Edcon: ‘A stuff-up of manic proportions caused by the owners’
Embattled retail group’s CEO rants about the doomed leveraged buyout and how he's trying to fix the mess
Edcon’s R2.7bn recapitalisation is probably the last roll of the dice for the retailer. But it’s also an extraordinary collective rescue effort. We asked Edcon CEO Grant Pattison, who held all the cards?
This deal had everyone on the same side, right from the word go. What was everyone united about?
No-one wanted 30,000 jobs to go and the decimation of our supply chain. It was about working out who had the most to lose. The banks were going to lose their entire investment, and half of them were SA banks … the landlords were big time exposed, because we’ve probably got, at any one time, R5bn of lease commitments. It was on a scale I think few people were prepared to take a chance. We needed to attract new capital and there was no ways the banks would have done it without someone else coming in.
Was that always going to be the Public Investment Corporation?
Well we started off with the PIC not really thinking much about where they would get the money from, and then the PIC went through their own issues. And as the bureaucratic tightening up happened there, people started worrying about things like mandates, due diligence … and then they really discovered that no-one had a mandate – who’s got a mandate to invest in rescuing a business? It’s not like it’s ever been done before by them. Certainly the UIF [Unemployment Insurance Fund] has never done it before, and the landlords have definitely never done it before.
What’s the UIF’s exposure? Our best estimates were 140,000 jobs, and work out the UIF payouts on 140,000 jobs. All I can tell you is what I pitched to them [the UIF]: we’ve got a good plan to fix this and it’s the fact that we are one third of the manufacturing industry in SA and if you lose one third you lose it all. This whole deal has been sold on a shrink concept.
The business is over-spaced by a third. So what I said to the landlords and the UIF was: if we don’t get any money you’re getting the whole thing back now: all the space, all the unemployed. If you support us, let’s say you’re a sceptic and you say we still can’t make it, well at least we’ll be two thirds of the size and you’ll have had some time to absorb that. Importantly, no-one was bailed out, all the money goes into the company and everyone lost everything else. So if you were a shareholder before the deal you got naught, including employees. If you were a debt holder you lost the debt and got some equity in exchange and then the new shareholders got some equity so no money’s gone out at all.
Fund manager RECM says the listed property companies have now capitalised their losses …
I think [that’s] a business school answer. But what’s unusual here is, why is the biggest one going? And why is it going when everyone else is making money? Edcon is a stuff-up of manic proportions caused by the owners of the company. Is there anything fundamentally wrong with the clothing industry? No.
Isn’t the clothing industry facing some very lean years?
Yes, because the retail industry is one-for-one exposed to the economy and unemployment and there’s just no good news. All of us are going through trouble and it’s not nice but it’s useful for me to point at all the other hunchbacks because we were going through it publicly and now everyone’s in the same position. I suspect we had one of the best third quarters in the industry on a profit basis. Edcon was broken in a very specific way in an industry that’s healthy, going through its own cycle.
In other words, broken by Bain Capital?
Bain are morally liable for what they’ve done here. How were they allowed to use foreign debt to do a leveraged buyout in SA? Surely no one would go: the most volatile currency in the world in 2007/8 – oh that’s a good idea. Let’s put no money in, let’s just borrow it. The thing was inevitably going to collapse.
Bain Capital approached us at Massmart and [then CFO] Guy Hayward said this is the worst idea we’ve ever heard. So it’s not just with hindsight, this was a bad idea at the time. I remember talking to guys who were involved with it and saying what the hell are you doing? This has got a huge positive working capital cycle and when you grow Edcon it consumes cash; a leveraged buyout needs a company that when you grow it, it produces cash. The collapse of Edcon is entirely, 100% due to Bain Capital.
Is that a criticism for all private equity?
No, just that deal. As long as the company who’s doing the leveraged deal is going to be the one to put the money in when it can’t pay the debt, then it’s fine. Private equity are the dung beetles of business: they come in and clear up the mess.