Bondholders trapped?

Edcon may continue to hobble along even without a cash injection from the PIC

Word is the Public Investment Corp (PIC) is not inclined to hand over about R2bn to Edcon to save it from a fate we’ve all long thought unavoidable.

Of course, right now the PIC is so fixated on its own survival it’s probably not in the mood to consider the survival of other chronically poorly managed entities, even those in the private sector.

It’s been almost 12 years since private equity firm Bain thought it would be a brilliant idea to spend R25bn taking one of the country’s most successful clothing retailers private, load it up with tax-deductible debt and pocket lots of profit.

At that stage Edcon had about 50% of the clothing and footwear market and, under the stellar leadership of Steve Ross, looked as though it could pick up even more.

It is now below 30% and dropping. Still, at 30% it is nearly twice that of its nearest competitor, and large enough for “too big to fail” pleas for support. At stake are over 20,000 jobs and 1,350 stores.

Some analysts see Edcon as a retail version of SAA and say it should be allowed to go into liquidation no matter how painful.

“Is it the PIC’S job to bail out failed private equity transactions?” asks independent analyst Anthony Clark. “Let market forces play out. New, more vibrant competitors will take up much of the jobs and sites.”

More problematic is whether a more vibrant competitor would show the same commitment to sourcing locally.

It’s difficult to know precisely when things at Edcon went pear-shaped. Some say the initial targets set to justify the R25bn take-out price were unrealistic and put the top executives under too much pressure.

Whatever it was, Edcon began to steadily lose the market dominance it had long taken for granted.

“Ross’s departure was a major blow,” says one industry insider, adding that for the past few years there’s been no compelling reason to shop at Edgars. “They lost touch with their customers, gave up their merchandising expertise and started introducing expensive brands. Essentially they just gave away their traditional market dominance to competitors.”

But the insider believes that even without a fund injection from the PIC Edcon may continue to hobble along.

“The bondholders don’t want to lose their money so they’ll keep it alive.”