Edcon: Another rescue on the cards?

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In his last business update on 26 March, Edcon CEO Grant Pattison said the retail group would be engaging with government and other stakeholders to understand kind of assistance is available to help it reopen its doors after the lockdown.

The national lockdown, said Pattison, will see the group lose R800 million over the 21-day period. But having received help just a year ago when the Public Investment Corporation, landlords and creditors funded the R2.7 billion recapitalisation deal that enabled the company to keep operating, would there be appetite to extend a lending hand again?

"I think there's still a case for Edcon to get assistance because they employ so many people, but I think it's going to be tricky because there are so many other businesses that are also going to be in the queue, and these are businesses that haven't been there before, and were healthy businesses prior to Covid-19," said Evan Robins, portfolio manager at Old Mutual Investment Group's MacroSolutions business.

Competing for assistance with thousands of businesses who had not been bailed out before means Edcon has a steeper hill to climb when it makes a fresh request for assistance this time. The other factor that's changed this time is that the retail group now occupies less space in shopping centres and malls than before, and its rent as a proportion of landlords' income is no longer as large as it used to be.

Edcon then and now

Keillen Ndlovu, head of listed property funds at Stanlib said Edcon now makes up about 1% of all listed property companies' income combined compared to about 2% before the group embarked on its store rationalisation and store closure exercise last year. The group now occupies 500 000 fewer square metres in malls than it did before.

But even then, Ndlovu too acknowledged that Edcon plays a major role in the economy. And given the extent of its supply chains and the people it employs, Edcon still has negotiating power. Add to that the fact that retail clients across the board are affected by Covid-19, it means that there are not necessarily new tenants lining up for Edcon's space.

"The challenge is letting the vacant space, the costs involved in fit outs and reconfiguring the space as well as the opportunity cost of vacant space while looking for a tenant," said Ndlovu.

Still a viable business?

Edcon's 2019 recapitalisation deal was not the first one. After US private equity firm Bain Capital which had bought out Edcon in 2007 dropped the retailer, creditors stepped in with a debt-to-equity swop arrangement which helped shave off over R20 billion its debt.

After the 2019 recapitalisation, the group started with "store rationalisation" process which saw it close and upgrade certain Edgars and Jet stores. It also moved its debt provider to more risk-tolerant RCS in a deal where the latter bought the retailers' store card debtors’ book from Absa late last year. At the time, Pattison estimated that Edcon would start seeing the positive effects of increased credit sales from that deal in March or April this year.

"Maybe the store rationalisation would have worked. The company made major strategic mistakes before. It looks like they were looking at being far more sensible. So, it's quite possible that it could have worked but you can't really tell now because they also had legacy issues," said Robins.

He, however, points out that if a business is not able to pay its stuff or suppliers for a month, it does not matter how good its turnaround plan looks, it does raise viability concerns.

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