The Big Read
Break-up of group on the cards if creditors reject restructuring
D-day looms for Edcon
● Edcon’s corporate strategy is a tale of four men who tackled but failed to solve the group’s legacy problems.
The first was American Stephen Ross, appointed after Boston-based management consultancy Bain bought Edcon for R25-billion 11 years ago. Then came German Jurgen Schreiber, who tried to nurse the company back to health by introducing more international brands.
He was soon followed by Australian Bernie Brookes, who valiantly attempted to list the company. Now there’s South African Grant Pattison, who may be the instigator of Edcon’s break-up.
And with an impending deadline of less than three months to get its house in order, the Edcon as we know it — owning brands such as Edgars, CNA and Jet — may be a thing of the past.
Last month, the retailer secured a R500million bridging loan to help support its liquidity needs while a long-term capital structure solution is finalised.
But this may have been the final nail in the coffin for Edcon, as the maturity of this facility is on September 30. It is a temporary reprieve while a long-term solution to the debt of the holding company and its subsidiaries is found.
Speaking on the sidelines of a company briefing this week, Pattison said if its creditors did not give Edcon a lifeline by the September deadline, “the company would be highly exposed and would need to find alternative funding, otherwise it could face failure”.
He added: “Edcon may not survive in its current state, but that does not mean it’s not going to survive; it might just look a bit different, it may be broken into pieces.”
However, it was unlikely that Edcon would be broken up. But if that did happen, he said, “I’m not scared of that either, because I have decentralised the company, so it runs in its different business units”.
Pattison said that although he remained confident that creditors would sign off on the group’s restructuring plan, “there’s going to come a day when shareholders say no”.
Edcon’s net debt at the end of 2017 was R4.2-billion, compared to R24.7-billion the previous year.
“We can’t borrow any more. We are going to issue new shares, if anyone is interested in these new shares, and that’s the process that will be required,” he said.
The restructuring by Pattison means Edcon now operates on a more decentralised model.
Each of the group’s mainstay brands, including Edgars, Jet and CNA, has its own management team and CEO.
Edcon’s owners include Franklin Templeton Investments, Sanford C Bernstein, the Harvard University pension fund and Absa, which took over Edcon when it was suffocating under foreign-currency debt used to finance its 2007 takeover.
With most malls in South Africa built around Edcon’s big brands, many landlords will support its rationalisation.
Anas Madhi, a director at Meago Asset Management, said: “In certain circumstances landlords who are proactive may see the opportunity to get the underperforming Edcon stores out and either install one of the international emerging brands or alternatively bring in another retail anchor that would suit the tenant mix in the centre.”
Pattison said Edcon would close a number of stores, mostly in peri-urban areas. This included homeware retailer Boardmans and cosmetics brand Red Square — which would be housed in Edgars as concession stores known as Edgars Home and Edgars Beauty. White-goods retailer Jet Mart would become part of Jet. Other brands to be closed included lingerie brand La Senza and bags and jewellery stores Accessorize, which would also be incorporated into Edgars stores.
Last month, Edcon shut its flagship Topshop store in Sandton. Getting the licensing rights of UK-based Topshop was a joint venture between Edcon and the House of Busby. Pattison confirmed that this joint-venture would not be renewed — but the House of Busby continues to be a supplier to Edcon
The House of Busby and Edcon also had the licensing rights to Mango and Nine West, whose stores were closed in March 2017.
“Some people are going to lose their jobs; it would be naive to say otherwise,” said Pattison. “We’ll do everything we can to make it as small as possible. It’s my intention not to make it big.” It was likely that store management jobs would be on the line, but the group was yet to have discussions with the unions to confirm job loss numbers.
Edcon has 14 000 permanent staff with about 2 000 managers in its stores.
Madhi said: “The operational problems experienced in Edcon of late appear multifaceted, with revenue declines and poor product mix exacerbating their continuing loss of market share, resulting in declining profitability.”
Keillen Ndlovu, head of listed property funds at Stanlib, said Edcon accounted for 2% of the retail space rented out by South Africa’s listed property sector. “This used to be higher. But as property companies grew their portfolios . . . as they expanded to offshore markets, this has diluted the exposure to Edcon or local tenants in general.”
Ndlovu said some property companies were anticipating this and had not been aggressive in rolling out space to Edcon brands in the past few years — largely due to weaker sales or trading densities from the group.
This was because Edcon had been characterised by a series of blunders that included the buyout by Bain, the introduction of international brands and an aggressive store expansion.
Pattison said: “After we’ve managed the interests of all stakeholders, our job is to maximise for shareholders, and if the shareholders could get more money by [Edcon] being broken up into pieces rather than operating as a group, that’s the definition of whether the group has value or not.”
He maintained that the future of Edcon was in the hands of its shareholders, landlords, suppliers and customers.
“Ultimately, I’ve just got to figure out what’s best in that for them.”
Edcon may not survive in its current state . . . Grant Pattison
Edcon CEO