brands within its staple.
The company has Woolworths, Mr Price, Mr Price Home Adidas, Angelo, Truworths, Identity, 4U2, and the most recent LifeFitness brands.
The company forecasts sales of Sh2 billion for this year compared to Sh1.44 billion last year. Its net income is expected to close the year at Sh149 million compared to Sh79.6 million the previous year.

The net income for 2008 was Sh68.3 million after the economy was depressed by post election violence compared to Sh99.9 million in 2007.
Eric Musau, a research analyst with African Alliance, says growth for retailers is mainly pegged on economic cycle, with an upswing having a direct impact on sales.

“Their brands do well when disposable income is on the increase a trend in line with economic growth, he said.
Kenya’s economy is expected to grow by 5.2 per cent in 2010 mainly driven by the agricultural sector, construction, manufacturing and financial services.
With most of the company’s distribution agreements being with South African retailers, analysts say the company is exposed to foreign exchange risks especially those touching on the rand.

However, the company says in the information memorandum that it places bets on foreign exchange needs - technically known as hedging “when appropriate, in order to reduce exposure.”

The company has also been addressing the risk through value and differential pricing, in some cases reducing gross margins, in order to drive sales.
Deacons has been broadening its international brand portfolio in a bid to capture Kenyan’s emerging middle class and the youth population which, according to the 2009 census, was the segment with the most potent market.

“By bringing more brands on board the company has widened its risks and been able to rope in new clients,” said Mr Musau.
Going forward, Deacons is looking at introducing other lifestyle brands in the market including catering for the school uniform segment, cosmetic and accessories.

It also has its eyes on local acquisitions especially for brands that are looking to expand and have major potential.

The increased developments of shopping centres across the country, especially in new middle class markets, have created niche openings for the company to target in its expansion plans, especially after it secured space in two upcoming malls in Nairobi.
“We are holding off property developers who are at our doors,” said Mr Muchiri, adding that the company was looking at other developments across the country.

Property managers argue that the appetite for space is big, especially in areas that have been previously ignored but are attracting the middle class. This appetite has led to increased investments in most urban centres across the country.

Trevor Kanja, of Galleria shopping mall, says the increased number of households in the city with higher disposable income is the main driver behind retailers search for news spaces to open up outlets.

“The growth of the middle class with disposable income is what is driving the expansion of retail chains and they need the space to open up their shops,” he said.

Deacons have committed to lease 11,420 square feet for two shops in Galleria which opens in the next two weeks to tap the Christmas spending spree.
Retailers like Nakumatt, Bata and Tuskys have moved to other towns in the country like Kisumu, Eldoret, and Nakuru. Deacons is investigating the possibilities of setting up shop in these towns as well.

In the region Deacons has its focus on Uganda, where it already has a store, and is negotiating with up coming shopping malls for space. The company also sees Rwanda as a major entry point to Central Africa and is has launched a master plan to set up shop in Kigali.

The company will, however, be holding off expansion to Tanzania which Mr Wahome describes as a “tough market.”

Deacons started operations in 1958 and traded for over 20 years using the Marks and Spencer franchise for the East Africa region and traded in other locally made outfits. However, the liberalisation of the textile market in Kenya saw business affected leading to the company closing many of its stores in Nairobi.

In 1994 it acquired a Woolworths distribution agreement and later became a franchise with the first store being opened in Sarit Centre. Today, the company has moved to get similar franchises deals and has expanded mainly opening stores in Nairobi’s suburbs.


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