Edcon clears the first hurdle

But the next step — turning the retail giant around in the face of fierce competition — will be the real test

Edcon chief executive Grant Pattison and his team achieved what many critics doubted they could — secure an almost R3-billion lifeline for a retail company that is deep in the doldrums. But that, analysts argue, may have been the easy part.

The herculean task, as it is described by one analyst, is going to be keeping the Edgars, Jet and CNA brands afloat in a rapidly changing retail environment. Plus there is now R1.2-billion in deferred workers wages from the Unemployment Insurance Fund (UIF) in the game.

Late last Friday, thanks to a blend of commercial self-interest on the part of participants and an acute concern about possible jobs losses, the group announced it had secured the R2.7-billion in cash it needs to keep going for another two to three years.

The money was corralled from existing lenders, landlords exposed to Edcon and the UIF, through its asset manager, the Public Investment Corporation (PIC). The deal included new cash commitments and rental reductions and leaving Edcon free of interest-bearing debt.

The UIF has R1.2-billion invested in Edcon. The fund, which pays out unemployment benefits to workers who lose their jobs, had about R156billion in surpluses, according to the PIC’S latest annual report.

The UIF’S investment policy allows for up to 20% of assets under management to go towards “socially responsible investments, which have a high social impact, while yielding a reasonable investment return”, its spokesperson, Makhosonke Buthelezi, says.

In addition, under a recent amendment to the Unemployment Insurance Act signed into law in 2017, the UIF is empowered to finance “the retention of contributors in employment” — in other words, to fund the keeping of workers who contribute to the UIF in their jobs.

Furthermore, the preservation of 38 000 jobs at the Edcon Group and 100 000 indirect jobs at downstream suppliers and manufacturers will save the fund about R2-billion in potential unemployment insurance claims, Buthelezi says.

“It is the view of the UIF board that the proposal presented by the Edcon group will preserve jobs and facilitate the immediate retention of many UIF contributors in employment and that, if ignored, it would be a cumbersome process to reintroduce the contributors back into employment, given the economic conditions that prevail at the present moment,” he says.

The PIC, which manages the money on behalf of the UIF, did not respond to questions but no doubt its wider portfolio of assets have been helped by the Edcon rescue.

Along with the UIF’S money, the PIC manages about R1.8-trillion for the Government Employees’ Pension Fund (GEPF). As part of its assets under management, the PIC manages about R45-billion in unlisted property for the GEPF, representing a gross lettable area of more than 1.2-million square metres. About 56% of this portfolio is exposed to the retail sector.

With Edcon, one of the largest nonfood retailers in the country, which occupies about 10% of mall space, its collapse would have implications for the property sector, not to mention the GEPF’S portfolio.

Nishlen Govender, a portfolio manager at Citadel, says Edcon’s landlords have avoided a significant vacancy risk at a time when investors are becoming increasingly concerned about vacancies and rental increases in an embattled retail and office sector.

“Under the circumstances, this type of deal is as good as it could get for the property companies,” he says.

But Govender is not convinced that saving jobs and averting higher vacancy rates in the short term will benefit the UIF and property companies in the long term.

“Yes, in theory, injecting funds into Edcon will avoid an event that could lead to significant payouts but this investment will now become a balance sheet issue for the UIF. For instance … will it need to be impaired should Edcon face further issues down the line? If the Edcon business is structurally in decline, will the investment require further inflows of capital from the UIF?”

The complexity of the issue could become immense, he says, moving “from a once-off payout to a multiyear investment decision with no guarantee of returns”.

The cash injection shifts the problem from a significant South African business and its effect on local suppliers and property companies to the UIF, the PIC and the balance sheets of the property companies.

“In a way, this is merely kicking the can down the road without dealing with the issues at hand,” Govender says.

But independent retail analyst Syd Vianello says the deal has bought Edcon time. It takes about six seasons, or three years, to turn a retailer around, and the deal enables Edcon to do this.

“Pattison and his team have their work cut out for them but there is no reason they can’t do it,” Vianello says.

In an interview on 702, Pattison said that, to secure the money, he had to prove that the turnaround at Edcon is already under way. The company had for some time been steadily rightsizing its business by reducing floor space and renewing its focus on its core brands, namely Jet, CNA and Edgars, as well as its Thanku services programme, which houses its credit, insurance, loyalty, cellular and e-commerce offerings.

Credit to customers is an integral part of the Thanku offering. In 2012 it sold its credit book to ABSA, but Edcon has since started a “secondlook” or internal book which is able to provide credit customers that might have been rejected by ABSA.

According to the company credit has always been and remains a big part of the group business as loyal credit customers tend to spend more with Edcon, and do it more frequently than cash customers.

But each Edcon brand faces competition on several fronts. Edgars is competing with a range of new international entrants such as Zara, H&M and Cotton On, not to mention several local competitors.

The Australian Cotton On brand also houses stationery shop Typo, which faces off against CNA, and