Edcon – Third time lucky?

I am pretty sure, that everyone has heard the painful radio interview by Bruce Whitfield with Edcon CEO Grant Pattison confirming the inevitable possible collapse of the group, due to an over 45% decline in sales year on year as a result of the lockdown due to C0vid-19 pandemic.

This, from a cash flow perspective the company only had sufficient liquidity to cover salaries, and would be unable to honour its commitments to suppliers.  The question remains though, is the global pandemic the sole cause of the expected downfall of the company?

Background and Context

In terms of introduction, Edcon is a national fashion and apparel retail store that was founded in 1929, in the streets of Johannesburg. And has since then it has grown to well over 1000 stores, now consisting of brands such as Edgars, Edgars Beauty, Edgars home and Jet.

The early success of Edcon group led, to the company being an attractive acquisition target, to global private equity House Bain Capital, which bought out a controlling stake in the company in 2007, at the time the buyout was at R45 per share, representing a 51% premium to the prevailing share price of the time of R25 per share. The transaction was funded by a combination of Equity, and specifically, debt instruments consisting of two major debt instruments one being a senior facility of €1,180 million and the other being €630 million. The duration of the Bain Capital ownership resulted in the inclusion of international brands, such as Top Shop, Lucky Brand etc.

Post completion of the acquisition, the expected upside from the acquisition didn’t materialize, and as a result in 2016,  Bain capital existed Edcon group in an equity for debt swap, that resulted in the company reducing debt exposure from the R26 Billion to R6 Billion.

The Restoration

In 2018, Grant Pattison joined the group as CEO tasked with turning around the business, he is most famously known as the man who is credited for steering the ship towards the Walmart acquisition of Massmart (another story for another day). He came into the group knowing he had an enormous task of turning around the group.

In order to remedy some of the issues with both the balance sheet and income statement of the group he initiated the following strategic plan:

• Equity / Debt

A big source of trouble in the group, was the Debt AS at the end of 2018 the debt was sitting at circa R7 Billion, and in order to relieve the stress, Grant Pattison negotiated a transaction where all the interest-bearing debt, was converted to a new shareholding structure with a new injection of capital led by the Public Investment Corporation client Unemployment Insurance Fund (UIF) this which was approved by the Competition Commission in May 2019.  This effectively meant that the only debt, that was on the balance sheet was related to debtors.

One of the biggest line items, in the Income Statement for Edcon was rental payments, and in terms of sheer retail space, Edcon is the largest non-food retailed in the country and as such requested that a rental reduction/ holiday in exchange for equity within the group.

The landlords who participated in this transaction included the likes of Vukani, Attac, Liberty, and Redefine. Due to the square footage occupied by the group, they had some leverage to negotiate, it should be noted since the rental transaction closed, the likes of Massmart, and TFG have also announced they would be looking at some sort of rental reduction.

• Asset rationalisation

In order to lean out the group, Edcon sought to optimise, its assets and in some cases dispose of parts of the business that were labelled non-core, some of these include the following but not limited to the following:

• In October 2019, consumer finance group RCS announced it had acquired Absa’s stake in the Edcon store card portfolio. The amount of the transaction was not made available – Absa had bought the credit card portfolio for R10bn in 2012. The premise was that the lending criteria for RCS was slightly more bullish than Absa and therefore there would be an uptake in sales as a result of a change in credit provider. The deal was approved in January 2020.
• In February of this year, 167-store stationery chain CNA was sold to a consortium led by JSE-listed and Mauritian-based Astoria Investments for an undisclosed amount. This should have added some much-needed cash relief to the group, at the time of writing this article not sure if the cash has been received for the disposal.

A revamp and a revitalisation was done to the traditional store format of Edgars, to be more single branded, i.e. a more curated shopping experience for consumers, what this meant was a rebrand of Boardman’s to Edgars Home, and Red Square to Edgars Beauty. The concept was to create a more curated shopping experience for consumers.

In simple terms, all these initiatives were designed to rebase the top line of the company to a smaller more sustainable base, and to get stakeholders to buy into the vision of returning or surpassing the former glory days.  You must give credit to Grant Pattison, for getting all the stakeholders to buy into a clear and definite vision.

Conclusion

The forever optimist and fighter, Grant Pattison indicated that they would be engaging with stakeholders such as their current shareholders, and government to aid during this tough trading period.  If it were any other period, I am sure most it would be fair to assume that there would be a step in of some sorts to save the 40 000 direct and indirect jobs that would result from a shutdown of the group.

However, this time it’s different, there are so many more pressing issues on hand currently.

It should be noted, that per the update note posted on the Edcon website (on 26 March 2020), traditionally the March / April trading period is a time of liquidity strain. And that the matter of COV-19 made trouble for already delicate situation.

In closing, one must ask what can Edcon do differently now that it hasn’t done before? And is it a responsible allocation of capital, to save a business that has proven unable to compete in the modern fashion retail market.

If one tracks the number of bailouts the company has received, is the third time the charm?