Edcon may be too big to fail, but does that justify a state bailout?
Some fear a state rescue may set dangerous precedent
SA’s national power utility’s woes have threatened to shut down industries, while the flagship airline has been bailed out repeatedly. Now a scramble to help a retailer selling school shoes and fast fashion suggests that it, too, may be seen as too big to fail.
Edcon Holdings has about 30,000 employees, a supply chain that includes 750 companies and floor space of about a tenth of occupancy in the country’s biggest shopping malls, more than that of any other company. A collapse could aggravate the unemployment crisis and reduce income from commercial property rentals.
The Johannesburg-based group is in talks with the biggest lenders and landlords to get more cash and reduce rentals as it struggles with a debt burden that is a legacy of the way its 2007 takeover by Boston-based Bain Capital Private Equity was financed.
“If Edcon were to fail, it would be a big challenge for SA and it’s in everyone’s interests to get a deal signed,” said Wynand Smit, a property analyst at Anchor Stockbrokers.
“Even just closing a lot of stores would be negative for the property sector as the market is very sensitive to vacant space.”
Among potential rescuers is the Public Investment Corporation, which oversees investment of government workers' pension funds. Informed sources say it is leading talks to provide R3bn in funding to the group, along with landlords and banks.
Some ask whether it would set a dangerous precedent to help a struggling retailer when its troubles were due to a private-equity deal. Daniel King, a Cape Town-based analyst at Avior Capital, said it would have to be considered whether a bailout would incentivise "reckless levels of indebtedness among private and listed retailers as they compete for market share”.
Bain handed ownership of Edcon to creditors, including Franklin Templeton, Sanford C Bernstein & Co, LLC and Harvard University Pension Fund in 2016.
In July, new Edcon CEO Grant Pattison, who replaced Bernie Brookes a year ago, said they would be closing some shops to lure customers to its flagship Edgars clothing chain. Under Pattison’s strategy, Edcon has been reducing its footprint from more than 1,300 stores, cutting floor space 17% over five years, to restore profitability.
The owners, taking control in a debt-for-equity swap after Bain walked away, offered landlords a 5% equity stake in Edcon in exchange for a two-year rental reduction, the Johannesburg-based Sunday Times reported in December, citing a letter to landlords.
Talks are at a sensitive stage with the retailer asking for a 41% rental reduction. “It’s hard to know at this stage whether it will go through or not,” said Smit.
The demise of department stores is not solely a South African problem. London-based Debenhams said this month it was in talks with lenders as it faced at least £300m in debt falling due starting next year.
Stuttafords was put into business rescue in October 2017 after the 159 year-old retailer became a casualty of a slump in local consumer confidence. In 2018, Woolworths posted its first full-year loss since at least 2002.
Independent Johannesburg retail analyst Syd Vianello said Edcon had been walking a tightrope between improving sales and running out of money.
“The existing shareholders are there by default, not because they wanted to be there and the banks are reluctant to add more cash because of Edcon’s history," he said. "So it’s come down to the landlords, who have a lot at stake, and then also looking for a new investor, which appears to be the PIC.”
Pattison said in December that the group was close to announcing a “complete recapitalisation of the business that should endure for the next few years”. Edcon didn’t comment further.
Smit said: “If government did move to help, one option that could be considered is tax breaks.” Edcon could also try for rental holidays, he said.
In the UK, company voluntary arrangements, or CVAs, are used by financially distressed businesses to reach agreement with unsecured creditors, often by getting more favorable rent agreements and letting some outlets close before their leases expire. CVAs are becoming more common in UK shopping districts, with Homebase joining the retailers using the process to shutter outlets.
King said property companies could by against granting Edcon rental breaks for fear of other retailers becoming "more emboldened to bargain for fair treatment”.
“Edcon’s competitors may even view the agreement as somewhat anticompetitive, especially if landlords take an equity stake in Edcon and proceed to give preferential treatment to the tenant.”
Smit said rising costs had resulted in SA mining companies cutting tens of thousands of jobs. “A move to help Edcon would leave the question of what about other struggling companies?”