Ellerines rescue no free ride for Abil

WITHIN hours of Leon Kirkinis resigning as CEO of African Bank Investments Limited (Abil) this week, negotiations to sell Ellerines were abandoned and the furniture retailer commenced voluntary business rescue proceedings.

Analysts speculate that it was only when Kirkinis — who drove the ill-fated R9.1 billion acquisition of Ellerines in early 2008 — had departed that the board felt able to take the tough but inevitable decision to cut loose its albatross.

Speculation has mounted that Abil had been in prolonged discussion with Steinhoff CEO Markus Jooste to buy Ellerines. Jooste had apparently indicated he would want to be paid around R2-billion to take over the troubled business — but this speculation could not be confirmed.

In the initial statement on Wednesday, announcing the need for R8.5-billion of funding and Kirkinis’s resignation, Abil referred to negotiations with an “unidentified party” and added it was exploring other alternatives.

“We anticipate that the negative capital impact to the group will, at a minimum, be between R1.5-billion and R2.5-billion,” Abil said.

The ring-fencing of Ellerines under the business rescue should reduce the additional funding burden to around R7-billion. However, it is unclear how much of the R61-billion of advances on Abil’s books as at end-March relates to the funding of Ellerines sales.

Analysts say the business rescue process could jeopardise collection of these debts.

“The Ellerines book is owned by Abil, now Abil is going to have to work out how to collect that book without the Ellerines stores,” said retail analyst Syd Vianello.

Vianello said the splitting of the financing functions from the selling functions had been a major source of Ellerines’ difficulties.

“The Ellerines management had no say over the granting of credit and it seems the bank granted credit inappropriately.”

He added that it didn’t help that the new management under Abil also got the product range wrong.

While the Abil shareholders have taken a massive hit from the ill-considered acquisition of Ellerines in 2008, the business rescue process will hurt other parties. Many of the 6 623 Ellerines employees could lose their jobs, the landlords with the leases for the 1 025 stores may have to accept tougher terms and the furniture makers that supply the group are unlikely to see full payment.

Vianello, who said the market was overtraded, reckoned there were only two potential industry buyers, namely, Shoprite’s OK Furniture chain and Steinhoff’s JD Group. These buyers would only be interested in about 30 % of the business.