Edcon’s survival will avert retail apocalypse

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.”

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