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Edcon gets lifeline from the public, landlords and lenders

Groundbreaking R2.7bn deal will see the PIC, through the UIF, landlords and existing secured lenders rescue the retail giant.

Edcon has been saved. Thousands of workers within South Africa’s largest clothing retailer, its suppliers and even landlords breathed a collective sigh of relief on Friday as the group announced that it had secured R2.7 billion in new funding to recapitalise the cash-strapped company.

The deal effectively means Edcon, which owns Edgars, Jet and CNA, won’t be closing its doors, thus staving off what labour unions claimed would have been the country’s biggest single jobs bloodbath.

Edcon said in a statement that it had secured binding agreements with existing secured lenders, the Public Investment Corporation (PIC) on behalf of its client the UIF and participating landlords, which will result in the implementation of the R2.7bn recapitalisation programme.

Had Edcon not secured the funding, it might have gone into a business rescue process. However, the size of the business, its debt and scale of its restructuring would have meant a business rescue would have had slim chances of succeeding.

Read: Edcon continues ‘downsizing’ stores as it awaits R3bn lifeline

Many have called it a major coup for Edcon CEO Grant Pattison. But, in an interview with Moneyweb last night, Pattison said: “There’s no way one person could have pulled this off… On a personal level, this has been the most remarkable process that I’ve ever been a part of in business.”

He added: “It was complex with many diverse stakeholders, including existing lenders, unions, the Ministries of Economic Development, Labour and Finance; the PIC and UIF; participating landlords; and our management team and staff that came together to secure Edcon’s future and ultimately thousands of jobs.”

Pattison, who led JSE-listed retail giant Massmart before it was acquired by Walmart, was brought in by Edcon’s board just over a year ago to lead the group’s restructuring and turnaround.

Grant Pattison. Picture: Moneyweb

Edcon has been grappling with a debt burden ever since it was bought out by US-based Bain Capital in a R25 billion private equity deal in 2007. Three years ago Bain cut its losses and transferred ownership of Edcon to several of its creditors. But, Edcon still had a sizeable debt burden and was also in bad shape operationally, with too many stores, declining sales, lost market share and an incoherent retail strategy.

Over the last year Pattison said that Edcon has made headway on the operational front by focusing on staff and customer service; getting rid of Edcon’s internationally branded stores and focusing on its higher margin local clothing lines; bringing down stock levels; rationalising and upgrading stores around the key Edgars, Jet and CNA brands; and, rebuilding Edcon’s credit and insurance division under its Thank U customer loyalty programme.

However, Edcon’s debt burden remained a major issue, with the cost of its restructuring sapping up more cash. Pattison had to find new funds to recapitalise the group and has been in talks with various potential funders for several months.

The three-way new recapitalisation deal took longer than anticipated, with retail and property insiders saying that Edcon was teetering on the brink, having not paid some of its suppliers last month.  

“Edcon’s businesses are key players in the South African retail market and this is an important turning point for a company, focused on delivering growth and creating value for all its stakeholders going forward,” Edcon chairman Gareth Penny, said in a statement announcing the agreement.

Meanwhile, asked how the latest funding deal was structured, Pattison told Moneyweb it was roughly an equal split between the PIC/UIF, “participating landlords” and Edcon’s existing secured lenders.

“It’s safe to say all parties were reluctant investors,” Pattison conceded. “This took longer than we anticipated, but they needed to do their due diligence and interrogated Edcon’s management. The banks, PIC and landlords were equally rigorous and it took time to iron out the nuts and bolts of the deal in terms of who gets what share,” he added.

For SA’s retail property sector, the agreement is unprecedented and it remains to be seen how Edcon’s competitors and other major retailers respond. Effectively the agreement will see JSE-listed Real Estate Investment Trusts (Reits) and private property companies that lease retail space to Edcon becoming its shareholders.

Picture: Moneyweb

“Between 20 to 30 of our landlords have agreed to be part of the process, but this could increase as some negotiations are still ongoing. Participating landlords have been waiting for our announcement around the overall recapitalisation of Edcon and are now free to make their own announcements,” said Pattison.

Retail-focused Reit Hyprop was the first to confirm on Friday that it had in principal “agreed to support Edcon’s restructuring proposal, with a reduction in rentals, compensated for by equity participation in Edcon”. Hyprop, the owner of Canal Walk and Rosebank Mall, has the highest exposure of any Reit to Edcon, with around 9% of its GLA occupied by the retailer.

Speaking to Moneyweb, Hyprop CEO Morne Wilken would not comment on the value of its stake. However, he said Edcon’s overall funding deal was “exciting and positive” news for the property sector.

Redefine Properties confirmed in a Sens announcement on Friday that it also was party to the Edcon recapitalisation agreement. It said its equity contribution would amount to R54.6 million, in addition to agreed rental reductions up to a maximum of R13.8 million over a two-year period. Redefine is a significant landlord to Edcon, with 78 760m2 GLA exposure.

Liberty Two Degrees and Resilient Reit also have high exposure to Edcon. Resilient Reit’s CEO, Des de Beer, said during the company’s results announcement last week that it “supported Edcon’s restructuring”, but did not give further details. Liberty Two Degrees, which houses Edcon’s biggest Edgars store over three floors at Sandton City, made similar comments.

Read: Failing retailers a headache for Liberty Two Degrees

Pattison said the recapitalisation will result in the removal of all of Edcon’s interest bearing debt and introduces a new group structure and set of shareholders. “The deal is still subject to the normal regulatory approvals required for a transaction of this nature.”

He said there were no plans currently to listed Edcon on the JSE and he was “committed to the business as CEO, as long as the board and shareholders are happy” to see him stay.

Commenting on the deal, retail analyst Chris Gilmour said: “It solves Edcon’s immediate funding problem which is good. Now Grant can turn his attention to clawing back lost market share… They dodged a bullet with this recap, however they also need to now reach out to their suppliers whom they left in the lurch in January with no warning. They just did not pay them and that needs to be addressed urgently.”

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“Edcon has been saved.” But for how long? The key problems are still there. A drastic overhaul of its business model is needed for this not just to be a case of kicking the can further down the road. Difficult to see a turnaround given that Edcon looks decidedly sluggish and old-fashioned.

Hats off to PIC for investing in an actual business that can hopefully still be saved. The knock on effect of this would’ve been very big.

Fundamentally, this retail remains under deep stress.

Consumers are buying online, lots of cheaper imported options available and shopping malls heyday is over. A stagnating SA economy not helping either.

The hangover probably has some way to go and more closures ahead are inevitable.

Agreed. Retail all over the world is feeling the pinch of online competition. SA malls need to plan ahead on options to minimise the effect which will no doubt become worse. Throwing more money at the same model is throwing money away.

If the ACTUAL impact of this were reflected in the THEORETICAL journal entries of the STUPIDLY overvalued REIT in this country, by how much would that bubble deflate?

My guess is management is incentivized by the number of positive zero in the journal entries and therefore not much.

There is a trillion adjustment waiting in the wings of SA Listed Property

Edcon, Eskom, SAA, Denel, etc etc, pretty soon the Pic will also be bust. Then what?

The PIC just manages the GEPF and UIF. Both of which are underwritten by – you guessed it – the taxpayer.

So Edcon is now just another SOE.

Maybe they should put Molefe in there as CEO. Or Gigaba. Or Koko. All snappy dressers.

What could possibly go wrong?

Is it me or did they start falling apart when they did away with their 6 month interest free accounts and started charging absurd store card fees while the quality of their clothing was worse than everyone elses, but at a premium?

So the PIC is basically in the business of keeping failing entities alive these days.

Edgars is a terrible business and deserves to go under.

What they’re doing here is simply delaying the inevitable.

Sales would help.
A lot of Pietermaritzburg people don’t bother with Edgars.
The service is so bad that if you are lucky enough to find help, it will be slow and unfriendly.

There are so many other stores with helpful staff and quality products that you can don’t need to waste valuable time going to Edgars.

Perhaps the other Edgars stores in the country are better.

Don’t the powers in being ever learn, pushing good money after bad. Do they really want to lose a further R2.7 bil. Do the realise the effort and time it takes to amass that amount? We are living in a fools paradise.

Well, if this act of landlords is not uncompetitive behavior then we can throw the Competition Commission into the bin.

If I was a retail tenant I would be on Landlords “like white on rice”. What’s good for Edcon must be good for ALL retailers ……

Landlords your uncompetitive acts are coming home to roost ….. you discount the larger retailers and “screw” the small guys…..

What this move does is it allows time for the bosses with large positions and exposures to close or reduce those positions with the money of the average Joe reading this articles thinking afterwards that everything is going to be ok. It’s not. Also clear that the Competition Commission needs competition, but throw thoem in the bin anyway!

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