Private Equity | Bain Cedes Control of Retailer Edcon in Debt-for-Equity Deal

LAGOS, Capital Markets in Africa: U.S. private equity firm Bain Capital will cede control of Edcon Holdings Limited in a debt-for-equity swap, handing ownership of South Africa’s largest clothing retailer to creditors including Franklin Templeton after almost a decade of ownership.

The move will reduce Johannesburg-based Edcon’s debt to 6 billion rand ($433 million) from 26.7 billion rand, Chief Executive Officer Bernard Brookes said in a presentation in Johannesburg on Tuesday. Edcon will also sell the Legit chain to Metier Private Equity for 637 million rand, he said.

Banks and secured bondholders will take over Edcon after the retailer struggled under foreign-currency debt used to finance its 2007 acquisition by Boston-based Bain for 25 billion rand. Edcon, the owner of chains including Edgars, Jet and CNA, won support from creditors in April to defer paying cash interest obligations as it started negotiating a debt restructuring.

About “70-80 percent of my time since March has been spent on the debt restructuring and now I can get back to the business of retailing,” said Brookes, a former CEO of Melbourne-based department store Myer Holdings Limited, who joined Edcon a year ago. The company has no plans to sell flagship chain Edgars nor try to buy back its private-label store cards business from Barclays Africa Group Ltd., a deal that caused credit approvals to customers to plunge due to the lender’s tougher criteria.

Edcon Endgame
Franklin Templeton, a fund based in San Mateo, California, will be the single largest shareholder, Brookes said. Edcon will seek a listing on the Johannesburg Stock Exchange in three to four years, he said. Existing cash flow should be enough to pay down borrowings after the deal.

“With very poor results, it was the endgame for Edcon,” Cedric Rimaud, director of emerging-markets research at Gimme Credit in Bangkok, said by phone. “The question now is whether the new capital structure can help turn around the business quickly and whether sales can restart.”

Bain Capital bought Edcon to tap into rising economic growth in Africa’s most industrialized economy, but the company overpaid at the height of the credit bubble, according to Brookes. The private equity firm didn’t take any funds out of the retailer during the nine years of ownership, the CEO said.

Holders of about 80 percent of secured bonds in value signed a lock-up agreement for the debt restructuring, according to a company statement. Other owners include Harvard University Pension Fund and South African lenders Barclays Africa and FirstRand Ltd.’s First National Bank.

Adjusted earnings before interest, taxes, depreciation and amortization slumped 54 percent to 321 million rand in the 13 weeks ended 25 June, Edcon said in a statement. EBITDA declined 1.7 percent to 2.7 billion rand in the year ending March 26.