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The Edcon Deal: Insights and Lessons Learnt with CEO, Grant Pattison

Following the successful R2.7bn refinancing of retailer Edcon’s debt, CEO Grant Pattison anticipates a future where the group can once again “become independent and sustainable.” 

The subsequent strategy to restructure the Edgars, Jet, Jet Mart and CNA brands with over 1100 stores in Southern Africa and 40000 direct employees is ambitious, Pattison admitted at a recent Gordon Institute of Business Science (GIBS) forum. 

He has committed to fewer, but larger Edgars department stores with improved customer experience and service levels: “We plan to invest in stores and a curated experience, rather than pushing product and price.” There will also be a renewed focus on the financial services offering. 

Pattison described the business as part discounter, part department store, and part financial services provider. The credit offering is “a very important part of the business and we have to get back to the discipline of running that properly,” he said. 

Edcon Recapitalisation 
The recapitalisation programme, which was approved by the Competition Commission at the beginning of May, sought to mitigate the dire financial position the Edcon Group found itself in and avoided potential liquidation, which would have resulted in substantial job losses. 
The deal concluded binding agreements amongst existing secured lenders, the Public Investment Corporation on behalf the Unemployment Insurance Fund and participating landlords. The deal will result in the removal of all of Edcon's interest-bearing debt and introduces a new group structure and set of shareholders.
After an initial failed process to attract new investors, Edcon approached the PIC for funding: “All roads led back to the PIC,” Pattison explained, “as no one else had that kind of money.”

Following the successful completion of the recapitalisation deal, Pattison said he felt corporate debt, specifically bonds, need more stringent regulation. “Often investors don’t know the terms underlying the securities of JSE listed companies. When you breach your covenants the world stops and you are run by the credit committee of a bank, whose only motivation is to get their money back.” 

He credits the involvement of a small group of interested parties for the ultimate success of the deal, as well as the committed participation of stakeholders. 
Pattison said he had been encouraged by the broad support received, and the show of unity and partnership among existing lenders; the ministries of Economic Development, Labour and Finance; labour unions and participating landlords. 
While management put the deal together and advisors were there to guide on how to implement and finance it, Stephen Koseff, former CEO of Investec, “helped the PIC and the banks see implications of a possible failure.” Pattison also acknowledged the involvement of Etienne Vlok, National Industrial Policy Officer at the Sothern African Clothing and Textile Workers’ Union (sactwu), who he said was “integral in helping to pull the deal across the line. It was a true act of leadership, as they had the least money to lose,” Pattison said.
“When you do a restructuring, you are effectively selling the company to new owners. The only reason we are here today is because not a single person wanted the deal to fail. They all worked together to ensure a viable future for Edcon." 

Realignment strategy
Pattison joined Edcon’s Executive Management team in June 2017 and was appointed as CEO in January 2018. While the group has had a series of foreign Chief Executives in its recent past, a South African candidate was preferred to run the business. “Fashion is local, and credit retail is particularly local,” Pattison said. 

Accepting any leadership position requires deep due diligence to understand the financials of a company, he said. “You need time to get into a business and understand it, especially in a turnaround situation. My initial realignment strategy was to open stores, but that destroys value and is in fact totally different to the strategy we ended up with.” 

Pattison called his realignment of Edcon a ‘shrink strategy,’ with plans to focus on fewer department stores and bring Edgars’ beauty offering back in-store with the reabsorption of the Red Square brand. 
Foreign retailers entering the South African market have had “a massive effect” on Edcon’s business, Pattison said. The group’s response, which was to invest in more international, stand-alone stores has drawn customers out of the department store, he explained.  “Our competitors got it right with an increased focus on more local brands.” Future plans include building the Spanish clothing brand Mango as well as Edgars’ private label brands in an attempt to attract high-end shoppers back into the store. 

Deal Learnings 
An important learning Pattison said he gained during the course of the recapitalisation deal was not to burn bridges: “I learnt during the Walmart takeover of Massmart and again now that it’s important to fight and push to the edge, but never ruin the relationship. I would never have been able to do Edcon’s recapitalisation if hadn’t I done the Walmart deal, as I knew the people and what to do,” he said.  
Central to Pattison’s business philosophy is that honesty is the only policy, as customers, staff, shareholders, and investors all prefer the truth. “Keep your integrity. You are under a lot of pressure to lie, but tell it like it is and deliver the bad news first.” 

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