The Public Investment Corporation (PIC) is likely to support flailing retailer Edcon with a R1.2bn lifeline, but a rental holiday from landlords could set a difficult precedent for the property industry.
In response to questions sent to the PIC this week, including how it could justify the investment in a business that may not survive, Deon Botha, the PIC's head of corporate affairs, said: "The PIC has been approached with a proposal in relation to the Edcon situation. The proposal is being subjected to the PIC investment processes, after which a decision will be made."
It is believed negotiations between the PIC, which invests government employees' pensions, and other stakeholders and Edcon were still continuing this week, though the retailer said in a letter sent to 31 of its biggest landlords last week that the PIC's investment committee had approved its request for the investment.
Edcon is also seeking R700m from its lenders.
Edcon CEO Grant Pattison said the company's board had approved the structure of the proposed recapitalisation plan, and in response lenders have extended waivers to allow time for implementation.
"This will allow sufficient time for the number of necessary due diligence and governance processes to be completed," he said. At this stage, he said the ailing retailer can't release additional details because of confidentiality agreements.
Lumkile Mondi, a senior lecturer at the University of the Witwatersrand School of Economic and Business Sciences, said the cash injection was the right move to stave off a potential 140,000 job losses. The PIC would also "play a very critical role in providing an industrial policy instrument" to help the retailer focus on sourcing more goods directly from local suppliers.
The South African Federation of Trade Unions (Saftu) said the proposed PIC bailout again raised the issue of a lack of worker representation on the investment committees of the PIC and the Government Employees Pension Fund (GEPF). Saftu said any rescue plan must be mandated by the funds' members and "Edcon must be turned into a publicly owned workers' co-operative".
Edcon's proposal to tap into the GEPF depends on whether its landlords at malls where its stores are located approve the retailer's request for a two-year rent holiday of 41% in exchange for a 5% share in Edcon.
Without the deal, the business faces liquidation. But the prospects of a positive return for new investors is doubtful.
The retailer, which owns clothing chains Edgars and Jet and the CNA brand, has been operating for 89 years but has struggled for more than a decade. US investment firm Bain Capital bought Edcon for R25bn in 2007. In 2016, when Bain bailed, Edcon was drowning in R26.7bn debt and the group's creditors - in a debt-to-equity deal that reduced the retailer's debt to R7bn - took ownership.
Since then, the retailer said in the letter to landlords, it had struggled to find a buyer as it continues to face challenges with "excess financial leverage, an over-leased estate and declining credit sales". Edcon said it had appointed Rothschilds and Matuson & Associates to attract buyers, which had failed.
Rothschilds and Matuson & Associates were now providing "business rescue and liquidation services" to Edcon, the retailer said.
Imtiaz Suliman, a portfolio manager at Sentio Capital Management, said Edcon's problems stemmed from the size of its stores, low demand due to SA's tepid growth, unemployment and weak business confidence.
Suliman said the rent holiday was not the right move, but Edcon had opted for this because its leases could not be terminated overnight. Whether landlords "would want equity in Edcon, I doubt that because you are just sort of slapping one form of debt to another. The equity is more risky than debt." The rent holiday agreement would also set a precedent for property companies and put pressure on them from other tenants that might want a similar arrangement...