Distribution and Warehousing Network (Dawn) CEO Stephen Connelly speaks about efforts to recapitalise the group through a rights offer.

Stephen Connelly.    Picture: ROBERT TSHABALALA
Stephen Connelly. Picture: ROBERT TSHABALALA

Stephen Connelly is Distribution and Warehousing Network (Dawn) CEO.

BUSINESS DAY TV: Dawn has detailed the terms of a rights offer, first announced to the market last week, in which it will look to raise R350m from the market by issuing new shares at R1 each. Joining me now on the line is the fairly recently appointed CEO Stephen Connelly.

Stephen, Dawn shareholders have been through the ringer and the stock was down again 14% today on the pricing of the rights offer, was this the only option for Dawn at this point?

STEPHEN CONNELLY: Yes, that’s right. There were four steps to the turnaround that I saw when I joined here, the first one, and the most immediate one, was to stop the losses. and we did that by the end of September last year which was our half-year and we reported that to the market in the middle of November. The second step was then to refinance the business to strengthen the balance sheet, to enable us to get the confidence of our suppliers that we were going to be around.

That’s now been achieved with the publication of the SENS announcement this morning. So the first two have been done. The next two are to improve the results of the business, to normalise the returns that it’s making — and then the fourth one is to decide on the future strategy of the business.

BDTV: I know that you are yet to produce an update on how that future strategy is progressing, and also some of the clean-up mechanisms at Dawn, and I ask that because, as a shareholder, you don’t have sight of that information. So how confident are you that shareholders will take up their rights without that information?

SC: When we published our results to the end of September I said to the shareholders that there was no ways that we could come to the market for a rights issue, unless we could tell them that we’d stopped the losses. So we were able to tell the market that we’d made a profit in the month of October and I can reveal now that we made another profit in the month of November. So the losses have been stopped and I think our shareholders do know that.

Of course, December and January are terrible months for businesses like ours because most of our customers go away on holiday. So what we’re hoping, of course, is that turnover will come back to normal levels as they usually do in the months of February and March. March is our year-end and we’ll be able to report to the market that indeed we’ve continued the profits when we return to normal trading months.

BDTV: Having said all that, you’ve made provision in case some of your retail investors don’t take up their rights, I know Coronation, you say, has committed and so has Ukhamba Holdings, but you’ve entered into an underwriting agreement with RECM in which they’ll subscribe up to a maximum of R201m. Do you see them a) having to take up that maximum and b) what is the cost of that agreement?

SC: The cost of that agreement is on normal commercial terms. It wasn’t onerous, number one, and number two, I can’t tell you the answer to that. They’re an underwriter, they may get all of the shares, they may get none of the shares, and maybe a number in between. I really don’t know.

BDTV: What’s your communication been like with shareholders outside of the two that I mentioned?

SC: It’s been very good. One of the things that we have to do in order to get this rights issue away is we need to get 75% of our shareholders to agree to support a special resolution in order for us to issue the shares to ... in fact, do the rights issue. And I can tell you that we have written agreements from more than 80% of our shareholders to vote in favour of that resolution.

BDTV: You moved from Hudaco, there was a bit of period in between and you’ve come to Dawn, are you basically throwing the kitchen sink at Dawn’s problems and clearing up the business and taking drastic measures now in order to, hopefully, set it back on an even keel?

SC: Yes, I’m fully committed here, that’s the first point. The second point is, the kitchen sink as you call it, was all done by the end of September. So there’s a few more things that are being done subsequent to that, but the really big things had all been done by the end of September and we’d reported how much that cost us, and we’d reported in detail on what we’d done.

BDTV: And what about the prospects from here on out? So you mentioned that December and January are really bad months for a business like Dawn, we’re into the month of February, are you seeing any signs of an improvement in demand for the infrastructure side of the business and what’s happening to the retail side of the company?

SC: Normally you find from about the third week in January turnover starts to return to normal, and indeed we’ve seen that. In the last two weeks turnover has steadily grown and in the first couple of days of February it seems fine.

BDTV: Okay and just going back to what you’re going to be using the R350m for, will that be used to eliminate just about Dawn’s debt which was ... what about R308m as at the half year?

SC: It will eliminate some of the debt, it will pay for a lot of the costs of doing the restructuring of the business. In fact that’s one of the reasons why we needed to do the rights issue in the first place, was first of all to finance the losses that the business has experienced over the last 18 months, and secondly to pay for the costs of restructuring the business into its present format.

BDTV: Yes, and I guess the future from this point in time, is it going to be a long hard slog for Dawn, do you have any estimations for how long it might take for Dawn to return to break-even and then profitability?

SC: Well we’re at break-even at the moment and if the turnover does come back to October and November levels in February and March we’ll be back at break-even. So we’ve gone through that and now the third stage of the restructuring plan that I’ve got is to normalise the returns that the business will earn. How long will it take? I think we’ll make significant progress over the next six to eight months, so in other words by the time we publish our interim results, up to the end of September this year, but it largely also depends on the economy. The economy has, and this is one of the reasons why we’re in such trouble I believe, is because the economy has been so bad and the particular markets that we serve over the last 18 months. My sense of it is that we’re probably through the worst in those markets and I think we’ll see some growth this year, probably not a lot, but at least it will be some growth.

BDTV: Stephen hopefully we’ll speak to you in the studio when you come out with the full year results.

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