Retailers fall victim to time’s cruelty
Retail was pumping in the early 2000s. Sales growth hit a record high of 15.50% in September 2006 and averaged about 12% a year from 2004 to 2007.
Average inflation in 2006 was 3.24% while GDP growth broke the 5% level. Economists were positive about the trajectory and forecast that SA would experience a sustained growth phase that would probably continue for another three to four years.
In this context, several private equity deals were done in the retail sector. Bain, one of the world’s biggest private equity investors, approached Edcon for a R25bn buyout late in 2006. Once the deal was agreed in 2007, Edcon delisted from the JSE.
In late 2007, leading private equity fund manager Ethos approached House of Busby and the two reached an agreement early in 2008 with an estimated enterprise value of R1.3bn. House of Busby then delisted from the JSE.
In another private equity deal, a consortium comprising Vestacor, Retail Ventures Group and Ellerine Brothers announced in 2006 it had bought Stuttafords for an undisclosed sum.
However, the retail picture has since deteriorated. Edcon fell into serious difficulty, which culminated in a debt-to-equity deal in 2016. There are persistent rumours that House of Busby is under considerable pressure, with a possible exit by Ethos on the cards.
The company denies such claims and says it shut its Nine West and Mango standalone stores in March to match domestic needs.
Stuttafords entered business-rescue proceedings in 2016 and its creditors adopted the plan in 2017.
CEO Robert Amoils says the retailer has completed the process and is now a “rescued entity” with plans to make some sweeping changes.
Electus Fund Managers equity analyst Damon Buss says private equity houses generally invest for seven to 10 years.
He says House of Busby and Edcon had been unlucky, with their moves to private equity coinciding with the global financial crisis.
“Public shareholders would not have allowed the businesses to be geared up as much, therefore the interest burden would have been much lower, freeing up more of the cash these businesses generate to be invested in the operations and hence enabling them to compete more effectively,” says Buss.
Absa Wealth and Investment analyst Chris Gilmour says Edcon could not have chosen a worse time to go private.
Edcon says the decision to go private was taken by shareholders at the time, and without the full background, it is difficult to say whether it was a regrettable decision.
“At the time the transaction was done, Bain Capital recognised the growth potential in Edcon, providing shareholders with an offer for the company at a significant premium to the prevailing share price,” says a representative of the company.
Edcon says that while many private equity models work exceptionally well, it would consider listing on the JSE again.
“There are a number of internal strategic business imperatives currently being implemented across the Edcon group which are aimed at simplifying the business, improving customer service as well as enhancing employee accountability and autonomy, offering better and more relevant products, and positioning the group to meet its growth objectives. Edcon must advance this process considerably, prior to any decision being made on a possible listing,” the company representative says.
House of Busby did not respond to questions concerning the possibility of relisting and under what circumstances it would consider it.
While private retail is going through a rough time, Gilmour says it could work with the right people in management.
“Private is good in the case of a tightly run business like Cape Union Mart. Stuttafords has never been a good business in my opinion,” he says.
Buss says private companies have the ability to make longerterm capital allocation decisions as their owners are generally in it for the long haul in comparison to shareholders in listed companies.
Buss also says private companies do not have the “onerous reporting requirements” put on their public counterparts and generally have much flatter organisation structures that enable them to react much faster to changes in the sector or economy.