Edcon and Massmart: When corporate wranglers go wrong
One has been in consistent decline and more recently on the edge of business rescue, the other is just meh
The two stunning retailer-related events of the 21st century have been the decision by Bain Capital to take Edcon private and Walmart’s acquisition of just over 50% of Massmart.
In early 2007 Bain announced the largest-to-date private equity deal in a R25bn heavily-geared transaction that marked the beginning of the end of a spectacular growth period for the decades-old Edcon. Since then Edcon has been in almost consistent decline and more recently on the edge of business rescue.
In 2012, after a prolonged battle with the competition authorities, Walmart eventually got its hands on 51% of Massmart, paying R148 a share for the stake.It isn’t just the benefit of hindsight that makes these deals look ill-considered. Back in 2007 many analysts were concerned about the steep price at which Bain was buying out shareholders and the hefty amount of debt that was being piled onto the Edcon operations.As for Massmart, the R148 looked like a gift at the time – it still does. The share price has moved above that level on a few occasions since but for much of the past year has hovered below R100. Perhaps if Walmart hadn’t been blocked from taking 100% by the competition authorities it might have been able to impose its own disciplines and management style on Massmart. (Although it has to be said Walmart hasn’t got an impressive record outside the US.)
It’s difficult to excuse Massmart’s poor performance on tough local conditions given that the other major retailers have managed to generate attractive returns. One analyst reckons Massmart’s return on invested capital has been dropping almost steadily since 2011 as trading margins have been squeezed on a significantly growing asset base.