Tag: Edcon

By Alistair Anderson for BusinessLive

Listed property fund managers are hopeful that the rescue mission at SA’s largest clothing retailer, Edcon, is an isolated case and that other retailers will not have to beg landlords and investors for rental reductions or cash injections.

Edcon is a large employer, with 40,000 staff, while its operations also affect numerous suppliers and 100,000 workers indirectly.

A number of the landlords where Edcon rents stores have assisted it by either granting a rent reduction or by investing cash, both in exchange for equity.

Edcon also achieved a recapitalisation deal worth R2.7bn at the end of February. These funds were raised by some of SA’s biggest landlords, banks and the Public Investment Corporation (PIC).

Property analysts and fund managers argue that it is in the national interest for Edcon to survive.

Edcon has been battling to save jobs following some poor strategic decisions and mounting competition from newer retailers who have eaten into its market share over the past decade. In the past few weeks, it managed to sign a rental savings deal with a fifth of its landlords so that CEO Grant Pattison could implement a turnaround plan. This plan includes selling or closing underperforming businesses and flattening management structures.

“The collapse of Edcon would have posed a systemic risk to the retail sector in SA. Edcon does appear to also have a more focused and simplified strategy, which I think is important as the various landlords that supported the recapitalisation would have taken comfort from this,” said Pranita Daya, a real estate analyst at Anchor Stockbrokers.

“Furthermore, an Edcon failure would have resulted in massive job losses and these landlords exercised good corporate citizenry in working towards a commercial solution,” Daya said.

Edcon approached 30 of about 100 landlords, with 21 agreeing to reduce rent for two years, while the turnaround plan was implemented, in exchange for stakes in the group. Others injected cash in exchange for equity.

Other retailers have not asked their landlords for rental reductions despite weak economic conditions, and a lack of consumer and business confidence. This was confirmed by Growthpoint SA CEO Estienne de Klerk.

While Growthpoint, which is the largest property group in the country, participated in Edcon’s restructuring by providing it with an injection of R110m in return for an equity stake, it said a rental reduction for the troubled retailer would not have been in line with its own strategy.

Hyprop Investments, which owns blue-chip malls such as Hyde Park Corner, Clearwater Mall and Canal Walk, however, did agree to a rental reduction. CEO Morne Wilken said if any other tenants opted for a rental reduction, Hyprop would need to recognise value in acquiring an equity stake in return.

One landlord who also declined to reduce rentals paid by Edcon but had chosen to implement cash for equity was Liberty Two Degrees; the owner of stakes in malls such as Sandton City, Melrose Arch and Eastgate. The company’s CEO, Amelia Beattie said she had not been approached by any tenants other than Edcon about rental savings.

“Edcon is a specific case. We didn’t decrease rentals and our leases with Edcon have not changed. Instead we are making cash contributions,” she said.

Beattie said the company focused on creating environments where tenants could trade well. “We negotiate our leases with our tenants’ stores case by case. There is demand for space at our malls, which can be seen with how quickly we relet the space vacated by Stuttafords.”

How Edcon is shrinking its footprint

By Glenda Williamns for Fin Week

Edcon’s current restructuring process includes significant space rationalisation.

JSE-listed real estate investment trust (REIT) Attacq, owner of Mall of Africa, announced that Edcon exposure, (25 499sqm at 31 December 2018, down from 29 262sqm at 30 June 2018) will settle at 22 945sqm of primary gross lettable area (PGLA) by 1 October 2019 for an estimated 3% of the REIT’s effective PGLA. Contractual gross monthly rental at this time will be R3.2m, down from R4.1m at 30 June 2018.

Owner of Sandton City, Liberty Two Degrees’ (L2D), says Edcon currently occupies 5.3% of its current portfolio, which is expected to reduce to 4.3% of gross lettable area (GLA) by 31 December 2019.

Redefine Properties, SA’s second-largest REIT and owner of Centurion Mall, has a hefty retail portfolio that at 31 August 2018 comprised 1.4m sqm of GLA.

The REIT is a significant landlord to Edcon with GLA exposure of 78 760sqm (down from 122 856sqm at August 2018) housing the Edgars and Jet brands.

Redefine’s equity contribution will amount to R54.6m, the REIT says. As a consequence, Redefine will receive 100% of its rental due from Edcon on 56 788sqm representing in force leases for profitable Edcon stores.

Redefine has also agreed to rental reductions up to a maximum amount of R13.8m over a two-year period in respect of leases totaling 21 972sqm.

Other major players in the listed property sector have yet to make their formal announcements on the recapitalisation process.

Some like Hyprop Investments Limited, owner of super-regional mall Canal Walk, have significant exposure to Edcon.

At 31 December 2018 that amounts to 9.4% of GLA (66 781sqm) and 7.6% of gross income.

Speaking at Hyprop’s interim financial results for the six months to December 2018, newly-appointed CEO Morné Wilken says that almost 7 600sqm of Edcon’s total 67 000sqm floorspace has already been taken back and mostly re-tenanted.

Hyprop has, in principle, agreed to support the Edcon restructuring proposal with a reduction in rentals, compensated for by equity participation in Edcon, says Wilken.

“While that will impact distributable earnings in the 2019 and 2020 financial years by 0.8% and 2.3% respectively, it is considered an acceptable limitation of the risk,” he says.

Others like top-performing SA REIT and low-LSM focused Fairvest Property Holdings have insignificant Edcon exposure.

In Fairvest’s case that’s a mere 0.8% and exposure is only to the still well-trading Jet Stores. “That,” CEO Darren Wilder tells finweek “was not by chance, but by strategy.”

Edcon group gets R2.7-billion lifeline

By Lynley Donnelly for Mail & Guardian

The Unemployment Insurance Fund (UIF), debt holders and landlords have all come to the rescue of the troubled Edcon group — which owns Edgars, Jet and CNA — in a deal that proponents say will avert a “jobs massacre” and swathes of mall space being shuttered.

The recapitalization programme will inject R2.7-billion into the company through new cash commitments from the parties and rent reductions by participating landlords, the company said in a statement late on Friday afternoon.

The Southern African Clothing and Textile Workers’ Union (SACTWU), as well as trade federation Cosatu, have hailed the deal.

It will avert a “job’s massacre,” not just at Edcon but in the wider clothing and textile manufacturing industry, said Sactwu’s national industrial policy officer, Etienne Vlok.

The sentiment was echoed by Edcon chief executive Grant Pattison who said the deal was not just about saving Edcon jobs.

According to Sactwu’s research Edcon procures around 45% of its clothing products locall — the most of all the country’s major retailers. The local manufacturing businesses that Edcon supports are also concentrated in geographic areas in rural and peri-urban areas, particularly in KwaZulu-Natal, Vlok said.

Edcon – one of the country’s largest non-food retailers, which occupies around 10% of mall space – has battled to cope with an increasingly tough retail landscape, crowded with both international competitors and increasingly popular online offerings. It has also been labouring under a legacy of debt since it was delisted in a private equity deal by Bain Capital in 2007.

Critics have however argued that public funds should not be used to rescue a poorly performing private company, whose demise began with a highly leveraged private equity deal.

The UIF – whose assets are managed by the Public Investment Corporation – has R156-billion in surpluses. The fund pays out workers in the event of retrenchment or job losses.

But according to Vlok rather than a bad investment, the UIF’s participation was potentially a cost saving for the fund. This was based on the union’s belief that as many as 140 000 jobs could be lost – both directly at Edcon, which employs about 30 000 people, as well as in the wider clothing and textiles manufacturing sector.

In a presentation given to the UIF in January, arguing that it should help fund Edcon, the union calculated that the fund would have paid between R2.95-billion and R3.9-billion to support workers who would have potentially lost their jobs.

The UIF did not immediately respond to questions for comment but according to Edcon’s Pattison, the participating parties all contributed a roughly equal amount in cash, leaving the UIF’s contribution in the order of around R1-billion.

“Edcon is a very large employer of people and we also buy an enormous amount of goods, manufactured here in South Africa,” he said.

“Edcon’s problem is not just one of our staff, its multiplied by a factor of three or four.”

The fund’s mandate does allow it to invest in transactions that have social returns.

In response to questions early last month spokesperson for the fund Makhosonke Buthelezi, told the Mail & Guardian that the fund’s “mandate makes provision for a social responsible investment asset class of 20% of the total portfolio”.

“The intention of this asset class is to sacrifice some financial return for a higher social return,” he said.

“Should the Fund consider [investing] in Edcon in an effort to retain jobs and [prevent] the negative effects it will have on the economy, the decision will be based on a thorough due diligence process and risk impact assessment.”

The potential impact of an Edcon collapse would also have been felt by the property sector – as it occupies around 10% of some of the country’s prime mall space.

As with the UIF, there was commercial sense behind landlords participating in the deal, said Pattison.

“They looked at the potential benefit of helping us survive, albeit in a smaller shape and size,” he said.

In the run up to the deal’s announcement, Edcon was reported to have asked its landlords to reduce its rents by as much as 40%.

Pattison stressed that while most of Edcon’s major landlords had participated in the deal, not all did. There were also a number of landlords who had negotiated different arrangements with the retailer.

“The participating landlords have committed to giving us some cash and for that they get an equity stake,” he said. While some have opted to give Edcon cash upfront, others are providing cash over time – in what could be viewed as a reduced rental. Still other landlords are opting for measures such as releasing Edcon from lease agreements, to enable it to close down poorly performing stores, said Pattison, or helping Edcon renovate stores.

He could not disclose the size of the equity stake different landlords, or that the UIF, would take up. But he stressed that it was “not a particularly large share” and would not entitle them to “some special relationship with the company”.

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.

 

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.

Edcon may run out of money in 2019

According to a report by the Financial Mail, Edgars may “effectively run out capital towards the end of 2019”.

After Bain Capital paid R25-billion for the company, the retailer’s balance sheet saw debt of R17.3-billion – an amount that nearly sank the company as the 2008 financial crisis hit.

Since 2012, Edcon has lost an estimated 22% of its clothing and footwear market share where it once held more than 50% of the sector, according to Financial Mail.

Edcon still owes an estimated R7-billion to its lenders.

On a positive note, Stats SA reported that retail sales grew 2.5% for the year to August — almost twice the 1.4% annualised growth reported in July.

The problem is, says the Financial Mail, that Edcon is making a loss, and “someone has to fund the loss”. This falls to the shareholders and the problem under discussion is “how long will they fund these losses”?

Edcon’s most recent set of accounts, for the year to March 2018, saw sales down 4.8% to R24.1-billion. Trading losses ballooned to R1.36-billion from R373-million in 2017. Even though R20-billion in debt was written off in 2016, Edcon incurred R1.53-billion in “financing costs” to repay remaining debt. The three months to June were no better: sales were down 8.8%, and the quarter saw trading losses of R225-million.

The lack of customers are evident at even flagship Edgars stores. “At Melrose Arch, most of the initial space Edgars occupied is boarded up, reinforcing the impression of a gradually disintegrating department store,” reports Financial Mail.

As many as one in five South Africans used to shop at one of the 1 350 stores owned by Edcon. Despite the downward trend, Edgars has remained SA’s largest nonfood retailer, accounting for nearly a third of the clothing and footwear market.

The company employs more than 27 000 staff members, with an indirect effect on a further 100 000 people.

Source: IOL 

Edcon Holdings said on Thursday that it will be closing three of their chains: Boardmans, Red Square and La Senza lingerie.

This is the latest strategy to save the company after dwindling sales and profits.

By shutting down the other chains they hope to attract more customers to their flagship Edgars stores.

The decision to shut down certain chains comes from the newly appointed CEO Grant Pattison who took over the position fro Bernie Brookes. Edcon is South Africa’s largest non-food retailer.

The Johannesburg company has had a hard time staying afloat amid weak consumer spending and economic growth and in 2016, the company had to be taken over by banks and bank holders to stop it from collapsing.

Under Pattison’s plan, Edgars will cut down on more than 1 300 stores’ footprints as well as reduce floor space by 17% over the next five years to increase profitability.

They will also be focusing on Edgars mainly, which sells most of the of the items that are available in the stores that are being shut down.

Other stores that have made the cut include CNA and Jet.

Pattison said that he thinks that the company can turn. He said, “The quicker we can do this, the better”.

Debt

The urgency to make changes comes after Edcon retail sales dropped by 9,4% in three months through December 23 while adjusted earnings before tax, taxes depreciation and amortisation declining by 25%.

The owners of Edcon Holdings are Frank Templeton Sanford C. Bernstein & Co. LLC and Harvard University Pension Fund. They took over when Edcon was struggling under foreign-currency debt that was used to finance the takeover by Bain Capital Private Equity LP in 2007.

The 89-year-old company also employs 14 000 permanent a significant number in a country where more than 1 in 4 people are unemployed.

At the of last year, the company’s net debt was R4,2 billion. Some of the other attempts to revive the company include increasing the workforce, decreasing prices and bringing in international brands.

Edcon said earlier this year that they were in talks with creditors about refinancing debt to strengthen the balance sheet. Edcon also has liquidity facilities and credit facilities that will be maturing towards the end of 2018.

Edcon to cut retail space by one third

By Roy Cokayne for IOL 

Redefine Properties is to reduce its exposure to Edcon as South Africa’s biggest clothing retailer seeks to cut its total retail space from about 1.5-million square metres to about 1-million through a rationalisation process.

Redefine chief operating officer David Rice yesterday said that the group would reduce its Edcon exposure by about 20 000m² this calendar year.

Rice said Redefine planned to fill the space vacated by Edcon. At Boulders Shopping Centre in Midrand, for instance, the retailer would reduce the number of outlets from three to one.

But Rice said one of these outlets had been re-let and it had interest from tenants for the third outlet.

Vacancies

Rice said retail vacancies in the market and Redefine’s portfolio had been increasing, particularly in the larger shopping centres, and lease negotiations were “tougher than they have ever been.”

He said there had been a significant push back from retailers on rental escalations, specifically from national retailers, and on parking fees.

“National retailers are far more clear about the space that they want in terms of their strategies and they are not scared to give up space whereas previously they may have kept more space,” he said.

However, Rice said international retailers were still coming into the South African market.

Rice said Redefine had secured two deals for 17 000m² stores with French-based Leroy Merlin, a DIY and homes company that would be competition to the likes of Builders Warehouse.

Rice added that Redefine had also done two deals with Decathlon, a sporting goods retailer that was a sister company to Leroy Merlin, that would also be big competition for local traders.

He said the office market was “very weak” and it was “musical chairs” with vacancy levels in many areas probably increasing beyond where they were.

Rice said Redefine’s focus in the industrial sector was on development, because its vacancy levels were low at 2.7%.

Redefine yesterday reported a 5.5% increase in distributions a share to 47.30 cents for the six months to February and expects to maintain this growth rate for its full financial year. It reported an operating margin of 82.7%, with the property cost ratio stable at 33.9%.

The overall occupancy rate improved to 95.8% and tenant retention to 94.7% from 86% in the prior period.

Leon Kok, the financial director at Redefine, said the company’s loan to value ratio declined to 40.1% and they would look to reduce it further to below 40% over time.

Redefine’s total assets were valued at R93.4-billion at end-February, an increase of R1.9bn since end-August, following the acquisition of a strategic 25% stake in Chariot Top Group in the reporting period for R907.9-million to give it direct access to a retail portfolio in Poland.

Redefine’s overall portfolio remains biased towards retail at 41% of its sectoral spread by value, with its offshore footprint contributing 25% of distributable income.

Redefine rose 0.89% on the JSE yesterday to close at R11.78.

According to an article published in the Sunday Times at the weekend, former Exclusive Books CEO Benjamin Trisk is willing to re-engineer Edcon’s flailing CNA brand.

This follows his recent departure from the book retailer after a breakdown with the company’s shareholders. Hired in 2013, he spent the past five years in charge of a turn-around strategy after the store had experienced a series of failures.

Trisk told Business Times this week that he would only consider joining CNA if approached. “I would probably look at it very seriously. However, I must make it clear that I have not been approached.”
“But I’m not leaping into anything. I’ve had one approach from overseas which I can’t talk about at the moment. Locally I’ve also had approaches, but I think it’s quite early in the cycle,” he said.

CNA: Edcon’s white elephant

CNA has long been in the doldrums. In 1997, Wooltru bought CNA out of CNA-Gallo for R447-million.
A turnaround plan was implemented but failed dismally and in 2001, the company was sold to Gordon Kay & Associates for R192-million. By the following year, CNA was in liquidation.
Edcon, under the leadership of US retailer Steve Ross, snapped up CNA for R141-million, but 16 years later the retail brand continues to make losses.
CNA is part of Edcon’s speciality division, that once housed Legit, Edgars Shoe Gallery and the group’s non-profitable brands.

According to The Sunday Times, Chris Gilmour, an investment analyst, said: “They tried hard, but couldn’t win. They [Edcon] are thinking about getting out anyway, they can’t keep on putting more money into it. [CNA] is a pile of unadulterated rubbish that should have died 20 years ago.”
Gilmour said South Africa didn’t have a high-street retail culture anymore, making it difficult for brands such as CNA to have a market “and as a result the model is completely shot”.
Meanwhile, Alec Abraham, a senior equity analyst at Sasfin Wealth, told The Sunday Times: “I don’t know what they [CNA] are and I don’t know if they know what they are.”
He said there was a likelihood that CNA would end up in a similar situation to that of Musica, where “they can’t find a buyer because no one wants to buy this unfit business and they are running with the idea as long as they are not losing money on it. And if they are going to be the last man standing, then so be it.”

An Edcon spokesperson has confirmed that CNA is not for sale.

According to Edcon’s latest financial results, for the 13 weeks to December 23 last year, CNA has 196 stores, including 11 Samsung stores, positioning its offering in electronics, stationery, gaming and the limited book retail offering.

Original article by Palesa Vuyolwethu Tshandu for The Sunday Times

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