Newsletter No. 08                                                              8 March 2019

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Edcon gets lifeline from the public, landlords and lenders

By Suren Naidoo

Groundbreaking R2.7bn deal will see the PIC, through the UIF, landlords and existing secured lenders rescue the retail giant.

Edcon has been saved. Thousands of workers within South Africa’s largest clothing retailer, its suppliers and even landlords breathed a collective sigh of relief on Friday as the group announced that it had secured R2.7 billion in new funding to recapitalise the cash-strapped company.

The deal effectively means Edcon, which owns Edgars, Jet and CNA, won’t be closing its doors, thus staving off what labour unions claimed would have been the country’s biggest single jobs bloodbath.

Edcon said in a statement that it had secured binding agreements with existing secured lenders, the Public Investment Corporation (PIC) on behalf of its client the UIF and participating landlords, which will result in the implementation of the R2.7bn recapitalisation programme.

Had Edcon not secured the funding, it might have gone into a business rescue process. However, the size of the business, its debt and scale of its restructuring would have meant a business rescue would have had slim chances of succeeding.

Many have called it a major coup for Edcon CEO Grant Pattison. But, in an interview with Moneyweb last night, Pattison said: “There’s no way one person could have pulled this off… On a personal level, this has been the most remarkable process that I’ve ever been a part of in business.”

He added: “It was complex with many diverse stakeholders, including existing lenders, unions, the Ministries of Economic Development, Labour and Finance; the PIC and UIF; participating landlords; and our management team and staff that came together to secure Edcon’s future and ultimately thousands of jobs.”

Pattison, who led JSE- listed retail giant Massmart before it was acquired by Walmart, was brought in by Edcon’s board just over a year ago to lead the group’s restructuring and turnaround.

Edcon has been grappling with a debt burden ever since it was bought out by US-based Bain Capital in a R25 billion private equity deal in 2007. Three years ago Bain cut its losses and transferred ownership of Edcon to several of its creditors. But, Edcon still had a sizeable debt burden and was also in bad shape operationally, with too many stores, declining sales, lost market share and an incoherent retail strategy.

Over the last year Pattison said that Edcon has made headway on the operational front by focusing on staff and customer service; getting rid of Edcon’s internationally branded stores and focusing on its higher margin local clothing lines; bringing down stock levels; rationalising and upgrading stores around the key Edgars, Jet and CNA brands; and, rebuilding Edcon’s credit and insurance division under its Thank U customer loyalty programme.

However, Edcon’s debt burden remained a major issue, with the cost of its restructuring sapping up more cash. Pattison had to find new funds to recapitalise the group and has been in talks with various potential funders for several months.

The three-way new recapitalisation deal took longer than anticipated, with retail and property insiders saying that Edcon was teetering on the brink, having not paid some of its suppliers last month.

“Edcon’s businesses are key players in the South African retail market and this is an important turning point for a company, focused on delivering growth and creating value for all its stakeholders going forward,” Edcon chairman Gareth Penny, said in a statement announcing the agreement.

Meanwhile, asked how the latest funding deal was structured, Pattison told Moneyweb it was roughly an equal split between the PIC/UIF, “participating landlords” and Edcon’s existing secured lenders.

“It’s safe to say all parties were reluctant investors,” Pattison conceded. “This took longer than we anticipated, but they needed to do their due diligence and interrogated Edcon’s management. The banks, PIC and landlords were equally rigorous and it took time to iron out the nuts and bolts of the deal in terms of who gets what share,” he added.

For SA’s retail property sector, the agreement is unprecedented and it remains to be seen how Edcon’s competitors and other major retailers respond. Effectively the agreement will see JSE-listed Real Estate Investment Trusts (Reits) and private property companies that lease retail space to Edcon becoming its shareholders.

“Between 20 to 30 of our landlords have agreed to be part of the process, but this could increase as some negotiations are still ongoing. Participating landlords have been waiting for our announcement around the overall recapitalisation of Edcon and are now free to make their own announcements,” said Pattison.

Retail-focused Reit Hyprop was the first to confirm on Friday that it had in principal “agreed to support Edcon’s restructuring proposal, with a reduction in rentals, compensated for by equity participation in Edcon”. Hyprop, the owner of Canal Walk and Rosebank Mall, has the highest exposure of any Reit to Edcon, with around 9% of its GLA occupied by the retailer.

Speaking to Moneyweb, Hyprop CEO Morne Wilken would not comment on the value of its stake. However, he said Edcon’s overall funding deal was “exciting and positive” news for the property sector.

Redefine Properties confirmed in a Sens announcement on Friday that it also was party to the Edcon recapitalisation agreement. It said its equity contribution would amount to R54.6 million, in addition to agreed rental reductions up to a maximum of R13.8 million over a two-year period. Redefine is a significant landlord to Edcon, with 78 760m² GLA exposure.

Liberty Two Degrees and Resilient Reit also have high exposure to Edcon. Resilient Reit’s CEO, Des de Beer, said during the company’s results announcement last week that it “supported Edcon’s restructuring”, but did not give further details. Liberty Two Degrees, which houses Edcon’s biggest Edgars store over three floors at Sandton City, made similar comments.

Pattison said the recapitalisation will result in the removal of all of Edcon’s interest bearing debt and introduces a new group structure and set of shareholders. “The deal is still subject to the normal regulatory approvals required for a transaction of this nature.”

He said there were no plans currently to listed Edcon on the JSE and he was “committed to the business as CEO, as long as the board and shareholders are happy” to see him stay.

Commenting on the deal, retail analyst Chris Gilmour said: “It solves Edcon’s immediate funding problem which is good. Now Grant can turn his attention to clawing back lost market share… They dodged a bullet with this recap, however they also need to now reach out to their suppliers whom they left in the lurch in January with no warning. They just did not pay them and that needs to be addressed urgently.”  Moneyweb

AfDB backs launch of Pan-African Fashion initiative

Pic: Fashionomics Africa

The Fashionomics Africa initiative of the African Development Bank (AfDB), together with the African Union (AU), the AfroChampions initiative and other partners, launched the Pan-African Fashion initiative last month in Addis Ababa. It is a platform for stakeholder engagement, dialogue, strategy and policies on fashion within the African Continental Free Trade Area (AfCFTA).

The initiative aims to remove trade barriers between African nations and expand annual intra-Africa trade by about $35 billion. Intra-African imports and exports currently account for just 15 per cent of all trade on the continent, according to an AfDB press release.

It will offer all stakeholders the opportunity to inform African entrepreneurs about the expected benefits of AfCFTA.

Out of the 44 AfCFTA signatories, that include garment-manufacturing countries like Egypt, Ethiopia, Kenya, Lesotho, Madagascar, Mauritius, Morocco, South Africa and Tunisia, 19 have ratified the the agreement..

The value of the global fashion industry, in which 90 per cent of the businesses are small and medium-sized enterprises (SMEs), is around $2.4 trillion, with an annual growth of 5.5 per cent. Africa accounts for less than 5 per cent of this value, while Asia and the United States share 80 per cent of the market valued at $3 billion

South African firms interested in a Mozambique textile unit

South African textile firms are eager to reactivate the factory in Mozambique’s Chimoio belonging to the former Textáfrica – Sociedade Têxtil de Vila Pery, according to Manuel Rodrigues, governor of the latter’s Manica province. The representatives from such firms expressed the interest while visiting textile facilities in Chimoio, he said.

The interest of foreign enterprises had increased over the last three years and the facility had been visited by entrepreneurs from India, China, and Japan, Rodrigues, who paid a visit to the factory that closed more than 25 years ago, said.

In February last year, Mozambique’s Prime Minister Carlos Agostinho do Rosário said he had visited the company’s premises to understand the situation and take suitable measures to revive the factory, according to a report in a portal dedicated to news items from Africa.

The closure of two textile mills, Textáfrica and Empresa Moçambicana de Malhas (EMMA), both owned by the same Portuguese group, led to a drop in cotton production in that part of Mozambique F2F

Ghanaian president announces textile industry stimulus package

Ghanaian President Nana Addo Dankwa Akufo-Addo recently announced a stimulus package to boost the country’s’ struggling textile industry in his State of the Nation Address to parliament. The domestic textile industry has been granted a zero-rated value added tax (VAT) on the supply of locally-made textiles for three years, the president announced.

A tax stamp regime has been put in place for both domestically-manufactured and imported textiles to address the menace of pirated designs and logos, a news agency reort quoted the president as saying.

The Tema port had been designated as a single-entry corridor for the import of textile prints, with a textile taskforce in place to ensure effective compliance, and reduce, if not eliminate, smuggling of imported textiles, President Akufo-Addo said.

A new textile import management system has also been set up to control textile imports.

Under the Rural Enterprises Programme, funded by the African Development Bank and the International Fund for Agricultural Development, 50 small-scale processing factories would be established by the end of the year in 50 districts, particularly in areas where there was evidence of significant post-harvest losses, he added. F2F

Did you know……..

Dying the hair is very fashionable, but it was trendy back in ancient times too. However, the process often resulted in total loss of the hair, which prevented many people from trying it.

Cardigans are comfortable and cozy pieces to wear now, but when they were first made, the idea was to create a knitted military jacket.