In the dour industrial surroundings of Edgardale in Jo’burg, Edcon this week drew the veil back on a rescue package that it hopes will help restore it to the apex of SA’s fashion hierarchy.
Edcon has been battling to keep its head above an ever-rising tide of debt — R26.7bn at last count — which had sunk its ability to compete with rivals such as Cotton On, Zara and even Woolworths.
This debt was heaped on the company in 2007, when Boston-based Bain Capital swept into town and announced it would buy Edcon for R25bn in the largest private equity deal in SA corporate history.
But Bain’s gamble failed.
It overpaid initially and the 2009 financial crisis saw consumer spending dry up. It will now cut its losses and slink away, having sunk R6.4bn into Edcon and got back not a cent.
It’s a monumental failure that will, for years to come, remain a cautionary tale for other global private equity players considering taking a punt on SA.
"We have been living beyond our means," said CEO Bernie Brookes, a 57-year-old Australian who joined the company only last year.
The rescue plan is this: more than R20bn of the debt has been converted into equity. The result is that Franklin Templeton (one of the world’s largest fund managers, based in California, in the US) will become, inadvertently, Edcon’s largest shareholder. Standard Bank, Barclays Africa, FirstRand and Investec will also inherit shares. Remarkably, even the Harvard University Pension Fund will end up as an accidental owner of Edcon’s stock.
Edcon’s debt, after this deal, will stand at a much more manageable R6bn.
Clearly, the bondholders never envisaged ending up as owners of Edcon. So it’s no surprise that the plan is for the retailer to list again on the JSE within the next three to four years, so that they can exit.
Compared to the glitzy over-the-top presentations back in 2007 when the Bain deal was first clinched, the announcement of Bain’s exit was understandably more low-key.
Brookes broke the news to a small group of journalists, flanked by four senior managers and his public relations team.
"It’s been a mammoth task, as you can imagine, getting everyone to agree on the debt-to-equity transaction," he said.
Brookes revealed that, as part of the debt-to-equity swap, Edcon’s creditors would all have to agree to take a haircut.
"But the haircut is only so that we can grow the hair longer," he said.
It’s not like Bain had any other options. In March, it had to choose between business rescue or defaulting on its payments to debt holders. It mulled over selling assets, but the only offers it got were at fire-sale prices that didn’t make any sense.
Speaking to the Financial Mail earlier this month, Brookes said: "Not a week goes by where we don’t have an offer from someone to buy a CNA, a Legit, an Active, Red Square or Boardmans. There are a lot of offers for them, but they are what I call buzzards sitting around the body. So we have no interest in doing that."
Instead, he said the plan was to fix some of Edcon’s poorly performing divisions and potentially sell them off at a later date.
Though Edcon will keep its well-known brands, Edgars, Jet and CNA for now, it will sell the Legit chain to another private equity outfit, Metier Private Equity, for R637m. The question remains whether, shorn of huge debt obligations, it can recapture lost market share.
As it was, for the year to March, Edcon’s sales dropped by 1.3% to R27.1bn, while its earnings before interest, tax and depreciation fell 1.7% to R2.6bn.
It’s not exactly a sign of a thriving business. But Brookes said the company will invest R600m over the next three years and open 60 new stores — which he described as a "strong platform".
Still, it will be a difficult task to return to the retailer it was in 2006, when it was run by tough-as-nails American retailer Steve Ross, who still lives in SA.
Analysts say it has a decent shot if it can address where it went wrong in recent years. This included moving away from customer service as it slashed costs so it could afford to repay debts. For customers, it virtually became a self-service outlet.