After Bain bid adieu, it’s now time to ‘clean up’ Edcon Banks, who are owners of the struggling retail group, are mum on the retail group’s prospects.
When Edcon CEO Bernie Brookes took to the stage at the South African Council of Shopping Centres Annual Congress in Sandton earlier this month, his presentation was premised on retailers that are ahead of the curve.
The emboldened Brookes said retailers like global supermarket chains Aldi and Lidl, and the home-grown discount apparel retailer Pep have either capitalised on online shopping, aggressively competed on price or successfully managed costs.
The 57-year old was pandering to an audience of largely shopping mall owners, landlords and managers that have been at the brunt of Edcon’s consolidation of floor space, largely at its flagship brand Edgars and CNA.
At the time of Brookes’ presentation, the 87-year old retail group was probably adding the finishing touches to its radical ownership structure changes.
Brookes announced last week that US-based private equity firm Bain Capital will relinquish the control of Edcon to its creditors as it finally loses its grip on the battle to manage the retail group’s smothering R26.7 billion debt pile.
This arrangement means that creditors will surrender their debt in the company and replace it with Bain’s 75% stake – paving the way for new owners at Edcon.
Market watchers call Bain’s exit the worst private equity scenario in South Africa, as it’s walking away with nothing from its initial R25 billion leveraged buyout of Edcon in 2007 – which marked its foray into the African continent. Shortly after the deal, Edcon started to introduce more debt in the business for its operations. At the time, market conditions were favourable as retailers and banks fervently dished out credit to consumers and the domestic economy pulled in a growth of more than 4%.
Then the global financial crisis hit, darkening Edcon’s fortunes.
US-based asset management firm Franklin Templeton, an early backer of Edcon through its 10% stake, will now become Edcon’s largest single shareholder along with other foreign funds, collectively owning 70% of the retailer.
High-flying bankers such as Barclays Africa, Standard Bank, Investec Bank and Rand Merchant Bank, who were lenders to Edcon, will now make up the remaining 30% of the local shareholding.
A new board at Edcon will be assembled in the next two months.
New owners are tight-lipped
Banks at the moment are mum about plans for Edcon to claw back market share at a time when there are few signs of a revival in consumer spending, rising living costs and heated competition from Woolworths, The Foschini Group and international apparel retailers such as Zara, Cotton On and H&M.
Even Franklin Templeton is tight-lipped, finding refuge in its corporate mandate of “not commenting on specific companies/holdings and stocks.”
There are already concerns about the prospects of corporate bondholders – with limited clothing retail experience – running the show at Edcon. This concern is warranted if the track record of banks being involved in retail groups is anything to go by. Cue Absa, which has tightened the credit taps to consumers since it bought Edcon’s store-cards book for R10 billion in 2012.
Cedric Rimaud, the director of emerging-markets research at Gimme Credit in Bangkok said it had become evident for some time that the sale to Absa of the credit book had been a mistake as Edcon has struggled to generate sales on credit.
Credit sales continued their downward trend – declining by 15.6% for the 13 weeks to June 25 2016. Its cash sales fell by 2.7%. Edcon used promotions to clear its old merchandise to raise cash for operations, which promptly weighed on its sales growth.
Bain didn’t have a choice but to exit after Edcon deferred cash interest payments of R1.6 billion in April to December and has in recent years asked bondholders to take a haircut (or losses) on bonds – buying the retailer time for its turnaround.
“It was probably difficult to find a white knight to rescue Edcon from the hole it found itself in. The macroeconomic context in South Africa has been extremely difficult, the retail sales are decelerating, with rising inflation and monetary tightening weighing on consumer spending,” Rimaud told Moneyweb.
The new ownership structure will reduce its debt obligations from R26.7 billion to R6 billion and present a cash flow injection of R3 billion that will be used to pay creditors, landlords, suppliers and service providers.
Independent analyst Syd Vianello said the debt reduction will give it breathing room. “But it’s insufficient. I think it’s going to be hard convincing clients and suppliers to continue supplying them. It’s possible that they will get it right but it ain’t going to be easy,” says Vianello.
He added that Edcon’s efforts are dwarfed by losses – with its trading profit declining by about R318 million during the period. “Even though this new restructuring puts money in the bank, money is going out in other areas of the business,” Vianello explained.
Radical changes are already taking place at Edcon since Brookes, who is the former chief of Australia’s largest department store Myer, took over from Jürgen Schreiber nine months ago. “I have cut all the costs that I can but I have also doubled the expenditure on consumer focus groups and consumer research.”
To stabilise the business, Edcon planned to sell its non-core assets. It announced the sale of its ladies’ apparel brand Legit to private equity firm Metier for R637 million.
“We also got a lot of offers for our businesses such as CNA, Red Square and Boardmans,” says Brookes, but the pricing didn’t make sense. There was a consensus in the market that retail tycoons Markus Jooste and Christo Wiese would be ideal suitors for Edcon’s assets.
Brookes said there will be some more cleaning up at Edgars as it looks to drop some international fashion brands and focus on its high-margin private label brands such as Stone Harbour and Kelso.
Under Schreiber’s leadership, Edcon aggressively pushed international fashion brands such as Top Shop, River Island, TM Lewin, Lucky Brand, Tom Tailor and Dune into Edgars – an expensive exercise which flopped.
Edcon plans to spend over R600 million over the next three years on opening over 60 new stores that will add to its current 1 542 stores.
Other turnaround measures include improving customer service and space productivity and launching online shopping channels at Jet and Edgars.
Time will only tell if Edcon will be ahead of the curve again.
By Ray Mahlaka for www.moneyweb.co.za