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01 Mar 2019 19:23
(Waldo Swiegers/Bloomberg via Getty Images)
The Unemployment Insurance Fund (UIF), debt holders and landlords have all come to the rescue of the troubled Edcon group — which owns Edgars, Jet and CNA — in a deal that proponents say will avert a “jobs massacre” and swathes of mall space being shuttered.
The recapitalization programme will inject R2.7-billion into the company through new cash commitments from the parties and rent reductions by participating landlords, the company said in a statement late on Friday afternoon.
The Southern African Clothing and Textile Workers’ Union (SACTWU), as well as trade federation Cosatu, have hailed the deal.
It will avert a “job’s massacre,” not just at Edcon but in the wider clothing and textile manufacturing industry, said Sactwu’s national industrial policy officer, Etienne Vlok.
The sentiment was echoed by Edcon chief executive Grant Pattison who said the deal was not just about saving Edcon jobs.
According to Sactwu’s research Edcon procures around 45% of its clothing products locall — the most of all the country’s major retailers. The local manufacturing businesses that Edcon supports are also concentrated in geographic areas in rural and peri-urban areas, particularly in KwaZulu-Natal, Vlok said.
Edcon – one of the country’s largest non-food retailers, which occupies around 10% of mall space – has battled to cope with an increasingly tough retail landscape, crowded with both international competitors and increasingly popular online offerings. It has also been labouring under a legacy of debt since it was delisted in a private equity deal by Bain Capital in 2007.
Critics have however argued that public funds should not be used to rescue a poorly performing private company, whose demise began with a highly leveraged private equity deal.
The UIF – whose assets are managed by the Public Investment Corporation – has R156-billion in surpluses.
The fund pays out workers in the event of retrenchment or job losses.
But according to Vlok rather than a bad investment, the UIF’s participation was potentially a cost saving for the fund. This was based on the union’s belief that as many as 140 000 jobs could be lost – both directly at Edcon, which employs about 30 000 people, as well as in the wider clothing and textiles manufacturing sector.
In a presentation given to the UIF in January, arguing that it should help fund Edcon, the union calculated that the fund would have paid between R2.95-billion and R3.9-billion to support workers who would have potentially lost their jobs.
The UIF did not immediately respond to questions for comment but according to Edcon’s Pattison, the participating parties all contributed a roughly equal amount in cash, leaving the UIF’s contribution in the order of around R1-billion.
“Edcon is a very large employer of people and we also buy an enormous amount of goods, manufactured here in South Africa,” he said.
“Edcon’s problem is not just one of our staff, its multiplied by a factor of three or four.”
The fund’s mandate does allow it to invest in transactions that have social returns.
In response to questions early last month spokesperson for the fund Makhosonke Buthelezi, told the Mail & Guardian that the fund’s “mandate makes provision for a social responsible investment asset class of 20% of the total portfolio”.
“The intention of this asset class is to sacrifice some financial return for a higher social return,” he said.
“Should the Fund consider [investing] in Edcon in an effort to retain jobs and [prevent] the negative effects it will have on the economy, the decision will be based on a thorough due diligence process and risk impact assessment.”
The potential impact of an Edcon collapse would also have been felt by the property sector – as it occupies around 10% of some of the country’s prime mall space.
As with the UIF, there was commercial sense behind landlords participating in the deal, said Pattison.
“They looked at the potential benefit of helping us survive, albeit in a smaller shape and size,” he said.
In the run up to the deal’s announcement, Edcon was reported to have asked its landlords to reduce its rents by as much as 40%.
Pattison stressed that while most of Edcon’s major landlords had participated in the deal, not all did. There were also a number of landlords who had negotiated different arrangements with the retailer.
“The participating landlords have committed to giving us some cash and for that they get an equity stake,” he said. While some have opted to give Edcon cash upfront, others are providing cash over time – in what could be viewed as a reduced rental. Still other landlords are opting for measures such as releasing Edcon from lease agreements, to enable it to close down poorly performing stores, said Pattison, or helping Edcon renovate stores.
He could not disclose the size of the equity stake different landlords, or that the UIF, would take up. But he stressed that it was “not a particularly large share” and would not entitle them to “some special relationship with the company”.
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