By Nicky Smith

Investors are set to have shares of a third food retailer to trade before the end of the year, as Spar's unbundling and listing is expected to get overwhelming support.

Last week Tiger Brands announced very solid interim results, lifting headline earnings by 28 percent to R695 million and operating income by 40 percent to R1.13 billion.

The results, however, were all but eclipsed by a raft of measures announced by Tiger's management to "unlock shareholder value".

Tiger announced it would be reducing its dividend cover to 2.5 times, as the food and drug mammoth looked for ways to get more of its earnings to shareholders.

Tiger will not only be increasing the flow of cash to its shareholders in the form of increased dividends, it will also move to make the shares worth more, by buying them on the open market.

Tiger has never bought its shares on the market before and the board made arrangements to get approval from the JSE Securities Exchange to do so.

The real kicker in the announcements, though, was news of the proposed unbundling and listing of Spar before the end of this year.

Tiger executive director Roy Smither said the spinning off of Spar was still subject to shareholder and regulatory approval.

But "the response so far is this will get overwhelming shareholder support", he said.

Fund manager Allan Gray is Tiger's largest shareholder, with more than 25 percent of the group's issued share capital.

Allan Gray's chief investment officer, Stephen Mildenhall, said: "We're obviously fully supportive of management, not only [of] the unbundling but of the decreasing dividend cover and the aggressive buying back of shares."

Mildenhall said Allan Gray's clients held about 25 percent of Tiger, and from the announcement he would presume that the unbundling would give Allan Gray as much in a listed Spar.

"The Spar business model is particularly attractive because it requires very little capital. There is a very high return on equity, and you can pay out a significant part of your earnings and still grow," he said. "Normally business need to retain earnings to grow."

He added that businesses were valued for their ability to pay out dividends.

The sense behind the unbundling was clear, given that Spar's true value was not reflected in Tiger's share price.

Mildenhall said Tiger was trading at a price:earnings (p:e) multiple of about nine or 10 times. Retailers such as Pick 'n Pay and Shoprite were trading at p:e multiples of about 15 to 13 times respectively, which means an investor would have to wait up to 15 years to get the earnings they are paying for in the share price of Pick 'n Pay for example.

He felt Spar should be trading, at the very least, on a par with Pick 'n Pay.

Spar has a different business model compared with the two retailers. Spar owns a handful of corporate stores and its assets are largely its five distribution centres and the Spar brand. In the past year Tiger bought out Nelspruit Wholesalers, the acquisition brings its distribution centres to six. This gave it ownership of the Spar brand nationally and in Namibia, Botswana and Swaziland.

Spar's concept is to give independent retailers the size and muscle of a corporate chain to negotiate bulk prices from suppliers. Netherlands-based Spar operates in 35 countries.

Shop owners are not obliged to source products through Spar distribution centres .

There are now 468 Spar stores, 105 Super Spars, 188 Kwik Spars 125 Build-its and 107 Tops liquor stores. The building suppliers and liquor stores have been progressing well, according to Tiger.

Build-it's turnover rocketed 50 percent to R750 million last year and by the end of this year a total of 150 Tops liquor stores should be open for business.

Spar lifted its revenue by 20 percent to just over R6 billion and its operating income increased 21 percent to R216 million.

John Thompson, an analyst with JP Morgan, believed Tiger would handle Spar's unbundling in much the same way it did with Astral in 2001.

Analysts have suggested that the stripping-out of Spar would help to make Tiger more focused, as it would no longer be a three-pillar business and management would be able to concentrate on food and drugs.

Thompson said questions that still needed answering were issues such as what the mix of cash and debt on Spar's balance sheet would be on listing.

Thompson puts a value of about R22 a share as a listing price for Spar, based on the idea that it is worth about R3.6 billion.

Little is known about the specifics of Spar's accounts, as Tiger publishes only the revenue and operating income figures for its roughly 25 business units.

Thompson said it was possible Tiger would transfer some of its debt to Spar before it listed.

Mildenhall dismissed the idea that the unbundling had in part been motivated by a desire to remove a perception of conflict of interest as Spar was too closely linked with its suppliers, as analysts had suggested.

If one looked at the mix of products on Spar's shelves, he said, Spar generally bought more from other suppliers than it did from Tiger.

But why unbundle Spar? Some analysts have said Tiger had held on to Spar because it was so cash-generative and too much of a jewel to let go of.

Others, however, stated Tiger as a whole was so incredibly cash-generative that losing the Spar income stream would not really dent group performance.

Smither explained that Tiger had about R2.2 billion in long-term debt, of which about R1.5 billion needed to be paid in April next year. The group had an endowment policy that would cover about R1.2 billion of that debt maturing at that time.

Combining the remaining long-term debt and cash on the group's balance sheet would leave Tiger virtually ungeared.

Quite simply, the group does not need as much cash as it is able to generate.

Smither indicated the dividend cover over the past four years or so had come down steadily.

The group, however, would not hesitate to hold the dividend cover at this level if it had to make a large acquisition.

Tiger would be issuing the shares in Spar on a pro rata basis, based on investors' shareholdings in Tiger.

For example, a 15 percent holding in Tiger would entail 15 percent of Spar.

"We haven't decided if it's on a one-for-one basis yet," Smither said, adding that Tiger would soon create a board of directors for Spar and appoint advisers.

He could not be drawn into a valuation for the stock, saying that while Tiger did have its own ideas about the value, the market would ultimately decide.

He expected work on the circular detailing the guts of the Spar proposals to be completed in three or four months.