The Edcon rescue playbook

In the past, public sentiment towards business rescue hasn’t been great. Often, it’s been seen as akin to euthanasia of a terminally ill patient in their already dying moments, in which employees and creditors have no option but to accept their apocalyptic fate.

It was into this rather pessimistic context, during a once-in-a-lifetime pandemic, that Edcon was placed in business rescue on April 29 last year.

The retailer had been struggling for years, even before Covid-19 hit: in December 2018, it had already had a R2.7bn bailout from landlords, banks and the Unemployment Insurance Fund.

But once the lockdown was instituted, Edcon lost R2bn in possible sales. At the time, it owed R6.7bn to creditors — R3.1bn of which was owed to unsecured creditors.

As you can imagine, the prospects seemed anything but auspicious.

It meant Edcon would be the largest attempt at business rescue of any retail business in SA. And the stakes couldn’t have been higher: there were 17,500 permanent employees across its 750 stores, which traded on more than 1-million square metres of retail space.

And this was just the tip of the iceberg: more than 100,000 jobs would have been affected, when you take into account the 3,000 mostly smaller firms that supplied the group.

Still, there was value — a large customer base and well-established brands that, in the case of Edgars, have been trading since 1929.

I’ve been in the industry for nearly a decade, so when my company, Matuson & Associates, was appointed, we knew it would be an immense task. Still, nothing truly prepared us for the day we walked into Edcon’s offices.

In the end, given the constraints — its historical financial weakness and Covid-19 — we had to break the mould of how a typical business rescue happens, creating a new playbook in the process.

So what made the Edcon business rescue plan different?

First, timing.

Our first big headache was to meet legal requirements to submit the business rescue plan within 25 working days. While that’s the law, the fact is that it’s incredibly rare to have a rescue plan proposed within that timeline, without any extension.

In our case, not only was the plan proposed within 25 days, but the actual rescue plan was implemented within three months of being approved — something that pretty much never happens in business rescue.

The fact is, we had no choice. Had we missed this deadline, the wind-down of the company would have become a reality.

So, we had to get up to speed with the picture: assessing and analysing each store and its financial parameters, and assessing the odds of rehabilitating individual stores. Then we had to identify and engage potential investors.

How did we make that happen?

First, we did a "preassessment" of the business and created a tactical plan, separating it out into the distinct legal and financial processes needed. We prepared scenarios, which meant we were ready when quick decisions needed to be made.

The Matuson & Associates team of experts, together with a strong and competent management team at Edcon, provided analysis across four core streams: financial, legal, business and investor negotiations. Committees were also set up to represent lenders, creditors, landlords, trade unions and employees.

This was unique during Edcon’s business rescue. Often, business rescue focuses mostly on sorting out the financial and legal issues — "stakeholder engagement" is often neglected. But in this playbook, we saw these relationships as critical.

For any business rescue to succeed, the one critical thing you need in place is post-commencement financing to allow you to trade, pay invoices, salaries and the usual operating costs. Many business rescues that fail do so precisely because they can’t secure post-commencement financing.

In the case of Edcon, the shareholders and bankers had no appetite to put in any more money, having sustained large losses in recent years during the various restructurings and recapitalisations of the group.

The company was in deep financial distress, which only worsened the crisis of confidence.

This sentiment was even more pronounced as Covid-19 began to dig in its claws, and the lack of confidence in all retailers worsened. Who would bet on a company that relies on customers coming into their stores during a lockdown?

Edcon, fortunately, had R2bn worth of stock. Though encumbered, the secured lenders agreed to let us use the proceeds from selling this stock as post-commencement finance to run the business and execute the plan. But this obviously hinged on whether the stores could remain open and trading.

We were also fortunate to receive the support and buy-in from landlords, who allowed us to pay what we could afford when we could afford it.

In a country with unemployment north of 30%, selling Edgars and Jet saved close to 10,000 jobs

Thankfully, Edcon’s experienced management — firmly committed to the disciplines of retail — was entirely on board with the plan and played a critical role in its success. Still, it was clear that if lenders didn’t agree to provide us with post-commencement financing, the landlord support alone would not be enough to effect a restructuring of the Edcon business.

So, given the concerns about future sales levels thanks to Covid-19, we realised the only option we had left was to embark on an "accelerated sales process" to sell the various divisions — such as Edgars and Jet — before the end of June 2020.

That deadline was critical to ensure any buyer had enough time to negotiate with suppliers and buy summer stock. Without that, there would be no compelling merchandise in the stores at the end of the year, and the plan would have fallen apart.

Selling these divisions individually, despite their strong brands, wasn’t as easy as it sounds.

Mainly, this is because Edcon had a complicated business model: it had centralised operational support and infrastructure that had to service three different businesses — Edgars, Jet and Thank U Digital, the credit and financial services operation.

So, we gathered bids and proposals, and approached others we thought might be interested. Then we weeded out the ones which wouldn’t work and convened a number of investor, creditor, employee and lender meetings to put the proposals on the table.

It is important to note that the decision to accept offers was not only based on price; we also looked at buyers’ ability to operate, and their retail expertise, to ensure business continuity.

By July, we were able to announce that TFG, the JSE-listed company that owns Foschini, among other assets, would buy 371 Jet stores for R480m. In the end, TFG took over 425 stores — more than expected.

A few weeks later, we announced the sale of 130 Edgars stores to Durban-based private equity company Retailability for about R350m. The company already owns clothing outlets Beaver Canoe and Style and has 440 stores throughout Southern Africa, so it’s a safe pair of hands.

Critically, in a country with unemployment north of 30%, these two transactions saved close to 10,000 jobs.

Inevitably, some creditors resisted the plan. But all we could do to win them over was show them the undisputed facts and data, which informed our decisions.

What it means:
The business rescue of Edcon against all odds has created a template other firms in distress can follow
— What it means:

The recovery for creditors may not have been what they would have wanted, but the alternative would have been far worse. In the event of liquidation, secured creditors were estimated to get 10c for every rand they were owed, with unsecured creditors not receiving anything back.

In this case, however, suppliers will recover some of what they were owed, and the Edgars and Jet businesses will remain alive and continue to service customers, employ staff and preserve a retail footprint of more than 700,000m².

I believe the fact that we communicated constantly, using data, helped ensure we had the overwhelming support of all sides: shareholders, staff, unions, creditors, landlords and buyers. Had we failed in any of these areas, it might have been a different story entirely.

It’s an important point. With more companies battling during Covid-19, we will see more applications for business rescue. Between April and October last year, there were 233 applications for business rescue.

Estimates suggest that just 10% of business rescues are successful: some fail because the businesses really are beyond saving, but others fail because the rescue process wasn’t carried out optimally.

But the encouraging thing is that we were able to rescue an organisation as complicated as Edcon, during a pandemic, despite the company’s history of being financially frail.

Hopefully, we’ve created a new playbook that others can use. Ultimately, it shows that companies — and jobs — can indeed be saved from the graveyard.