Filed under: Retail
Edcon Holdings staved off an interest squeeze in the year to March, generating sufficient cash to meet hefty repayments arising from its leveraged buyout by Bain Capital last year.
May 30, 2008
By INGI SALGADO
Cape Town – Edcon Holdings staved off an interest squeeze in the year to March, generating sufficient cash to meet hefty repayments arising from its leveraged buyout by Bain Capital last year.
But concern remains about whether the apparel retailer can continue to keep up if the economic downturn worsens.
Retailers are feeling the pinch of higher interest rates and soaring fuel and food costs. Their customers may tighten their belts further if the repo rate is hiked by another 2 percentage points, as threatened, and bad debts are likely to rise.
These developments have raised questions about whether US-based Bain paid too much for Edcon. The R25 billion deal was by far South Africa’s largest private equity takeover.
“They took this counter out at the top of the cycle when interest rates were benign and the credit environment had the appetite for the deal,” Roy Chapman of Sanlam Investment Management said yesterday. “They paid too much for it. I guess this can happen … in the euphoria of a cycle.”
However, Edcon’s investor relations manager, Tessa Christellis, said Bain had not bought Edcon on a one-year view.
“It’s patient capital because it’s long-term capital.”
Edcon said yesterday that it had generated cash of R2.9 billion in the year to March, of which R2.3 billion was swallowed by interest payments.
It accrued R17.3 billion in debt in the takeover and delisting. It publishes results on the Irish Stock Exchange because it has issued a bond there.
Earnings before interest, tax, depreciation and amortisation rose a respectable 10 percent to R3.1 billion. Retail sales grew 9 percent to R20.2 billion.
Net bad debts rose marginally to 11.6 percent, in line with the sector’s trend.
Christellis said Edcon was confident of its ability to continue meeting its debt. For one thing, it was coping with a climate that had been tough for some time. And it had R5.5 billion in revolving credit lines that had not been drawn.
Evan Walker, a portfolio manager at RMB Asset Management, said there were no indications yet that Edcon’s debt position might force it to consider a relisting.
Chapman said a relisting was unlikely given the state of the market. If Edcon could not meet its debt obligations, a more likely option was debt restructuring, although the appetite was “almost minimal”.
Foschini manages just 6%
Foschini grew retail turnover just 6 percent in the year to March due to extremely difficult trading conditions in the second half, which were likely to continue this year, the soft goods retailer said yesterday.
The year “has been a tale of two halves”, the group said, as retail turnover growth slumped from 8.8 percent in the first six months to 3.7 percent in the second half. Full-year revenue came in at R7.7 billion.
From last July trading became difficult across all divisions. It owns Markham, @home, American Swiss and Sterns.
Headline earnings were up 2.4 percent at R5.47 a share.
Foschini said its conservative stance on opening approved accounts slowed turnover, but preserved its debtors book health. Net bad debts worsened to 8.3 percent from 7.4 percent.
The group opened 76 new stores and closed 15 during the year. Despite its “cautious” approach, it expected to open more than 100 stores this year.
All trading divisions were in “good shape” to weather the consumer downturn. Foschini shares fell 5.8 percent to R33.82.
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