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Stuttafords | Business rescue | Industry news
Q2 2017



are not smiling

Many local suppliers of clothing and footwear brands got their first taste of the concept of business rescue from Stuttafords — and didn’t like it at all. Luckily, Edgars seems to be back in business. Words: Trudi du Toit

Stuttafords provided many brands in the industry with a first taste of a business rescue plan … and for several of them it was akin to Don Vito Corleone of The Godfather making them an offer they couldn’t refuse.

Losing 75% of the debt owed after Stuttafords applied for business rescue at the end of October last year, was never going to go down well with suppliers. It is estimated that the retailer has R200-m worth of unsold branded stock.

But, the terms of the agreement makes it even less palatable. They will only receive 4% of what they are owed up front, and a further 21% over the next 21 months, provided they continue to supply further stock during the period. And they must leave their store-in-store fixtures in place. There is, however, an unspecified promise of perhaps some more if the retailer is sold or makes a profit.

But, in the end it didn’t matter if they refused the offer, or not. Major creditors like Nedbank (owed R147-m) and certain shareholders like Ellerines, owed R37.49-m, had enough votes to approve a business rescue plan put forward by the Ellerine brothers at a creditors meeting on March 8.

Industry suppliers are the losers

The biggest losers are some of the cosmetic brands like L’Oreal or Estee Lauder and directly imported brands like Tommy Hilfiger, which are owed more than R10-m each. But, distributors of brands in the athleisure industry like adidas, PUMA, Polo, Levi’s, Jeep, etc. are also owed amounts worth more than seven digits.

The implication of the deal is that a brand that was owed R2.1-m at the end of October will lose R1.6-m; one that was owed R1.34-m, will lose more than R1-m and a distributor that is owed R800 000 will lose R600 000.

All stock they supplied after business rescue commenced in October 2016, has to be paid for in full.

Ironically, the purpose of voluntary business rescue, as defined in the Chapter 6 of the new Companies Act of 2008, is to provide for the efficient rescue and recovery of financially distressed companies in a manner that balances the rights and interests of all relevant stakeholders. The management of the company is placed under supervision and there is a moratorium on all legal action.

A business rescue plan must be approved to restructure the company’s affairs, property, debts, liabilities, etc. to maximise the likelihood of the company continuing its existence — or, if that is not possible, to result in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.

With the business rescue plan for Stuttafords, the benefits to the creditors who supplied their stock are not as obvious as the benefits to the people who created the problem in the first place, namely the management and owners (shareholders) of the business.

But, since the amount owed to suppliers is less but a fraction of Stuttafords’ R836-m total debt, they had a minority vote, even though none of the suppliers at the final meeting voted in favour of the business rescue plan, says Alex Elliott of Hogan Lovells, who with partner Gareth Cremer, represented some suppliers.

It can be argued that the business rescue practitioners (BRPs), Neil Miller of Mazars and John Evans of RS Advisors, had their eye on the bigger picture. A debt of say R2.1-m may therefore seem insignificant as it is but 0.25% of the total, yet it is a huge amount for any athletic brand to lose.

Despite numerous attempts, Sports Trader was unable to reach either of the BRPs for comment before going to print.

But, if Stuttafords had applied for liquidation, the tables would have been turned: it would have been the worst-case scenario for management, the employees and owners who would have lost their job and a company. All creditors would, however, have got a representative proportion of what they are owed, which would have included assets like the fixtures and branding for store-in-store areas that Stuttafords now retains together with R200-m worth of stock.

If the suppliers had not been satisfied with the terms of liquidation, they could have sued.

Three plans

The business rescue plan that the shareholders and big creditors like Nedbank voted to adopt on March 8, had several facets to it. Apart from the debt repayment structure mentioned above, the main difference between this rescue plan and the previous two proposals concerns the future ownership and management of the store:

  • The Ellerine Brothers will invest R12-m in the company for a 76% stake. They previously had a 26.4% shareholding. The remaining 24 percent would be held by Stuttafords’ parent company.
  • The management team appointed by the other major shareholder, venture capitalist firm Vestacor, including CEO Robert Amoils, are to step down.
  • An unnamed retail expert would run the business until a buyer can be found.
  • They propose an 18-month period to meet performance targets and pay creditors back, or pay creditors back earlier if they find a suitable buyer.
  • The rescue plan would also be dependent on Nedbank giving Stuttafords a R60-m loan facility for operating expenses.

At the time of going to print the name of the retail expert or potential buyer was still unknown, although Ellerines said they had been in contact with interested parties.

“For all we know it could be the former owners,” commented a disgruntled supplier, who, like most others, was kept out of the loop.

A previous proposal by the BRPs was rejected by nearly 30% of the creditors on March 2nd. Then, the terms had been as follows:

  • Unsecured creditors {suppliers) would have received 23% of what was owed to them: 5% up front and 18% over the next 19 months, provided they continued to supply stock;
  • Vestacor, headed by current Stuttafords CEO Robert Amoils, would have contributed R10.3-m for a 56.12% stake. Some industry members would remember Vestacor as the former Fashaf and Moresport owners;
  • The shareholding of other shareholders (Including Ellerines) would have been diluted to below 15% in total, or 1% or less each.
  • The management of Stuttafords International Fashion Company would have 20.08% shareholding and Stuttafords Stores 13.9%

The changing-of-the-guard differences between the two proposals elicited the cynical remark from a creditor that “it is mainly about a spat between shareholders — everybody knows there has been a fall-out between the Ellerine and Rubenstein families.” Which is costing the industry dearly.

In trouble before

For business rescue to succeed, there must be a reasonable expectation that the financially distressed business would again trade profitably under careful management to reorganise and restructure it until it overcomes the special circumstances that caused the financial difficulties, attorneys Lawrence Whittaker and Henry Stubbings of Herold Gie Attorneys explain on their website.

“One of the key criteria to qualify for protection is that it can be proven that the company has a fair chance of recovery,” says Whittaker.

Even then, there is international evidence that only 5% of business rescue cases are successful, he writes. In South Africa studies are still being conducted, but the success rate is estimated to be 10-12%.

Stuttafords has been struggling for at least thirteen years under various owners and managers and it would therefore be difficult to identify the current special circumstances.

After the management buyout of 2004, high debt and inadequate funding had placed it on a path to commercial insolvency. In 2006 a consortium of shareholders came to the rescue. They were the Ellerine Brothers (26.4% ), Vestacor under CEO Gerald Rubenstein (20.1%) plus various smaller shareholders, including other members of the Rubenstein family.

The department store took a further knock in 2008 when former CEO Marco Cicoria decided to supplement their in-house brands by directly importing expensive international brands like Gap, Ted Baker, Banana Republic, Tommy Hilfiger, etc. This strategy also proved costly for fellow department store Edgars — especially after the Rand came tumbling down and credit controls were tightened.

More recently, by financial year end in June 2015, Stuttafords reported a R59.8-m loss, which it attributed to operating expenses and finance costs.

In the following year, ending June 2016, their pre-tax loss was R17.5-m, despite making a gross profit of R299-m on revenue of R753-m. This was due to high operating expenses (R276-m), finance cost (R13.8-m) and depreciation (R28.4-m) they reported.

Four months later Stuttafords was placed under supervision of the BRPs. For the next three months, over the 2016-17 festive season, all stores traded profitably, recording sales of R176.9-m, which is a gross profit of R82.8-m, they reported.

When applying for business rescue, CEO Amoils said the turnaround strategy would include growing house-brands to 10-15% of sales and only concentrating on own international brand imports that are the most profitable like Ted Baker, Tommy Hilfiger and Banana Republic.

They were also planning on closing some non-performing stores and no longer invest in shopping mall rejuvenations.

After the adoption of the Ellerines proposal, this becomes moot. It now remains to be seen what the turnaround strategy of the new manager or buyer will be.

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