ANALYSIS | Edcon is looking for buyers. But is the owner of Edgars sellable?

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An Edgars store in Johannesburg in March 2020.
An Edgars store in Johannesburg in March 2020.
Gallo Images/ER Lombard
  • Edcon BRPs delivered a business rescue plan for the retailer on Monday, 8 June.
  • They propose acceleration of sales of the entire group or its divisions to interested parties.
  • But Edcon, which went into voluntary business rescue in April, has baggage which can deter investors.
  • Analysts say some investors might be willing to look beyond its problems because it has some tempting attributes.

Edcon Business Rescue Practitioners (BRPs) have proposed what some market watchers have been speculating for a while – that the retail group will have no choice but to sell its other brands, like it did with CNA in February.

The BRPs say there was initially interest from 19 parties who were keen to buy the retailer or some of its divisions.

After fulfilling the preliminary requirements to participate in the proposed "accelerated sales process", 15 of these parties were given an opportunity to peruse the clothing retailer's data, and since then "various" groups have expressed interest in buying either the whole of Edcon or some of its divisions.

However, given its debt levels and the dethroning of many long-standing fashion retailers by international fast-fashion competitors like H&M and Cotton On, will the practitioners be able to pull off the proposed sales?

The debt problem

Lulama Qongqo, investment analyst at Mergence Investment Managers, said some of the interested parties might have wanted to take "a closer look at what's under the hood", but she would not be surprised if Edcon struggled to sell, despite that level of interest.

The problem, she said, is that the clothing retail sector in SA is already saturated, making it less of a compelling investment. For Edcon, there is an additional deterrent layer of inheriting its debt and the need to transform its organisational culture if it is to become a success.

"To be able to change the culture in a company with tens of thousands of people is a challenge," said Qongqo.

However, veteran retail analyst Syd Vianello said buyers would not need to take over Edcon's creditors now that the company is in business rescue.

Looking beyond Edcon's debt problems

Despite its debt problems, Edcon still has some muscles to flex. The group has approximately 650 stores. Edgars in particular has an attractive footprint in busy malls, which might appeal to other retailers, said Vianello.

Under Grant Pattison's leadership, the company had already closed many of its loss-making stores. And over and above its reduced overheads, a new owner has the chance to renegotiate more favourable leases. There is also the issue of brand equity.

"The brands have been around for a very long time. You have got brands to sell. There is some management. You will take over some stock. There are systems in place and locations that you are buying. Trust me, in these circumstances you can negotiate massive reductions in rentals. So, that's what you are buying," Vianello said.

He said some parties might be interested only in some of Edcon's divisions, like Jet Stores or certain stores. For instance, a buyer might say they are interested in taking over bigger Edgars stores that are in busier locations and ask the BRPs to liquidate the rest as one of the conditions for the sale.

Who would want to buy Edcon?

Vianello said existing SA apparel retailers and international retailers looking to expand their footprint in SA, such as H&M, could be interested in different divisions or specific stores.

Mr Price recently denied speculation that it was eyeing taking over Jet, the division that Vianello said most local apparel retailers would probably be more interested in.

Vianello added that private equity funds could also be willing to back the retailer, as Pattison's attempts to turn around Edcon would probably have worked had it not been for the lockdown, which stopped the group from trading in Level 5 and led to it losing R2 billion in sales in the process.

Even if Edcon does not make financial sense for some investors, it still holds a get-out-of-jail card due to the number of people it employs. According to the Business Rescue Plan, the company employs more than 17 000 people and about 5 000 seasonal workers. Qongqo said this alone can attract less profit-motivated investors.

For instance, the Public Investment Corporation was pressured by trade unions to take part in the R2.7 billion rescue plan that allowed it to keep its doors open last year until it went into voluntary business rescue last month.

"The issue of jobs is also a social matter for the South African government. We've seen this in the poultry industry too. So, there may be different motivations for why some may want to buy Edcon," she said.

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