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Sinesipho @Synesyfe
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The Story of Edcon : The Rise and Fall #Edcon
What prompted this was the Sunday Times article yesterday, which stated that Edcon was on the brink of liquidation. Like all articles , this was riddled with some facts and a few ommissions. The Ceo of Edcon @GrantPattison tweeted that his dissappointment #Edcon
Just as an intro Edcon is the largest non-food retailer in South Africa. The company has been in operation for more more than 80 years, with over 1100 store formats. #Edcon
The company manages brands such as Edgars, Edgars Beauty ( formely Red Square), Edgars Home (Formely Boardmans) , JET , Legit and CNA #Edcon
Through its multi brand offering, the company takes brand in being able to service consumers from LSM 2- 10. Like most retailers in South Africa, Edcon gets revenue from sales, and interest earned on store credit facilities #Edcon
In 2007, Bain Capital acquired the entire issued share capital of Edcon at a price of R46 per share.This was at a premium of 51.3%, and valued the company at R25 billion. The company was then subsequently delisted #Edcon
The buy out was funded by a combination of two major debt instruments one being a senior facility of €1,180 million and the other being €630 million. Which were due in 2014 and 2015 respectively. #Edcon
There are two things to note, the debt instruments were foreign dominated and were high yielding ie the debt was quite expensive. This itself is not a problem, if the company grows at a rate exceeding the cost of funding. Remember debt is a cheap than equity #Edcon
At the time, this was the single largest Private Equity Transaction in the africian continent, and was seen as an economic vote of confidence in the country and the greater retail market.#Edcon
For those of who who don’t know Bain Capital is , Bain Capital Bain Capital is a private investment firm based in the USA.And as of 2018, the firm managed more than $105 billion of investor capital #Edcon
The Business Model of a Private Equity Firm, is to buy a company that is under valued, utilise gearing ( debt), grow the business, and then sell it off within a period of 7 years- 10 years. Bain had the intention to make money , N had faith in the growth possibilities .#Edcon
Now lesson number 1,Edcon earned revenue in Rands, however its funding was in Euro’s . This mismatch at transaction conclusion should have been a warning, as effectively you are managing both currency and interest rate volatility #Edcon
At the timing of the transaction Edcon had relatively low gearing levels, so could afford the debt . SA was coming of an impressive economic growth streak, and there was generally alot of positive market sentiment in the market. So all of this actually made sense #Edcon
Now enters the economic crisis of 2008, 2009 .Which led to a few shocks. The depreciation of the rand, the increase in the cost of funding ( interest rates), the slowdown in the economy ( ie declining sales). These were all major external events. #Edcon
Business is a function of things you can control and things you cant control. And its important to remember this, the reason why i am setting the stage like this is to show that the Bain transaction was fantastic at the time #Edcon
Further more before 2010, SA retailers all operated in natural monopolies with very little competition worth mentioning. The reason being the interrelationships between the large retailers and property owners #Edcon
These relationships effectively ensured high rentals and the gave retailers certainity when it comes to floor space allocation. Have you ever wondered why Edgars and Wooloworths can never be cloose to each other, they have to opposite ??? Relationships not collusion #Edcon
High rentals which meant, new entrants locally couldnt penetrate or challenge them without having significant cash backing. @thulasindi tweeted yesterday as a result of this structure, small business cannot hope to enter to retail market, as this is economic exclusion #Edcon
The reason why I am mentioning economic exclusion, is that everytime you are tempted to feel sorry for Edcon. Remember they built a business model, premised on ensuring there are no new entrants. And not necessarily amazing product, business and entrepreneurship #Edcon
Further more I wont go into the predatory nature of the whole store card system is (thats a convo for another day) because that was a legacy of Apartheid. And the very fact this hasnt seized indicates the importance of credit when it comes to sales #Edcon
The introduction of Bain Capital, brought a few changes to the Edcon . And that was the centralization of the procurement system and the rise of international brands#Edcon
These included Mango, Salsa, House of Dereon, Diesel etc. They were many wethu. The rationale at the time was that SA consumers are now uprgading and bring in these internationals will result in increase of sales #Edcon
The problem is that at a micro level its more profitable to sell your own named brand items in this case (Kelso, Free To Be U etc) , Which meant alot of these International ventures were actually unprofitable and the company was in fact loosing money #Edcon
Now fast forward to 2012, . Edcon has had year on year decline in sales, the debt is effectively strangle holding the company . And in order to provide breathing room, the company then enters into a transaction to sell their debt book for R10billion to ABSA #Edcon
This on face value was good, nice cash injection. And you no longer have to worry about credit write offs. The problem was that ceeding control to ABSA meant that Edcon was granting new credit to new or existing clients as frequently,( remember predatory nature) #Edcon
I meant ** wasnt. So what happened , ordinary consumers were rejecting your product offering . The ones who were actually buying from you , cause of the credit you offered were unable due to absa credit scoring sytem ., Which meant your sales were on a further decline #Edcon
Getting back to the predatory nature of the store card. Alot of what keeps Woolworths, Foschini, Truworths alive in this market is credit sales., Edcon is a text book case study on what happens when its taken away, Furthermore indicates that there was some reckless lending #Edcon
Zara only entered the SA Market in 2012, now you had a competitor with financial muscle that can actually pay the high rentals . Edcon was already in some form of trouble, by then . So blaming the Internationals is not the full story #Edcon
So like all SA retailers in the face of a declining SA market, you look to expand your product offering to Sub Saharan africa. So the company expanded in Zambia, opened up in Mozambique
One thing you can say about Edcon, is SCHOOL FEES. Now what should hurt some of you , they has spent literally billions on attracting customers with the same business model, with no success They have revamped stores, closed stores, used influencers, introduced new brands, #Edcon
Now towards 2015/2016 the real wolves were circling in. Remember I mentioned earlier that the redemption of the buy out debt was in 2014, and 2015. This was later pushed back, and some negotiation took place with the lenders #Edcon
There is a term in banking world that says. if I owe you a R1 million rand its my problem, whereas if i owe you R100 million its your problem. Thats basically the Edcon story , because the debt levels are so significantly high they become the lenders probem #Edcon
Towards the end of 2016, the debt situation was unattainable . Bain Capital has handed over the retailer to its creditors in a debt in exchange for equity transaction, that reduced the debt from R26.7 billion to R6 billion. #Edcon
Now i saw some tweets yesterday about how Bain capital profited from the whole situation. That is false. Bain spent more than 6.4 billion rand in capital, did not take out any dividends and received no proceeds from the debt sale. #Edcon
In addition , to raise some cash Edcon sold Legit to Meteir Private Equity Fund for just over R600 million . The introduction of creditors as shareholders changed the structure of the business, first step was cancelling all those international brands partnership .#Edcon
This strategy was basically cost cutting at its best. the problem is that businesses grow from investment and not cost cutting, The debt / equity transaction resulted in Edcon actually being profitable. ..but as we all know profit not cash. #Edcon
In 2018, Edcon announced that they were were rebranding and going back to the traditional model of all brands in one house. This was a PR exercise , to say they are reducing their rental overhead expense . #Edcon
As virtue of its size Edcon through all its brands and shops occupies 6- 7% of all retail space in South Africa and approximately 10% of all mainstream malls. What this mean in a nutshell is that almost all listed property entities have exposure to Edcon in some form #Edcon
Quick note on the Listed Property sector, it has seen proper flames this whole year. Shareholder Value has been wiped out.Partly due to the scandals around the Resilient group . So alas if Edcon goes, is there any other retailer that can take its tenant space? #Edcon
Remember earlier I mentioned relationships. This is when such relationships screw you over ....#Edcon
Lets do a reality check here.Edcon management through many CEO changes has over the past 11 years. Failed to provide a product offering that is consistent with the needs of consumers which have changed. They dont innovate, they dont explore. Its the same recycled concept #Edcon
The decline of Edcon is no single fault of the Bain debt, the introduction of internation competition (ie Zara, Hnm , Cotton On), the evolution of consumers. In the words of @bonang_m " Edcon not giving the people what they want" #Edcon
I think @thulasindi put it more frankly. Even with countless resources (read :BILLIONS), Edcon has failed to deliver. and its a tragedy that ordinary people will suffer as a result #Edcon
Side note Gov has no real power to make retailers transform in terms of BBBEE, they they rely on the good hearts. Please note that management and the exec has largely been white, male and old...so as @loyisogola tweeted earlier it would be lovely of to see all their pics #Edcon
Side note Edcon in November 2018, successfully appealled the judgement against their Edgars club fees, so that additionally potential liability is gone for them #Edcon
Now we can finally get into the Sunday Times article. Since we all have background and context . So in all honesty Edcon does need a recapitalisation as in pronto, in order to operate in the new SA environment .#Edcon
There was debt due of R2,8 billion in November 2018, not sure if that has been pushed out and/ or restructured . #Edcon
Sorry this debt has been extended #Edcon
In Sept 2018, the Ceo of Edcon was on radio making a plea for revitalization of the local textile and retail value chain. The minute I heard that interview i knew for a fact, that this is a low key plea for government support. cause in our economy we dont like job losses #Edcon
On another side note. Its funny how business who shun government, whose existence is built on screwing over small business , and predatory business practice against black people. When ish hits the fan . Are the very first to scream job losses and go beg at the PIC . #Edcon
On the real though , if Edcon were to be allowed to be liquidated it would be catastrophic .. Besides the indirect / direct job losses and the loss of rental space for the property owners, there are also the sheer number of smme that depend on Edcon #Edcon
Eg,When stuffords was liquidated , creditors many of them small business got cents for ever rand they were owned. they had to write down a significant amount of money. For large suppliers this usually isnt a problem, cause they have creditors insurance. Smally players dont #Edcon
Now lets get back to the Recapitalization or New investment that has been doing the rounds involving PIC. What bright spark would agree to give Edcon management any money to grow the business, when they have no turnaround track record over the past 11 years to speak of #Edcon
No SA retailer has managed to reverse their decline in market share position. So why does anyone think Mr Pattison will be successful?? ? What in the privilege?? the current retail format is on a downward spiral . #Edcon
My suspicion ( so dont sue me), Edcon management is leveraging the devastation of job losses in an election and loss of rental income (6-8% floor space), as a way to lobby Gov ( read PIC) support . #Edcon
I am personally not convinced of any strategic decision that Edcon management has taken to date. All of them have been Epic Fails in all honesty. I simply dont see any upside for any future investor, just good money being thrown with the bad #Edcon
In terms of the whole Edcon saga , I am personally at a cross roads . Because in reality Edcon is at a much better Balance sheet perspective today , than it was 3 years ago. However in terms of top line sales, things havent improved much #Edcon
As a member of capitalist society , we are taught to belive if a company cant compete let it fail. Unfortunately for Edcon that would mean alot of black people, especially black woman will be left unemployed and in this current economy what are their options afterwards??? #Edcon
So like @khanyisile tweeted earlier. We are forced to feel sorry for these people, for the company itself. Cause at the end of the day,the livelihood of some of our family members depend on companies such as Edcon surviving even if they dont deserve to #Edcon
In conclusion, Bain is not to blame for the mess that it is Edcon. If you unpack the business model structure , you will see nothing much has changed in the past few years. SA retailers are stuck in the old age #Edcon
Oh forgot for those of you wanting Edcon to become Sephora. There is absolute truth in that statement, thanks to make up tutorials on Youtube. The make up industry is growing, so with close to no effort this could be the next Edgars should be the next Sephora, #Edcon
If you dont recognise the growth and power of Beauty, ask the guys at Woolowrths and Foschni how positive the contribution has been over the past 2 years. #Edcon
In real conclusion, thank you guys for engaging with my thread. This is based on my own personal opinion, on Edcon themselves edcon.co.za/investors-repo… , and my time in Credit. Fyi i dont celebrate failure that results in job losses, so hopes for the best.. #Edcon
This morning at the Morning show discussing the thread #Edcon
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