Pepkor builds R21-billion fintech giant - and plans to list it - Pieter Erasmus — Pepkor CEO Pieter Erasmus

Pepkor is merging its Flash business with Shop2Shop to create one of South Africa’s largest fintech platforms focused on the informal economy. It’s a combination valued at R21.3-billion that the retail group plans to list separately in the medium term.

The JSE-listed group said on Wednesday it will take a 57.1% controlling stake in the combined business — provisionally dubbed “FintechCo” — by injecting R1.57-billion in cash into Shop2Shop, which will be used to settle the fintech’s debt, while contributing 100% of Flash, valued at R10.6-billion, in exchange for new shares.

The combined platform will process more than R200-billion in annual throughput across the formal and informal economy, spanning Flash’s value-added services distribution network — the spaza shop airtime, electricity and digital voucher machine — and Shop2Shop’s merchant acquiring, payments, cash management and trade services business.

It is the biggest step yet in Pepkor’s push beyond retail into financial services. The group’s fintech segment grew 31% to R16.6-billion in its last financial year, and it secured approval to enter banking in November — and the combination pitches it squarely against Nasdaq-listed Lesaka Technologies in the race to digitise informal trade.

The numbers explain the logic. Flash is the bigger business, with revenue of R11.2-billion and earnings before interest, tax, depreciation and amortisation of R900-million in its last financial year — but Shop2Shop is growing far faster: its revenue has compounded at 28%/year over three years against Flash’s 9%, and its Ebitda at 85% against 28%. Pepkor is effectively paying to hitch its mature distribution machine to the faster engine.

Scale

“Shop2Shop was founded to bring purpose-built solutions to South Africa’s large and underserved informal merchant market, to empower small business owners,” said founder Peter Berry. “With Flash, we are able to deepen our offering and scale, and position a proven fintech platform in South Africa.”

The announcement deals at length with a governance wrinkle: Pepkor CEO Pieter Erasmus holds an indirect minority interest in Shop2Shop through an associated company — a stake that predates his appointment at Pepkor and was previously disclosed in its annual financial statements.

Read: New details emerge about Pepkor’s bank launch plans

After implementation, Erasmus will hold an indirect 13.2% of FintechCo — worth about R2.8-billion on the deal’s implied valuation — alongside Berry’s 24% and a residual stake held by Shop2Shop employees.

Pepkor said Erasmus recused himself from all deliberations and decisions on the transaction, that independent valuations were obtained for both businesses, and that its independent directors concluded the deal is fair and reasonable — a position supported by an independent fairness opinion obtained voluntarily.

Because Erasmus’s interest falls below the 35% associate threshold in the JSE listings requirements, the deal is not classified as a related-party transaction — and as a category 2 transaction, it requires no shareholder vote.

The Shop2Shop shareholders will keep at least 15% of FintechCo for five years, with put and call options exercisable between years five and eight providing a liquidity path if the planned listing does not happen — all options fall away if it does. A separate put and call arrangement covers Flash’s cellular Sim distribution business, which can be sold back to Pepkor.