Pepkor, owner of the Pep and Ackermans fashion chains, is betting that the future of financial services in the sprawling informal economy lies in uniting businesses built from opposite ends of the merchant value chain.
It is combining its Flash fintech unit and Shop2Shop into a single fintech powerhouse valued at about R21.3bn. Pepkor will hold a controlling 57.1% stake in the combined entity, FintechCo, with the balance split between Shop2Shop’s founders and staff.
Pepkor contributes its entire stake in Flash (valued at R10.6bn) in exchange for shares and will separately inject R1.57bn in cash to subscribe for newly issued Shop2Shop shares. These contributions secure Pepkor its 57.1% stake.
The remaining 42.9% is split between entities linked to Shop2Shop founder and CEO Peter Berry, and entities linked to Pepkor group CEO Pieter Erasmus. Erasmus’s minority stake in Shop2Shop predates his appointment as CEO and he was recused from all discussions and decisions.
Pepkor executives frame the deal as a natural evolution of a long-standing commercial relationship between the two businesses. Chief commercial officer Garth Napier pointed to Pepkor’s existing scale — more than 6,600 stores, more than 2-billion transactions processed annually, and around 32-million customers visiting its stores each year.
Flash has operated in the informal market for more than two decades. Its core strength is digital-product distribution — airtime, electricity, vouchers, SIM cards and prepaid services — alongside merchant services and a platform linking informal traders to the formal economy. The business processes about 5.5-million transactions a day through more than 80,000 acquiring devices, serving more than 170,000 traders across Southern Africa. Over the past three years, Flash grew revenue at a 9% compound annual growth rate (CAGR) to R11.2bn, with ebitda climbing 28% annually to more than R900m.
Shop2Shop started by making cash-handling safer for township traders. Its first product was a cash safe and its first digital payment ran through Coca-Cola. It expanded organically into supplier payments, card acquiring, digital vouchers, SME funding, retail management tools, remittances and rewards.
Shop2Shop’s digitalised transaction throughput rose from R58bn to R172bn over three years, while cash’s share of that mix fell from 70% to under 60% as tap-to-pay and card acquiring gained traction. The business now serves 177,000 traders through 114,000 acquiring devices and 2,900 cash-counting safes, processing R131bn in supplier payments and R772m in international remittances annually. Revenue grew at a CAGR of 28% and ebitda at 85% over the past three years.
Despite Shop2Shop generating lower ebitda, its faster growth trajectory means the two businesses landed on broadly similar valuations — R10.6bn for Flash and R10.7bn for Shop2Shop.
Berry stresses Shop2Shop is, at heart, a payments business — “a cash management system for small businesses” that replaces the need for separate bookkeepers and creditors’ clerks. Combined, he argues, the product offering available at store level becomes far greater than either company could deliver alone. Customer overlap between the two networks is estimated at 20%-30%.
Management expects the combined business to move more than R200bn a year in merchant working capital and transaction throughput.
Pepkor’s ambitions, of course, extend beyond payments. The group increasingly describes itself as a consumer platform serving customers and it recently secured regulatory approval to establish its own bank. The combined fintech platform is expected to sit alongside this planned bank, albeit as a separate legal entity. The aim is a seamless customer experience that makes it as easy to deposit or withdraw cash at one of the network’s 170,000-plus traders as at a Pep or Ackermans store.
Management estimates South Africa’s informal economy is worth between R900bn and R1.5-trillion annually. Berry expects the informal economy to continue formalising over the next five years, with more traders scaling into multishop operations, enabled by the combined platform’s tools.
There is a slight snag. Shop2Shop currently runs a lower ebitda margin than Flash. So management expects the deal to be earnings-dilutive in its first year but accretive from year two as Shop2Shop’s faster growth trajectory takes hold. Pepkor expects an internal rate of return of around 40% post-synergies —the highest of its recent acquisitions, according to group CFO Riaan Hanekom.
Keith McLachlan, CEO of Element Investment Managers, says the deal is on the expensive side, and having related parties sitting on both sides is never ideal. But he concedes it makes strategic sense to combine complementary informal-market fintech offerings with complementary management teams. This, he reckons, lowers integration risk and strengthens the value proposition.
McLachlan says the deal is material for Pepkor over a five-year horizon, though likely dilutive in the short term. “Disclosed conflicts of interest aren’t a problem if they’re properly managed.”
Casparus Treurnicht, portfolio manager at Gryphon Asset Management, says the deal signals that Pepkor wants this business to run separately from its core retail operations. He notes that in Pepkor’s case, its fintech business already had organic growth in the pipeline, and he expects the same to hold true for Shop2Shop. Treurnicht also believes a separate listing could unlock some shareholder value.
Pepkor plans an independent stock market listing for the combined fintech business within three years, though timing will depend on the pace of integration and prevailing market conditions.