There’s a growing chorus of dismay over Mr Price’s plan to buy German value retailer NKD from UK private equity firm TDR Capital.

Clearly, the market hates it: shares in the retailer sank another 5% at one point on Thursday, taking its losses to about 18% in just two days, and raising the spectre of an all-out shareholder revolt over the R9.66bn transaction.

The losses have wiped out what seemed to have been a latent recovery in Mr Price shares, with the stock now down 41% for the year.

Following yesterday’s presentation to analysts, in which only a few questions were taken – and summarised, at that, by Mr Price’s investor relations head Matthew Warriner – hedge fund 36ONE has written to chair Nigel Payne to “register serious concerns” about the purchase and requested a meeting to discuss the deal.

These concerns include what 36ONE, a shareholder in the company, calculates to be a four-year losing streak from 2020 to 2023, in which NKD generated negative profit after tax, “despite a large store base and reasonable reported ebitda [earnings before interest, tax, depreciation and amortisation] levels”.

Red flags all round

In what is surely a glaring red flag, 36ONE says that in 2023, NKD generated zero free cash flow after subtracting capex. “In our view, NKD’s cash profitability is marginal.”

This matters because Mr Price is taking on debt to fund the purchase, and it is entirely at odds with what CEO Mark Blair told analysts on Wednesday.

“[We are] very cash generative and so is NKD and we could bring that debt down quite quickly if we wanted to,” he said. He also promised that Mr Price would not sacrifice its dividends to pay for the deal.

The hedge fund has picked up a historic pattern of “multi-year losses followed by a sharp profit improvement on relatively slow topline growth, with limited visibility on the underlying drivers and sustainability of that improvement.”

This, writes CEO Cy Jacobs, “heightens our concern about the quality of earnings being acquired”.

But he is hardly alone in bemoaning both the cost of the acquisition, and the chilling lack of detail Mr Price has so far provided on NKD.

For starters, there are no publicly available audited financial statements for 2024 or 2025 to get into the guts of the company. This, says 36ONE, “makes it even more important, in our view, that Mr Price provides comprehensive forward-looking information and detailed assumptions around NKD’s future performance, capital requirements and returns, so that shareholders can properly assess whether this transaction creates value on a risk-adjusted basis”.

And every local analyst has already pointed out what Mr Price seems keen to forget: that South African retailers have, en masse, made terrible deals when they have ventured offshore, destroying billions in shareholder value in the process.

Anatomy of a bad deal

The worst of these acquisitions, writes Jacobs, share similar characteristics: they’re overvalued, financed with debt, large relative to the buyer’s own market capitalisation, and generally need more investment than expected down the line.

“Unfortunately, given the publicly available information it seems as though Mr Price’s proposed acquisition of NKD shares many of these traits,” he writes.

So, could Mr Price walk away if it’s such a bad deal?

That’s not yet clear. Which is why 36ONE is pushing for information on whether or not the retailer is irrevocably committed, and whether it will be on the hook for any break fees if it does jettison NKD.

“As a shareholder, we would like comfort that the board has preserved the ability – and is willing, if necessary – to withdraw from the transaction on economically rational terms rather than feeling compelled to complete it at any cost.”

Jacobs says “open dialogue – supported by clear forward looking information and transparent assumptions – will help ensure that all shareholders have confidence in the rationale for the proposed transaction and its expected contribution to long-term value creation.”

Currency has contacted Mr Price for a response and will update our article if we receive it.