Edcon sells its cards to Absa

Group may relist as R10bn deal cuts debt

EDCON’S sale to Absa of its store card portfolio for R10 billion will help South Africa’s largest non-food retailer settle debt, which analysts say will position it more favourably ahead of a relisting on the JSE.

Yesterday Edcon chief executive Jurgen Schreiber declined to comment on plans to relist, only saying the cash proceeds of the deal would be used to settle debt, invest in the business and cover transaction fees.

The group, which delisted from the JSE in 2007 when Bain bought the business, has debt of about R26bn.

Jean Pierre Verster, an analyst at 36One Asset Management, said Edcon’s deal with Absa would ultimately be part of its plan to relist, although a listing was not imminent.

It was likely that the company would list within the next three years, specifically as the company had debt payments that were due over that period and a listing could coincide with the settling of that debt.

Verster said a listing in the medium term would make sense for Bain, given the strong global interest in South African retail companies.

Syd Vianello, an analyst at Nedbank Capital, said the rationale for the transaction was a combination of Edcon positioning itself ahead of a listing and reducing the amount of capital it would need to raise.

With R10bn towards its R26bn debt, the company would then only need to raise R16bn at a listing, which it could do. “The deal simply means that if they want to relist it will be a far more manageable amount to raise,” Vianello said.

But if Edcon did not relist, the deal put the company in a strong position with its bondholders as it could invest in the business and make a partial payment towards the R15bn due in 2014 and 2015, and then renegotiate payment of the balance.

The companies said that once the deal, which is still subject to regulatory approval, was finalised in the second half of the year, Absa would own Edcon’s store card portfolio of 3.8 million active card holders, to whom it would provide retail credit and sell other financial services. This would more than double Absa’s number of active cards in the market.

Edcon would retain customer facing activities, including sales, marketing and collections. Edcon said the deal would facilitate its growth by allowing it to focus on core retail operations and by providing a more efficient funding structure to grow credit sales, which were 51 percent of total sales in the year to March.

Verster said the deal also made sense as banks had access to lower-cost funding and were better able to analyse credit risk. It was also an opportunity for Absa to increase its loan book in a climate where the big four banks had been struggling to grow lending books, resulting in a shift from mortgages to unsecured lending.

Absa has experience in managing a retailer’s credit book. It was in a joint venture with Woolworths and took over Woolworths Financial Services in 2008, which included store and credit cards.

Vianello said for Absa the deal would not be profitable from the outset, but it gave the bank the right to market to 3.8 million people. Absa was already the biggest retail bank and this deal would make it even more dominant.

Edcon announced its annual results for the year to March yesterday. Revenue rose 9 percent to R27.3bn and retail sales grew 8.6 percent to R24.6bn, while comparable-store sales rose 7.4 percent. Adjusted earnings before interest, tax, depreciation and amortisation increased 11.5 percent to R4bn.