Edcon stitching up debt deal

The future of Edgars, South Africa’s biggest fashion retailer, looks brighter than it has for years after its owner, Edcon, announced it would completely restructure its debt next month.

The final stages of negotiations between bondholders, banks and owner Bain Capital are under way and market watchers believe these will lead to bondholders shifting from debt into equity.
Edcon CEO Bernie Brookes said: “We are in discussions with them to fix the debt once and for all.”

As to whether Edcon would survive, Brookes, who took over the reins about a year ago, said: “Definitely, now. If you’d asked me that question six months ago I’d have said it’s marginal. Now it’s definite.

“With the imminent debt restructure the business will be the business that it was before 2006, which is a business that has a logical level of debt and plenty of money to invest in stores and service.
“We just had the first half of R3-billion put into free cash flow. So that R3-billion has given us the opportunity to pay all our bills and pay our suppliers on time – that’s the start of it.”

The next step is to get the level of debt down to the same level as that of its competitors.

“Once that’s done, we’re not fighting with one hand behind our back and we can be the old Edgars of pre-2006 and can invest in the stores.
“We are in the midst of a fairly sizable debt restructuring which will see us come out with a significant amount of free cash flow and no burning platform on our debt,” Brookes said.

“At the moment, for the past four years, the business has been running to pay their debts. It’s been making R2.5-billion to R2.7-billion profit and paying between R2.5-billion and R3-billion in debt and fees.
“Every year they’ve been selling something, outsourcing something or refinancing to pay the interest bill,” he said.

Independent retail analyst Syd Vianello said the logical step for Edcon would be to convert debt into equity.

“The company cannot afford to service the debt. The bondholders have almost no choice in the matter – if they don’t they will walk away with very little as the business will be forced into business rescue.”
There has been speculation that Steinhoff was looking to buy part of the group.
Brookes said that almost every major retailer in the country had been knocking on Edcon’s door, but had not offered an acceptable price for the noncore assets.
There were no immediate plans to sell off any of these assets, such as CNA.

“If you’d asked me this question six months ago, I’d have said: ‘We’re happy to sell all the speciality divisions quickly because we need the cash.’
Now, we’re no longer desperate and dateless, so therefore have the potential to sell some of those divisions over the next couple of years as we either fix them or as a good offer comes up. However, some such as Red Square and Boardmans are core to our business.”

If Edcon starts marketing in a responsible manner they may well be able to bring credit back as a differential advantage
Edcon has been lumbered with debt since Bain Capital bought the group in 2007 for R25-billion in a leveraged buyout. Shortly afterwards, the financial crisis hit and Edcon made several strategic blunders and lost a major slice of market share as it failed to invest in stores.

But Brookes has been changing the way the group operates, as is evident from a walkabout in one of its flagship stores in Sandton City.
No longer is the most prominent space occupied solely by international brands. Edcon’s foray into these brands was largely a failure, and most of the 37 international brands in its portfolio will be dropped. About a dozen will be retained, including the better performers like Top Shop and TM Lewin.

There’s a substantial focus to grow high-margin private label brands such as Kelso and Stone Harbour.

Dire times mean we must tighten our belts – the ones we bought on credit

Brookes expects about 10% of the chain’s 1500 stores to be closed in the next three years, mainly when leases come up for renewal. “We will be very reticent about opening new stores but will spend money refurbishing. Now we can focus on fixing the business, which I think is the first time we’ve been able to do that rather than focus on the balance sheet as we’ve done in the past four years. It will be exciting.”
If things go according to plan, the group will relist or do a trade sale in about four years.

Absa, now Barclays Africa, bought Edcon’s credit book for R10-billion in 2014 and applied stricter rules which curbed Edcon’s ability to drive credit sales.

Vianello said the group was now in a position to turn on the credit taps again. “If Edcon starts marketing in a responsible manner they may well be able to bring credit back as a differential advantage. Up to now they have been restrained by the bank,” he said.

“I don’t think customers have deserted them completely. If they see the right product in the store together with a cleaned-up credit offer and a good price, they will buy. Customers are not married to a brand.”
But he said restructuring the business meant nothing if sales were not generated. “In the meantime you have a new market, H&M and Cotton On, playing in the space where Edcon used to play. Brookes has to win those customers back.”

By Adele Shevel for Sunday Times Business

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