Shoppers walk past an Edgars store at a shopping centre in Soweto, Johannesburg. Picture: REUTERS/Siphiwe Sibeko
Shoppers walk past an Edgars store at a shopping centre in Soweto, Johannesburg. Picture: REUTERS/Siphiwe Sibeko

The R2.7bn bailout of the struggling Edcon Group is one in a growing list of lifeboats, some necessary and some not, offered to failed entities. Almost all of the corporate bailouts SA has had in the past 20 years or so have been preceded by the concentration of shareholder power and the trampling of corporate governance. Edcon, which operates Edgars, CNA and Jet, has not been immune to this.

A failure of corporate governance often leads to operational and financial crises, as has been the case at the SABC, Eskom, PetroSA, SAA, Fidentia, African Bank, Auction Alliance and countless others in the roll of corporate failures. While many small privately owned entities have been allowed to fail, others such as African Bank have been bailed out because they carried systemic risk for their entire market.

Edcon has been bailed out, this time by shopping mall landlords and the Unemployment Insurance Fund (UIF) through the Public Investment Corp (PIC). These stakeholders, together with the fashion retail group’s 40,000 or so employees and its scores of suppliers, stood to lose the most if Edcon had been allowed to fail.

Landlords would have been left with gaping holes in shopping malls, where Edcon accounts for as much as 10% of lettable space. The UIF would have come under enormous pressure in a market that has already shed too many jobs. That 44% of its products are made locally makes Edcon the biggest supporter of local manufacturers, according to the SA Clothing & Textile Workers’ Union.

This may well be third time lucky for the company. Two other resuscitation attempts over the past five years have only served to delay the inevitable.

The 2007 private equity buyout by Bain Capital saddled the then highly profitable and dominant Edgars group with debt. The private equity player came in and installed itself between the board and executive management, charging exorbitant "management fees" in the process.

This, together with sky-high debt-servicing costs, suffocated the balance sheet and took management’s eye off the fashion ball.

Three years ago creditors who were owed R29bn were forced to convert R26.7bn of that into equity in the struggling retailer. This all but eliminated Bain Capital from the picture.

Then about 200 of Edcon’s 1,600 or so stores were closed down, and others were reduced in size. Teen fashion outlet Legit was sold and cosmetics business Red Square and lingerie chain La Senza were closed. The group now has 1,350 outlets.

The restructuring will make some banks, several of its landlords and the UIF (through the PIC) shareholders as the R2.7bn debt is settled. This will ease Edcon’s balance sheet and allow CEO Grant Pattison’s management team to focus once more on saving the group through operational competitiveness and restructuring. Pattison, who became CEO in January last year, is credited with having pruned Massmart Holdings into a cash spinner that attracted Walmart.

Thus the deal would seem to be a win-win.

But there must be no free lunch. Edcon must reduce its floor space further in line with a shrinking retail sector generally. The company must be forced to source more of its goods from the local textile market to sustain more jobs down the value chain.

It must also be able to respond to such competitors as Mr Price, Zara, H&M and Cotton On, which have been eating its breakfast, lunch and dinner for many years now.