RON DERBY: Few will bat an eyelid if PIC rescues Edgars, but should they?

27 January 2019 - 00:31 By Ron Derby

Will Edcon, the owner of Edgars, survive? This is a question that has faced the 89-year-old retailer for what feels like an eternity. Its struggles have nothing to do with the current depressed spending patterns of consumers. The store, like some big-box retailers in the US, has been in a steady decline for decades. Someone should be applauding the old executive team at the former brewing company SAB, which unbundled the retailer at the end of the previous century.
It was perfect timing really, for though the retailer's fortunes were on the surface revived by Steve Ross's tenure that ended in 2011, this was evidently unsustainable. Underpinning the American CEO's turnaround was a flood of cheap Chinese imports. It was a period marked by the rise of China and the manufacture of cheap textiles, something that the world's second-biggest economy has long moved on from in favour of more valuable hi-tech production.
The influx of imports saw costs for retailers come down quite significantly, and given its sheer scale and the excitement around the emergent black middle class (or that crass term "black diamonds") in the heyday of former president Thabo Mbeki's term, Edcon would go on to attract the interest of US private equity player Bain Capital in 2007.
The truth is that beyond a change in procurement strategies, the Edgars store format that we all grew up with really didn't change much. The stores for the most part remain as large and the layout as cluttered.
At the depths of Pick n Pay's struggles more than a decade ago, some of its biggest competitors that were gaining market share from the Raymond Ackerman-founded grocer were proclaiming that the chain would go down the same route as department stores like John Orr's.
They were wrong, and instead in the years that would follow, 159-year-old fashion retailer Stuttafords would shut its doors. Given the rather similar market forces Edcon faces, this should be its unfortunate fate. There's no trading its way out of the choke-hold of debt that has come to suffocate the retailer in recent years. Last month, it wrote to landlords, asking them for a two-year "rent holiday" for 41% of its 1,350 stores in exchange for a 5% stake in the company.
But as it nears another bailout package, in which ever-reliable shareholder the Public Investment Corporation (PIC) will play a central role, a decision on its fate will have to wait for another day.
With a head count of just under 40,000 permanent and temporary staff and as one of the biggest tenants in a country overpopulated with malls, the consensus will be that the retailer is simply "too big to fail". Few eyelids would flicker if the PIC is forced to support a financial restructuring to save the retailer.
There's precedence here - the PIC has remained a shareholder in Lonmin, the ailing miner that also has a workforce in the high thousands. To not do so would have led to its collapse. Through its four rights issues in a decade, the PIC has grown its shareholding to more than 29% in a losing investment.
Other shareholders more responsible for the miner's ailments are long gone. The PIC is the one shareholder that simply can't cut its losses.
And here again, in this story, the PIC is tied to Edcon's fate. The big benefactors are creditors.
It's hard to make an investment case for Edgars and, despite its governance lapses, Eskom makes for a good investment case and does pass the "too big to fail" test.
Making a hard decision on Edcon in a country with unemployment as high as ours is going to be difficult, no matter who the decision falls to.
But taking a long-term view and accepting that SA has limited resources, can the PIC or any other "benevolent" investor see any value in investing in a business that has failed to disrupt itself enough to ensure the future of its employees, who everyone is trying to protect?..

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