It’s not often you see Brian Joffe emotional at a results presentation — let alone sporting stubble. But one of the country’s most prolific and ruthless dealmakers seemed somewhat shaken at the start of his presentation of results for lifestyle investment company Long4Life last week.
Joffe has experienced many daunting challenges in his 50-year career — but nothing, he said, comes close to the fallout from the Covid-19 outbreak. This will forever be known as the period in which we changed paradigms, ways of working and the way in which we relate and interact with one another.
"There is a lot of opportunity that will arise," he said. "But it’s very, very difficult at the moment to manage all the emotions that are going into Covid-19, together with the capitalist version of what we’d like to see."
At this point, Joffe said, the focus is on managing cash flow.
"We’re not managing the business any longer for accounting," he said. "Accounting can lead you to bankruptcy. We are prioritising cash, monitoring liquidity and taking steps to protect the asset base."
But while Long4Life is basically still trading, its Sorbet group — the largest beauty therapy brand in SA — remains shut under the government’s lockdown regulations.
Sorbet has waived or defrayed franchise fees from the middle of March and for April to help its franchisees and is providing about R6m to employees (around 3,500 therapists and workers) in the form of food vouchers for two months.
Timelines for recovery may be uncertain — it remains unclear when salons will be allowed to reopen — but Joffe is upbeat.
He believes the group’s customer base is resilient, and there’s huge pent-up customer demand. It helps that Long4Life has a large-enough balance sheet to survive a prolonged onslaught.
Not all businesses are that lucky.
In fact, the FM was able to confirm that 59 companies filed for business rescue in March and April, according to figures from the Companies & Intellectual Property Commission (CIPC). What makes this all the more remarkable is that CIPC’s business rescue office was closed from March 27 to May 1.
It suggests companies are falling over ever day, beyond just the high-profile casualties of Comair, Edcon and Phumelela.
Robin Nicholson, director of the Turnaround Management Association of SA, says we must expect a surge.
"The first wave of companies," he says, "were the ones that were in trouble pre-Covid-19 and include the likes of SAA, SA Express and Edcon. I think the second wave will include a lot of big companies in the tourism and related industries, as well as importers of industrial equipment and machinery."
And business rescue isn’t always a solution, says Nicholson.
"It is very difficult. You are dealing with distressed business models that are usually carrying large amounts of debt and where staff morale has been negatively affected. Securing post-commencement finance is also a big challenge as the banks are reluctant to provide more credit — they would prefer to provide capital to good companies."
Even on the JSE, where SA’s largest companies are housed, investors are bracing for more failures.
Veteran small-cap analyst Shawn Stockigt believes the most vulnerable companies will be those that are only able to generate a large amount of their pre-Covid-19 revenues at the lower lockdown levels.
"This would include all those businesses where it is challenging to implement safe social distancing — such as most leisure companies and airlines," he says.
Stockigt stresses that balance sheet strength, innovation and customer loyalty will be the keys to survival.
"This is essential in order to ensure that when their doors reopen, they have customers willing to re-engage with their product and service. Communication during lockdown with customers is critically important to sustain brand loyalty and maintain client relationships," he says.
Stockigt points to Virgin Active, which has been proactively offering online services — even if it can’t physically open its gyms.
While it seems many JSE companies are priced for collapse, Jarred Winer, a fund manager at Westbrooke Alternative Asset Management, says many smaller companies have well-fortified balance sheets.
Experts point to several companies likely to withstand a prolonged onslaught: Spur Corp, Capital Appreciation, Long4Life, Value Group, Bowler Metcalf, Quantum Foods, Cartrack, Nu-World, Combined Motor Holdings, Libstar, Lewis Stores and Caxton, to name a few.
Having survived an anaemic SA economy for years, they’ve built up cash reserves, have tried to pay off debt and haven’t indulged in wild bouts of acquisitions.
At this point, companies can’t afford to carry too much debt. On this score, the most vulnerable appear to be gaming giants Sun International and Tsogo Sun, industrial businesses Invicta and eNX, and fast-food brands conglomerate Famous Brands.
Some empowerment investment companies — like Hosken Consolidated Investments and Brimstone Investment Corp — have debt at the centre of the business, and may find it tricky to sell assets right now.
Looked at holistically, it suggests that business rescue practitioners are likely to be busy in the next few months.
Out of print
Perhaps the most visible collapse has been the demise of the magazine aisle.
First, Associated Media Publishing (AMP) shut, taking with it Cosmopolitan, House & Leisure and Good Housekeeping. Almost immediately, it was followed by media group Caxton, which closed its magazines division fronted by well-known titles including Bona, Country Life, People, Food & Home, Woman & Home and Essentials.
It sparked a mass outpouring of grief on social media, as loyal magazine readers saw their favourite titles evaporate from their lives in a New York nanosecond.
Magazines play an enormously important role in people’s lives, says media consultant Britta Reid. "They tap into people’s passions, and allow them to spend time with the things that really interest them."
But while the final nail in the coffin may have been the abrupt end to advertising under Covid-19, general interest magazines had been suffering for years. Over the past five years magazines’ "share of voice" — the percentage of overall print adspend — had dropped from 5.4% to 3.1%, according to figures from data firm Nielsen.
Part of the problem, says Reid, is that there isn’t a magazine body that promotes the industry locally — something along the lines of Magnetic, a dedicated marketing agency for consumer magazines in the UK.
"So each publisher has been fighting for their share, their title. There’s been doom and gloom when circulation figures come out, and nobody’s told a counter-story to the [advertising] agencies about the belief in the power of magazines and the role they may play."
There’s also the issue of subscriptions. In the US, more than 80% of magazine sales are subscription-based, says Reid, often at substantial discounts. According to Statista, about 41% of US consumers in 2017 had active newspaper or magazine subscriptions.
"We, perhaps thanks to our post office, never had those locked-in readers," she says.
To counter the downturn, AMP and to a lesser extent Caxton had been very conscious of the need to move into the new media landscape and had made great strides in doing so, says Reid. "They had transformed themselves into content producers and had great brands, but there really has been a long and slow decline of print publications over time."
While AMP in particular was innovative, trying to do new and interesting things and keep on top of digital publishing, several of its magazines, including Cosmopolitan and Good Housekeeping, were published under licence, says The Media editor Glenda Nevill.
"Before you even start, you have to pay back the licence fees — and, increasingly, with a weaker currency."
In the end, Covid-19 pushed them over the edge.
"AMP had gone large in digital investment and innovation, but of course innovation costs," says Nevill. "So you’ve invested money into a mobile company with new business models that encompass multiplatform publishing, but the next thing the coronavirus strikes … and the withdrawal of advertising has been the death blow."
Reid says the blame can also be laid, at least in part, at the government’s feet. If magazines had been declared essential rather than nonessential, they might have sold out during the lockdown. "They’re something comforting and reassuring," she says. "It was an incredibly short-sighted decision."
And the full effect will not have been felt yet. "I suspect Media24 will start to make their announcements soon. They have deep pockets but I’m sure they will have to start culling titles as well," says Reid.
The closure of AMP, in particular, signalled the end of an era.
Jane Raphaely has, for years, been the first lady of the local magazine scene. She grew Fair Lady into a formidable brand after launching it in the Naspers stable in 1964. In 1982, she left to start her own company, giving SA the local version of Cosmopolitan. The company went on to hold the first licence outside the US to publish O, The Oprah Magazine.
What will happen to its brands now is uncertain. "It’s not clear if AMP is selling titles or going into liquidation," says Reid.
For Caxton, there’s been significant interest from people looking to buy its titles, according to The Media Online. Anton Botes, general manager of Caxton and CTP Publishers, says he’s confident the company will find homes for 80% of the affected titles, but Woman & Home and Essentials will be more difficult to sell because they are published under licence.
More broadly, Nevill believes the sector, which is made up of about 420 titles, is set for consolidation. She thinks there will be far fewer magazines and certainly fewer general titles. Those that survive are likely to be niche titles with small print runs that appeal to particular interests, such as road running and cycling, and those with huge print runs and a built-in readership, such as Pick n Pay’s Fresh Living.
Reid says the magazines thriving overseas are those being produced by people who want to make a living out of something they’re really interested in, rather than be great contributors to a corporate bottom line. "The future of magazines is incredibly bleak," she says, "but it’s for the hyper-targeted title."
Says Nevill: "I like to believe we will still have magazines. I can read online news happily, but flipping through magazines online isn’t the same."
No soft landing
For airline business Comair, which operates the British Airways franchise in SA and owns budget airline Kulula, the only "responsible decision" was to put it in business rescue, CEO Wrenelle Stander tells the FM.
In February, Comair saw its 74-year history of unbroken profitability swing into a loss. There were many reasons for this, not least of which was the fact that national carrier SAA slipped into business rescue, still owing Comair R790m as part of an earlier damages claim. But the other factors included significantly higher fleet and maintenance costs, and the fact that its eight Boeing 737 Max 8 planes were grounded.
Then came the five-week lockdown, starting March 27 — and the odds began to stack up against it.
"Business rescue is not a decision taken lightly by the Comair board of directors," says Stander. "The tipping point was the announcement that the economy would only be re-opened in phases, with domestic aviation only being permitted on a limited basis in level 2."
This means no revenue for up to six months, says Stander.
"Given that our overhead costs are mostly fixed, we would simply not have had the liquidity to cover all our costs for a six-month period, as required by the Companies Act. The only responsible decision was to apply for business rescue to safeguard the interests of all stakeholders. The balance sheet, while strong, is highly leveraged."
It doesn’t mean Comair is planning to shut up shop. Stander is working 15-hour days with the business rescue practitioners to ensure the airline takes off again on November 1. "We are commercially insolvent, not technically insolvent," she says. "The business rescue practitioners believe there is a reasonable prospect of returning to the skies".
But the trick is being able to "access soft loans and possibly taxation relief", says Stander. It’s a big shift since Comair has prided itself on the fact it has never relied on government support.
To mitigate the pain, it is also in negotiation with Boeing, after the company’s Max 8 aircraft was grounded in the wake of two deadly crashes. Comair had already paid for its first Max 8 plane, and made part payment for another seven, resulting in an unproductive "cash lockup" of R1bn.
"We need to restructure our balance sheet and reduce debt. We are engaging with Boeing to terminate the contract and seek compensation ... At some point we might sell the aircraft we already have," says Stander.
Stander, like many other CEOs, believes it’s time to open up the economy.
The aviation sector "is an important contributor and enabler of economic growth and, given that context, we believe the government should open the skies earlier than level 2. There are sufficient protocols in place to open the airline industry in a way which is safe for customers and staff alike."
Aviation expert Linden Birns believes the industry is far better equipped than most other forms of public transport to provide a safe service. "On a modern airplane the cabin air is continually refreshed. Depending on the architecture you have either 100% full fresh air or a mix between fresh and recirculated air, that is constantly being scrubbed by the high-efficiency particulate air filters, the same ones used in hospital operating theatres," he says.
Birns says that as long as you take the right hygiene and sanitation measures, "you’re at no greater risk than any other place. What’s essential is stopping unwell people, or those carrying the virus, from getting on board."
But even if you open SA’s skies, the fact is the industry itself is in bad trouble the world over. The International Air Transport Association (Iata) doesn’t expect air travel to recover to last year’s levels until 2023 or 2024 — and even then there’s likely to be a preference for short-haul trips.
Iata chief economist Brian Pearce says governments around the world have provided unprecedented support through wage subsidies, grants and loans. But on a ranking of government support for 20 countries — including tax measures, loans and guarantees — SA comes last (Germany is top, followed by Italy and Japan).
What makes it worse is that margins on air travel in SA have always been thin. And it isn’t helped that most costs are incurred in dollars, including fuel.
Says Birns: "I was surprised that Comair went into business rescue, but very quickly realised it was a smart move," he says. "Airlines are trying to stretch whatever cash reserves they have. The problem is no-one has set a time frame."
What the industry needs, he says, is a time frame from government so it can plan for restarting: from maintaining aircraft to ensuring pilots are still deemed "proficient".
"To operate aircraft, crew members are legally required to retain their proficiency. To retain their recency, pilots must have flown at least three take-offs and three landings within a three-month period," says Birns.
At this point, the best that tourism minister Mmamoloko Kubayi-Ngubane can offer is that domestic flights should be allowed towards the end of the year, and international flights next year.
This isn’t good enough, says Birns.
"How do you go to lenders to renegotiate terms if you don’t have clarity?
"This must be one of the biggest frustrations facing people and business across the economy.
"What are the criteria for measuring and considering moves to the net level or back to the previous one?"
Surviving six months with no revenue
It’s a question with larger economic implications. While the air transport sector accounts directly for 70,000 jobs in SA, according to a 2019 Iata study, it also supports 472,000 indirect jobs, including associated business in the travel and tourism sectors, and contributes R179bn to GDP.
But by April 23, Iata put the potential cost of Covid-19 to SA at 252,100 jobs, and a loss of about R97bn to GDP.
For former Comair joint CEO Gidon Novick, air travel is an enabler: of tourism, of business and it’s "a people connector", he says. "The extent to which certain families spread out across the country have been unable to connect physically is becoming increasingly problematic."
But while Covid-19 has been catastrophic to travel and tourism business, he believes SA can remain a strong competitor in global tourism over the longer term. It has a compelling product offering, hospitable people, and a price point that has reduced continually on the back of the weak rand.
"The tourism sector has the potential to be our greatest national asset, producer of foreign income and creator of jobs," says Novick.
The fact is, however, international travel has gone for now. And though you’d hope domestic tourism might be able to flourish when the lockdown lifts, Novick warns that "the disposable income is not there".
It’s a sentiment echoed by Tsogo Sun CEO Marcel von Aulock. The hotel industry, like aviation, was been hit hard by the lockdown. "We saw it early because we had this big drop-off in bookings," he says.
"There’s no business that can survive six months to a year of no revenue and carry staff and other operating costs," he says.
While Tsogo Sun is doing what it can to survive, the only thing that will really fix the problem is to open the economy and trade.
"We know the international movement will be nonexistent to very weak. But to get your local travel going, you need business, government and local leisure travel. Until that movement comes back there’s not much you can do other than keep your cash burn as low as possible," he says.
End of an icon?
Perhaps the best-known brand to tumble into business rescue is clothing retailer Edcon. After several attempts to revive Edcon in recent years, SA’s largest apparel retailer was placed in business rescue on May 1. It wasn’t allowed to operate during the lockdown so it lost about R2bn in possible sales — a loss that consumed the group’s remaining cash.
While the government has repeatedly pledged that it is "assisting and helping" companies survive Covid-19, this seems to be more lip service than anything.
Edcon CEO Grant Pattison, for one, says his company has had little help from the government. If anything, the government restrictions continue to weigh on retailers.
While some have opened their doors, Pattison says the government needs to allow the clothing retailers and manufacturers to start ordering and manufacturing for summer, and remove its definition of what constitutes winter clothing.
But when a company like Edcon collapses, it cascades down the value chain.
Shopping centre owners, whose earnings took a knock before Covid-19 from rising rental arrears and bad debt as many retail stores closed, are suddenly more vulnerable.
When the full tally of losses from lockdown-induced rental holidays, tenant defaults and bankruptcies are calculated, it could be especially grim for these property companies and their investors.
While the government dithers, the banking sector is at least helping individuals.
Over the past few months, the banks have provided R11.5bn in "debt relief" to individuals battling to keep their heads above water due to Covid-19. In the two weeks between April 25 and May 9, they provided R3.8bn in debt relief.
Which is just as well, since it’s clear people are really battling. By May 9, the banks got applications for relief from people with more than 2-million credit agreements. So far, relief on 1.7-million agreements has been given the greenlight.
Others on the ropes
There isn’t a sector of SA’s economy that hasn’t been touched by the coronavirus fallout. Horseracing company Phumelela Gaming & Leisure was recently placed in voluntary business rescue too. It was predictable enough, given that it wasn’t able to generate revenue during the lockdown, as race meetings and betting outlets were closed.
Phumelela is based at Turffontein Racecourse in Joburg, and operates four race courses, five training centres and more than 200 betting outlets. It also manages two race courses and betting outlets in the Western Cape.
Yet it seems the company has found a white knight. Mary Oppenheimer Daughters, the family office for Mary Slack, daughter of the late mining magnate Harry Oppenheimer, gave Phumelela R100m in funding to stabilise it during business rescue. The lifeline gives it a safe space for six months to work out options.
That it was the Oppenheimer family riding to the rescue isn’t a major surprise. Not only did the family donate R1bn to SA’s Covid-19 rescue efforts, it has also been involved in the local racing scene for decades, breeding and owning top race-winning horses.
The family says the R100m in funding for Phumelela isn’t about saving one company — it’s more about trying to save the wider industry and its 60,000 jobs.
Other sectors haven’t been as lucky.
Take the craft beer industry. Walts Malts, SA’s only malting company to offer speciality malts to beer brewers, has been forced to close its doors due to the government’s decision to prohibit the sale of alcohol, according to the FoodForMzansi website.
It means craft breweries will have to import specialty malts at a punitive exchange rate. It may prove the end for some — already the Craft Beer Association of SA says half its members are in serious danger of closing by the end of May. As it is, more than 60% have had to retrench staff.
Companies in the property sector are also taking a smack.
Prof Francois Viruly from the University of Cape Town’s urban real estate research unit estimates that nearly 90% of SA’s 39,000 estate agents could potentially lose their jobs this year.
In a report in which the implications of the Covid-19 lockdown on the SA real estate market is assessed, Viruly estimates that housing sales are likely to drop by 45% in 2020 (year on year), which will cost estate agents R4.2bn in lost commission income.
Though the government reopened the deeds office on May 13 with a skeleton staff, estate agents are effectively precluded from closing deals as physical property viewings are still prohibited. These will be allowed only when SA shifts to a level 2 lockdown.
Viruly found that another R8bn in earnings will be wiped out for attorneys, mortgage originators, banks, removal companies and home improvement and building suppliers as a result of the home sale meltdown.
Seeff Properties chair Samuel Seeff agrees that most smaller estate agencies don’t have the financial reserves to withstand a prolonged lockdown.
Seeff says the key issue is that it takes an average three months for the proceeds of a housing sale — including the agents’ commission — to be paid out.
"Agents who did deals in January or February will only get their commission in June or July — if they’re lucky, given the current deeds office backlog."
Those who haven’t concluded any sales in the year to date could be without an income for at least nine months, he says. Meanwhile, no-one will commit to buying a house if they can’t physically view the property.
Andrew Golding, CEO of the Pam Golding Property group, agrees that it doesn’t make sense that registered real estate agents who already work remotely from home are not included in level 4 or even level 3.
"Estate agents represent a low health risk as private viewings can be limited by appointment to one agent, with all the relevant safety and sanitising measures in place," he says.
Golding says the lockdown is a double whammy to estate agents: housing sales were already down over the past year on the back of a stuttering economy; now they’re being prevented from even doing the sales they could.
The silver lining
In among the gloom, it’s hard to remain positive. But Joffe, for one, believes the economic decline could be a catalyst for policy reform, creating inclusive growth opportunities in SA. And there are other opportunities too: online retail will be the short-to medium-term winner, as shoppers become used to relying on deliveries.
"Gyms, I think, are yesterday’s news," he says. "I think at-home sporting and health activities will be the winners of the day." Which is good for him, given that Long4Life owns the Sportsmans Warehouse franchise.
But the government also needs to come to the party, says Joffe.
He believes businesses would be better served receiving government grants than loans, as taking on more debt in the current economic climate just isn’t attractive.
The state also needs to be "more sympathetic to corporate SA in terms of saving jobs. It’s very complicated if you want to buy a business ... it’s complicated by the lockdown rules and red tape."
In the end, what people really want is clear, simple and logical directives from the government. "And if that’s what they are, I’m sure all of us will follow," he says.
"I think South Africans shouldn’t be overpessimistic about what the outcome will eventually be. As long as we stick to the sciences and to economics, and have a proper balance between the two we will be OK. The risk is we sway to one or the other."
Those already crippled by Covid-19 include restaurants, pubs, craft beer outlets, tourism, aviation, gambling and real estate
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