The business rescue process announced by Edcon, South Africa’s largest retail company, will not yield much money for creditors, analysts said.
Last week, the company announced that between March 15 and April 29, it had lost R2-billion in sales and had filed for voluntary business rescue. This will allow the company to continue trading while its affairs are restructured to avoid liquidation.
Last year, Edcon got a lifeline when the Public Investment Corporation (PIC), landlords and creditors funded a R2.7-billion recapitalisation deal in exchange for a stake in the company. This enabled the company to keep operating.
The Unemployment Insurance Fund (UIF) has R1.2-billion invested in the company.
Independent retail analyst Syd Vianello says going under business rescue does not mean Edcon will be saved, “it simply gives business rescue practitioners a chance to work out how they can save the company”.
Ultimately, Edcon has run out of money, says Vianello, and to save it, a lot of money needs to be injected into it — but most companies and investors are financially constrained because of the effect of measures taken to limit the spread of Covid-19.
“Whoever invests the money, they are not going to put in a lot of money, they are not going to spend the fortune to pay for the names and the trademarks because there is no need to do it. Because you can rather have the company go into liquidation,” says Vianello.
The Covid-19 lockdown could not have come at a worse time for the company, which was working to reveal its first fully revamped store this winter.
The company says it was unable to pay its suppliers for both March and April. Paying April salaries will require assistance from the UIF’s programme.
Edcon, whose subsidiaries include Jet and Edgars, also anticipates that sales will be depressed for some time during the “Covid-19 risk-adjusted strategy” phase, which may last several months.
Vianello says the business rescue process under Covid-19 will be hard, especially because retailers are only allowed to sell winter items.
He says the company has expenses, no money to buy goods and a debtors book that needs to be collected on. Another problem, adds Vianello, is that when a company announces business rescue, customers don’t rush to pay their accounts.
“Whatever happens, the creditors of the company are not going to get 100 cents on their rand,” says Vianello. “And it really depends on what somebody is willing to offer to take over the business and recapitalise, that will determine how much the creditors will get. I think the amount of money to take the business will be a lot less due to Covid-19.”
Independent investment analyst Chris Gilmour agrees that the business rescue is unlikely to work because of the negative economic effect of the Covid-19 lockdown. On top of this is the uncertainty of how long the current phase of the lockdown will last.
Another factor is the increase in the unemployment rate, meaning people will not have enough money to buy anything beyond essential items or those needed for survival.
Vianello says Jet could probably be saved because it is a valuable brand. The store targets the lower end of the market while Edgars targets the middle and high income market where there is a lot of competition.
He says Jet is a brand that seems more profitable, but any buyer would still have to provide working capital to get the business going.
He added that even if that is the case it’s better to let other stores fall off because demand is low.
Vianello says retail is not going to recover in a hurry. The economic shock will be severe and there will be less money to spend on things like clothing. “No one is going to be in a hurry to buy a brand like Edgars,” he says.
Gilmour says: “Only the strong will survive. Only the companies that have deep pockets and strong balance sheets — and even then they cannot survive a prolonged thing.”
He believes Edcon could be saved if the two shareholders, the PIC and the UIF, come to the party and put more money into it.
“If we do not move to level 3 [of the lockdown] quickly, we might see other retailers suffering,” he says.
Tshegofatso Mathe is an Adamela Trust business reporter at the Mail & Guardian