Tag: bailout

Government unbundles SAA

By Odwa Mjo for Times Live

South African Airways is one of several troubled state-owned entities that are undergoing restructuring.

On Monday, Reuters reported that SAA CEO Vuyani Jarana confirmed that the airline would be split into three units, just over a week after President Cyril Ramaphosa announced that Eskom would be split into three units.

Here’s what you need to know:

SAA will be split into three business units: domestic, regional and international. Each unit will have its own management.

The unbundling could also involve the sale of Air Chefs, which is the airline’s catering unit.

The splitting of units is part of SAA’s turnaround strategy to revive the airline that has been operating at a loss since 2011.

Business Day reported on Monday that the airline had secured a R3.5bn loan it needed to continue staying afloat until June.

Last week SAA was ordered to pay competitor Comair R1.1bn to settle an anti-competition case.

In 2018 the airline requested a R21.7bn bailout from the government, but only received R5bn. Business Day reported that finance minister Tito Mboweni is expected to announce some kind of financial assistance for SAA on Wednesday in his 2019/20 budget speech.

PIC may not be willing to bail out Edcon

By Ann Crotty for Financial Mail

Word is the Public Investment Corp (PIC) is not inclined to hand over about R2bn to Edcon to save it from a fate we’ve all long thought unavoidable.

Of course, right now the PIC is so fixated on its own survival it’s probably not in the mood to consider the survival of other chronically poorly managed entities, even those in the private sector.

It’s been almost 12 years since private equity firm Bain thought it would be a brilliant idea to spend R25bn taking one of the country’s most successful clothing retailers private, load it up with tax-deductible debt and pocket lots of profit.

At that stage Edcon had about 50% of the clothing and footwear market and, under the stellar leadership of Steve Ross, looked as though it could pick up even more.

It is now below 30% and dropping. Still, at 30% it is nearly twice that of its nearest competitor, and large enough for “too big to fail” pleas for support. At stake are over 20,000 jobs and 1,350 stores.

Some analysts see Edcon as a retail version of SAA and say it should be allowed to go into liquidation no matter how painful.

“Is it the PIC’s job to bail out failed private equity transactions?” asks independent analyst Anthony Clark. “Let market forces play out. New, more vibrant competitors will take up much of the jobs and sites.”

More problematic is whether a more vibrant competitor would show the same commitment to sourcing locally.

It’s difficult to know precisely when things at Edcon went pear-shaped. Some say the initial targets set to justify the R25bn take-out price were unrealistic and put the top executives under too much pressure.

Whatever it was, Edcon began to steadily lose the market dominance it had long taken for granted.

“Ross’s departure was a major blow,” says one industry insider, adding that for the past few years there’s been no compelling reason to shop at Edgars. “They lost touch with their customers, gave up their merchandising expertise and started introducing expensive brands. Essentially they just gave away their traditional market dominance to competitors.”

But the insider believes that even without a fund injection from the PIC Edcon may continue to hobble along.

“The bondholders don’t want to lose their money so they’ll keep it alive.”

Edcon Holdings is making progress toward securing R3-billion in funding need to keep the South African clothing retailer afloat for another three years, according to Business Day.

The Public Investment Corporation (PIC), Africa’s biggest money manager, may provide R1.8-billion to assist the company. In addition,  landlords may contribute another R700-million in reduced rent, and Edcon’s banks about R500m, they said.

Meanwhile, according to an article by MoneyWeb, Edcon aims to take the following steps in a bid to downsize:

  • Reduce the size of its Edgars store in the Johannesburg CBD by a third
  • Close down its big Melrose Arch store
  • Reduce its footprint at shopping centres across the country
  • Reduce regional footprints in centres such as Mall of Africa, Eastgate and Gateway
  • Continue with closing smaller stores across the country (115 have been closed to date)
  • Downsizing several stores
  • Continue to reduce retail space – in 18 months, Edcon has already downsized by 7%
  • Reduce space nationally by 5% – 7% per year over the next few years

Edcon is one of the country’s biggest employers. It has 1 200 stores which employ approximately 30 000 permanent and casual workers.
Over 100 000 jobs are supported by the company when clothing suppliers and other service providers are included.

 

Are Eskom’s prices too low?

Source: Fin24

Eskom’s balance sheet has been providing a subsidy to consumers over many years, but this is not sustainable anymore and has reached a breaking point, the state-owned power utility said on Monday evening.

Eskom continues to share the rationale for its average annual electricity increase application of 15% for the fourth Multi-Year Price Determination (MYPD4) and Regulatory Clearing Account (RCA) balance application for 2018 made to the National Energy Regulator of South Africa (Nersa).

Nersa’s public hearings on the application continue and the latest one took place in Rustenburg for stakeholders in the North West.

“The main cause of the required price increase is the phasing-out of the current price subsidy, which does not preclude the subsidisation of specific targeted customer categories in future,” said Deon Joubert, Eskom’s corporate specialist for finance.

“Eskom is cognisant of the potential impact of the increase in various sectors, but it finds itself in a very difficult financial position… however, an objective analysis indicates that its debt situation is mainly or more than 80% a function of having had to take responsibility for the build programme, without the electricity price responding as was required.”

Eskom argued that, while higher tariffs are bound to dampen demand, a reluctance to raise prices towards cost-reflectiveness will deny Eskom the ability to fund investments and maintenance required to sustain an adequate security of supply.

“An inadequate security of supply has more negative repercussions to economic growth and social welfare than a tariff increase,” said Eskom.

Looking closely at unit costs, a World Bank analysis concluded that Eskom’s unit costs are very low relative to other sub-Saharan Africa utilities, Eskom said in a statement.

It found that Eskom’s unit cost was the 3rd lowest.

“Similarly, Eskom’s average price is very low relative to other sub-Saharan Africa utilities – but they are all pricing their electricity at unsustainably low levels and are thus in – or heading to – significant financial difficulties,” said Eskom.

The report calculated that 81% of the gap between Eskom’s current price and its costs is due to under-pricing, Eskom said.

In its presentation, Eskom looked at how its actual and projected electricity price from 2010 to 2024 compared to external references.

“On analysis, it became evident that similar to Nersa’s future price path, the various MYPD price paths Eskom requested would plateau once prices reached levels reflective of prudent and efficient costs – which Eskom calculated to be midway between Nersa’s previous upper- and lower price boundaries,” said Eskom.

140 000 jobs at risk as Edcon flounders

Source: Business Live

A few weeks ago, the FM reported that Edcon, an iconic SA retail brand that began life in 1929, was facing an imminent cash crunch. This weekend, news emerged that Edcon had written to its landlords, asking for a two-year “rent holiday” of 41% for all its 1 350 stores.

The reality may be less dramatic than the “Edcon crashes” headlines suggested, partly because its stores are still open and trading. But there’s no denying that these are dire times for SA’s largest clothing retailer.

That’s not surprising. Last month, CEO Grant Pattison admitted to the FM that new funding was needed. “The current process we’re under is looking for shareholders, new and old, to inject new capital into the business,” he said.

Now, a letter dated December 11 and sent to Edcon’s landlords spells out details of how this new “restructuring plan” will work.

What is apparently on the table is that the retailer’s existing funders would convert R9bn of their debt into equity, while injecting another R700m. Then, the Public Investment Corp will inject another R1.2bn into Edcon.

For this to happen, the lenders have stipulated that Edcon’s 31 key landlords (like Hyprop and Growthpoint) must agree to the two-year “rent holiday”. This would equate to R1.2bn worth of support, for which Edcon plans to give the landlords a 5% stake.

It’s a tough call for the landlords, especially since Edcon plans to shut a number of stores until 2022. But if they reject this deal, Edcon could end up defaulting on leases anyway.

The bigger issue is whether bailing out Edcon will create a stronger retailer able to compete, or whether it will be akin to an SAA bailout — where the money vanishes up a chimney, with no value created. It’s a tough call, since Edcon has been shrinking every year. Since 2012, it has lost 22% of its clothing and footwear market share; it once held more than 50% of the sector.

Disturbingly, there aren’t too many specifics on the turnaround plan. There are promises to close some stores and improve trading densities (sales per metre), get more stock through its tills, expand its financial services side (credit and insurance, primarily) and reduce IT costs.

There’s nothing ingenious in that, though. And it’s one thing to put those goals on a PowerPoint presentation, another to make it happen.

Still, the letter to landlords contains some interesting revelations.

First, it says that since March, advisory firm Rothschild & Co has been trying to sell Edcon, but has found no takers. It adds that unless there is a further “intervention”, liquidation is “highly likely”. Fortunately, Pattison seems to have a plan, likely to be announced in the next few days, to prevent that. Which is just as well, considering the 40,000 employees who would be affected.

Of course, Pattison hasn’t helped himself by repeatedly bungling the communications around Edcon.

He denounces the reports as “misleading”, without saying exactly what was wrong. At the same time, he admits that when asked to comment by the Sunday Times, he declined.

There has been a consistent pattern of refusing to comment, then blaming the media for publishing what happened, when greater introspection might have been the wiser approach.

Unfortunately, it goes hand in hand with Edcon’s years of displaying a profound lack of respect for customers and, it seems, staff.

Hopefully, a much stronger Edcon will emerge from the ashes, one that can restore the principles and market position it once held, selling things that people actually want to buy.

How the ANC broke Eskom

Source: MyBroadband

Eskom was once so successful that it was supplying more than half the electricity in Africa.

However, years of corruption, incompetence and political meddling has brought Eskom to its knees, and it is now begging for bailouts to stay afloat.

The company’s growing debt burden, which already exceeds R400-billion and can grow to R600-billion in the next three years, means it is technically bankrupt.

So bad is the situation that former Finance Minister Nhlanhla Nene said Eskom is the single biggest risk to South Africa’s economy.

The image below provides an overview of how Eskom changed over the last 10 years:

Image credit: MyBroadband

         

           

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