BUSINESS DAY TV: Rescue should have identified the stores to be closed
Gareth Cremen, Partner at law firm Hogan Lovells, discusses whether Stuttafords can be rescued as the department store launches a fire sale
BUSINESS DAY TV: With time running out ahead of a May 31 deadline for shareholders in Stuttafords to present a new business rescue plan, the department store chain is discounting its store stock in what appears to be a fire sale.
So what are the chances of saving the 159-year old retailer? Joining us in studio with the state of play is Gareth Cremen, he is partner at law firm Hogan Lovells.
Gareth … so Hogan Lovells represents some of the smaller creditors of Stuttafords. As far as you’re seeing it at the moment, is there a plan that is going to be on the table by the end of the month that could save Stuttafords?
GARETH CREMEN: It’s a difficult question to answer. You need to look at the current state of trading in the South African markets, especially the retail sector and as matters currently stand the business rescue plan has failed because of Ellerines obviously pulling out of the plan, which has become public knowledge.
The difficulty that practitioners are faced with at this point in time is securing supplies, to continue supplying on an ongoing basis, attracting consumer feet in store, trying to yield the sales. And you would have seen fire sales or discounted sales taking place currently in stores.
BDTV: Lets go back to what some of the viable options are down the line because the question is, do things potentially move to plan A, which was the Rubenstein family’s plan, the plan that was originally rejected by the Ellerines family, but it is also a plan that would have seen the creditors only getting 5c for every R1 they’re owed and an additional 18c over the next year-and-a-half. So is that something you see creditors willing to accept at this stage?
GC: Probably not, and if I qualify that for a moment, backtrack to the beginning of business rescue. When the company was placed into business rescue on October 28, a few weeks thereafter a first meeting with creditors was convened and a creditors committee was subsequently established. The review from the creditors committee at that point in time was that there was reckless trading within Stuttafords and they asked the business rescue practitioners to investigate reckless trading. The business rescue practitioners have, to date, conducted an investigation but they’ve refused to release their report to the general body of creditors, or let alone to the creditors committee.
So the short answer behind that is the vast majority of suppliers are saying, even if we supply moving forward, the terms forced on us in terms of the business rescue plan is one of two-fold approach. In order to receive the additional revenue of 21c in the rand together with the "agterskuld" which they were referring to they would have been forced either into 120-day credit terms; alternatively into a consignment model, which is manual and not favourable to the vast majority.
The difficulty that you have on 120-day credit terms is that you will not find a credit insurer in town prepared to insure the book.
BDTV: When Stuttafords was first put into business rescue last October, we chatted to Robert Amoils, the CEO, and he was pretty confident that if they could turn things around over the festive season they could get enough cash to continue. Now John Evans, one of the business rescue practitioners, has said things have, or did, improve over the first three months of business rescue, and he believes that Stuttafords can be profitable if it is rescued. What’s your view on that?
GC: If you look at the history and allegations pertaining to, again from the general body of creditors is that Stuttafords went on a massive drive to increase the amount of stock in stores, leading up to the rescue. And if you look at it going into the months of November, December, January, there was enough stock on hand to see them through the festive season.
Effectively from the date of rescue moving forward, the vast majority of creditors simply put a freeze on their accounts until such time that there was certainty pertaining to Stuttafords, or unless there was a definitive plan moving forward. And the plan on its own is not a simple one where you’re saying to the creditors you’ll receive X amount in the rand. A business rescue plan in a perfect world is supposed to cover areas of how do you attract more feet in store, how do you remedy the wrongs of the past or fix the company? You need to look at the very beginning and that’s the difficulty …
BDTV: … the model has to change.
GC: The model has to change and if you look at the retail sector, the retail sector at this point in time is under immense pressure from consumers generally, especially due to the fact that consumers can now go online, they can shop around for better prices and that is definitely one of the major factors.
BDTV: And I guess that context making it even more important for any investor who would potentially step into the fray here, wanting access to financial records, and Ellerines citing that as one of the reasons for it stepping back, that it did not have access to financial records to determine whether the operation was capable of rescue. How much of a challenge is that now down the line?
GC: It’s definitely not a straightforward one to be answered from a financial aspect. If you look at the ongoing operations and the running expenses alone, and if you look at the vast store size which they occupy throughout the country, effectively the running costs per store, and it is an important one from Ellerines, that you would need a full see-through process because some of the stores are not profitable.
They just simply do not turn the sales over and you will see it outside of Stuttafords for a second … you’ll see a number of other companies where you find that certain sectors, certain branch officers are the loss-making entities and effectively they pull down the entire group. And in this particular one the creditors committee did make the suggestion to the practitioners at the outset of business rescue that certain stores should be closed. In particular, they identified Clearwater among many others that should have been closed down.
So in terms of the initial plan and taking it back to the initial steps is that a successful rescue at the outset should have identified to a large extent, which were the highly profitable stores and which stores you should have closed down at that point in time, rather than carrying an unnecessary burden of employees’ costs, rental and so forth. And start retracting back to your profitable hubs and then expand the group in due course.
BDTV: It certainly looked like Rosebank was about to close its doors yesterday when I went past the Stuttafords there — what’s the best possible outcome for your clients for the smaller creditors? Because I know they were complaining that the larger creditors like Nedbank were being favoured, what’s the best outcome for your clients?
GC: You have a slight difficulty with the smaller suppliers because for some of the smaller suppliers their only point of distribution for some of their brands is Stuttafords. They unfortunately have nowhere else to turn to at this point in time to distribute their products. So for the smaller suppliers they would ideally still like to see Stuttafords very much thriving and up and running again. Equally at the same time for some of the larger suppliers it’s also their only source of distribution into the market place. So for them they would also like to see them survive.
On the other side of the spectrum you would also have creditors saying, we’ve been taken for a ride for the most part and they’ve thrown the allegations out pertaining to the trading aspects leading up into rescue. So a lot needs to be done. There’s been a lot of heat in this matter pertaining to allegations up and down and who’s right and who’s wrong and moving forward the only way if you were going to save this entity is you would have to downsize your footprint within SA and you would probably have to renegotiate your supply contracts, not forcing onerous terms on them, but to renegotiate them in a favourable manner both ways.