Finweek English Edition - - Letters -

costs and im­pair­ments) the op­er­at­ing per­for­mance of the core cloth­ing and tex­tiles di­vi­sions was omi­nous. Tex­tiles turned over R1,55bn but yielded an op­er­at­ing loss of R33m, while the cloth­ing clus­ter showed a hefty R162m loss from turnover of al­most R1,7bn.

The scari­est part is that Seardel’s busi­ness model has been creak­ing un­con­vinc­ingly for the past five years. Be­tween year-end June 2002 and year-end June 2007 trad­ing mar­gins have crimped from more than 6% to un­der 3%, re­turn on to­tal as­sets has fallen from 9% to 3,8%, re­turn on in­vest­ments from 3,5% to 1,8% and re­turn on share­hold­ers’ in­ter­ests from more than 85% to just 3,3%.

Those statis­tics would sug­gest that per­haps Seardel is a bridge too far for HCI…

Frater As­set Man­age­ment’s Matthew Kreeve says with the rand still vul­ner­a­ble, Seardel has more scope to im­prove prof­itabil­ity de­spite be­ing ham­pered by weak lo­cal re­tail de­mand.

Imara SP Reid an­a­lyst War­wick Lu­cas says at face value the Seardel deal looks a brave bid by HCI. “It prob­a­bly isn’t… Seardel is rich in lots of illiq­uid as­sets. While HCI may be sym­pa­thetic to the em­ploy­ees it will have no qualms about the as­set base.” But Lu­cas reck­ons HCI can ex­pect a time-con­sum­ing process.

Kreeve is a tad more hope­ful about an op­er­a­tional turn­around. “HCI has found in Seardel a large chunk of rev­enue held by dis­tressed sell­ers with no ac­cess to the two things HCI does have in spades: cap­i­tal and re­la­tion­ships.” He ar­gues that by ap­ply­ing cap­i­tal and re­la­tion­ships HCI should be able to keep a large por­tion of SA’s cloth­ing in­dus­try pro­duc­tive “at a rea­son­able if not stel­lar price”.

HCI, says Kreeve, will also gain ac­cess to the up­side rep­re­sented by im­proved bor­der con­trol, a weaker rand and Gov­ern­ment con­tracts (such as the SA Na­tional De­fence Force). “They can also af­ford to hold non-core as­sets un­til there’s a bet­ter en­vi­ron­ment to sell them.”

But what is – in HCI’s opin­ion – the most im­por­tant change that needs to be made to make Seardel vi­able? Re­cently ap­pointed ex­ec­u­tive di­rec­tor Stu­art Queen says un­lock­ing the econ­omy of scales in­her­ent in a busi­ness of Seardel’s size, right-siz­ing the busi­ness by elim­i­nat­ing low mar­gin and neg­a­tive mar­gin turnover and con­sol­i­dat­ing fa­cil­i­ties and man­age­ment struc­tures are key pro­cesses in a turn­around strat­egy.

Queen adds that Seardel will also need to drive pro­duc­tion ef­fi­cien­cies, which will not only re­duce the to­tal cost of pro­duc­tion but also en­able it to re­duce work­ing cap­i­tal lev­els, thereby re­leas­ing cash to re­duce debt. How­ever, he cau­tions there are a few things ex­ter­nal to Seardel that will have an ef­fect on a turn­around. “First, the in­stances of im­ported cloth­ing and tex­tiles en­ter­ing our mar­ket without the nec­es­sary du­ties be­ing paid are great. That in­cludes un­der-in­voic­ing, both value and vol­ume, trans­ship­ping and sim­ply smug­gling the goods into the coun­try free of any du­ties what­so­ever.”

Queen al­ludes to re­cent press cov­er­age of the raids be­ing con­ducted by the SA Rev­enue Ser­vice that those items aren’t re­stricted to the in­for­mal sec­tor but also end up in the for­mal re­tail sec­tor.

He says Seardel also has to com­pete with SA sup­pli­ers who don’t com­ply with the terms of the Bar­gain­ing Coun­cil’s col­lec­tive agree­ment. “If those prac­tices can be ar­rested it will cer­tainly im­prove the chances for a suc­cess­ful turn­around im­mea­sur­ably.”

Ul­ti­mately much – at least over the short to medium term – will de­pend on how much cost can be cut out of the Seardel busi­ness(es) without giv­ing up crit­i­cal mass. Queen says it’s not pos­si­ble to quan­tify how much can come out of Seardel. “It’s dif­fi­cult to es­ti­mate a num­ber at this point in our process but we be­lieve that cost sav­ings will be sig­nif­i­cant.”

So far Fin­week has noted some key de­vel­op­ments, such as the clo­sure of its plush Con­stan­tia head of­fice (al­though mod­est mea­sured against Seardel’s orig­i­nal HQ at Mon­terey in Bish­ops Court) and pro­pos­als to close down its not-so­vi­able Scripto sta­tionery-man­u­fac­tur­ing sub­sidiary.

Those are per­haps de­vel­op­ments that should al­ready have taken place un­der the pre­vi­ous man­age­ment’s ten­ure led by founder and ma­jor share­holder Aaron Searll. Searll no longer plays an ex­ec­u­tive role at Seardel, and a num­ber of long-serv­ing direc­tors (such as fi­nan­cial di­rec­tor Arthur Ja­cob­sohn and Rus­sell Up­ton) have de­parted the scene.

As far as man­age­ment changes at Seardel go, the of­fi­cial board re­struc­tur­ing sees Cope­lyn as­sum­ing the role of chair­man of the board, with Seardel stal­wart Wal­ter Sime­oni re­main­ing CEO.

But – sig­nif­i­cantly – HCI has opted to split the Seardel busi­ness into cloth­ing and tex­tiles di­vi­sions headed by An­thony Dixon-Sea­ger and Dave Dun­can re­spec­tively.

Nat­u­rally, the ma­jor premise around Seardel for the past five years is that many of the group’s fac­to­ries and plant man­u­fac­tur­ing cloth­ing and tex­tiles can be shut down, al­low­ing the sur­plus in­dus­trial prop­er­ties to be sold off for the ben­e­fit of share­hold­ers. Searll re­sisted such calls for the past three years, back­ing an op­er­a­tional turn­around rather than a break-up mis­sion to re-build share­hold­ers’ re­turns.

Will things change on HCI’s watch? Queen says cost-cut­ting at Seardel will be across the board and not lim­ited to the un­prof­itable cloth­ing man­u­fac­tur­ing side. He stresses: “As op­posed to the fac­to­ries be­ing un­vi­able, what we’re re­ally try­ing to do is iden­tify ar­eas where fac­to­ries pro­duc­ing sim­i­lar items can be con­sol­i­dated. We’re also fo­cused on con­sol­i­dat­ing man­age­ment struc­tures.”

Queen adds it’s not Seardel’s in­ten­tion to sell off non-core sub­sidiaries, such as Sharp Elec­tron­ics or Prima Toys. “Even if it were, the mar­ket isn’t con­ducive to as­set sales cur­rently.”

For those count­ing on an as­set strip and un­lock­ing prop­erty value, Queen throws a damp­ener on those hopes. “We ac­tu­ally have very lit­tle non-core prop­erty. Nearly all of the prop­er­ties are be­ing utilised by the group.” But he does con­cede the con­sol­i­da­tion process at Seardel may un­lock some sur­plus prop­erty.

Ul­ti­mately, Queen be­lieves HCI can pull off a turn­around at Seardel. “I do think that HCI has a good chance of get­ting a de­cent re­turn on its in­vest­ment.” How­ever, Queen is fully cog­nisant of the fact this is a dif­fi­cult time in a dif­fi­cult in­dus­try. “We know the turn­around won’t be easy or quick, so we’ll try and keep a healthy dose of prag­ma­tism in our ap­proach.

“It’s go­ing to take a lot of hard work to get there but I feel Seardel’s man­age­ment team is com­mit­ted to the process and the group has very tal­ented peo­ple who are rel­ish­ing the chal­lenge.”

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