Tasked with turning around South African retailer Edcon, which had been on the verge of collapse just a few months ago, its management thinks it can apply simple fixes after Bain Capital walked away with nothing from its African venture.
The team led by Bernie Brookes, an Australian appointed in September last year, have much working to their advantage at Edcon, whose owner, Bain Capital, handed control to creditors in this week’s $1.5-billion debt-to-equity swap deal that slashed its debt-load by almost 80% to R6-billion.
In South Africa’s largest ever private equity deal at the time, Bain took Edcon private in a R25-billion, highly leveraged buyout in 2007 but slower earnings growth and a weaker rand made the euro-denominated bond repayments unaffordable.
Under Brookes, the company has trimmed its head office and plans to grow profit by boosting in-store credit sales and pushing its own clothing brands, while cutting back on pricey international labels.
“At least now they have the cash flow to enable them to do something, because up until now, they have been so starved of cash they couldn’t do anything,” a portfolio manager at Momentum Asset Management, Wayne McCurrie, said.
Edcon, which vies for market share with The Foschini Group, Truworths and international chains such as Inditex’s Zara, suspended interest payments on two euro and dollar-denominated bonds in April to boost liquidity.
A €425-million (R6.5-billion) bond – originally pitched in late 2013 as a bridge to an initial public offering – was written down last year in a distressed exchange offer.
For Brookes, who spent almost a decade at Australia’s biggest department store chain Myer taking it from a buyout to a listing, overhauling Edcon’s capital structure would free him up to focus on dressing up the 87-year-old company for a stock market floatation in three to four years.
“The interest burden of the company went as high as R4.2-billion a year. Now our interest payment is roughly half-a-billion rand,” Brookes said.
And importantly, around 70% of Edcon’s debt is now in the local currency, compared to only 30% before the swap, making the retailer much less vulnerable to the volatile rand, and no debt repayments are due until 2019.
Speaking at Edcon’s headquarters, Brookes said three to four years of hard work lay ahead.
Getting customers to buy on in-store credit is vital for Brookes’s stated goal of growing the company’s annual sales by at least 2% until it heads back to the Johannesburg Stock Exchange.
Up to two thirds of South African fashion retailers’ sales are on in-store cards, but tighter lending criteria by Barclays Africa, which bought Edcon’s debtors’ book for $1-billion (R13.7-billion) in 2012, choked off growth. — Reuters
Edcon sees in-store credit as salvation
The team led by Bernie Brookes, an Australian appointed in September last year, have much working to their advantage at Edcon, whose owner, Bain Capital, handed control to creditors in this week’s $1.5-billion debt-to-equity swap deal that slashed its debt-load by almost 80% to R6-billion.
In South Africa’s largest ever private equity deal at the time, Bain took Edcon private in a R25-billion, highly leveraged buyout in 2007 but slower earnings growth and a weaker rand made the euro-denominated bond repayments unaffordable.
Under Brookes, the company has trimmed its head office and plans to grow profit by boosting in-store credit sales and pushing its own clothing brands, while cutting back on pricey international labels.
“At least now they have the cash flow to enable them to do something, because up until now, they have been so starved of cash they couldn’t do anything,” a portfolio manager at Momentum Asset Management, Wayne McCurrie, said.
Edcon, which vies for market share with The Foschini Group, Truworths and international chains such as Inditex’s Zara, suspended interest payments on two euro and dollar-denominated bonds in April to boost liquidity.
A €425-million (R6.5-billion) bond – originally pitched in late 2013 as a bridge to an initial public offering – was written down last year in a distressed exchange offer.
For Brookes, who spent almost a decade at Australia’s biggest department store chain Myer taking it from a buyout to a listing, overhauling Edcon’s capital structure would free him up to focus on dressing up the 87-year-old company for a stock market floatation in three to four years.
“The interest burden of the company went as high as R4.2-billion a year. Now our interest payment is roughly half-a-billion rand,” Brookes said.
And importantly, around 70% of Edcon’s debt is now in the local currency, compared to only 30% before the swap, making the retailer much less vulnerable to the volatile rand, and no debt repayments are due until 2019.
Speaking at Edcon’s headquarters, Brookes said three to four years of hard work lay ahead.
Getting customers to buy on in-store credit is vital for Brookes’s stated goal of growing the company’s annual sales by at least 2% until it heads back to the Johannesburg Stock Exchange.
Up to two thirds of South African fashion retailers’ sales are on in-store cards, but tighter lending criteria by Barclays Africa, which bought Edcon’s debtors’ book for $1-billion (R13.7-billion) in 2012, choked off growth. — Reuters
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