Two well-known South African companies in deep trouble
Two well-known South African companies, Ellies and West Pack, are in business rescue and face an uncertain future.
The two companies have been casualties of a changing business environment, poor economic conditions, and poor business decisions.
Many businesses are struggling in the South African economy. Between January and April of this year, 513 companies have been liquidated.
Even some of South Africa’s largest companies, like Pick n Pay and DStv-owner MultiChoice, are facing headwinds.
Pick n Pay’s latest financial results revealed that it swung from a R1.17 billion profit to a R3.2 billion net loss over the last year.
For the first time in Pick n Pay’s listed history, it has become technically insolvent, with total liabilities exceeding total assets by R183 million.
Even more concerning was that the retailer breached all of its debt covenants. It now had to launch a rights offer and sell part of Boxer to reduce its debt.
MultiChoice unveiled equally atrocious results last month. Over the last financial year, the company recorded a R4.1 billion loss and became technically insolvent.
MultiChoice suffered a 9% decline in active subscribers, mainly due to a 13% decline in the Rest of Africa business and a 5% decline in South Africa.
The broadcaster’s financial mess was self-inflicted. It lost billions through poor acquisitions and bad business decisions hurt its DStv subscriber base.
Despite its challenging position, MultiChoice’s problems can all be solved through the planned Canal+ acquisition.
Ellies and West Pack are not so lucky. They face an uncertain future as it is not clear how they will be saved.
While their pain is partly caused by the South African business environment, most of their problems are self-inflicted.
Below is an overview of what went wrong at these companies and their plans to turn things around.
Ellies liquidation
Ellies has gone through business rescue proceedings, with the practitioners determining that the company cannot be saved and recommending liquidation.
This is a sad end to the once-powerful electronics brand founded in 1979 by entrepreneur Ellie Salkow.
Under Salkow, Ellies grew rapidly and became a favourite among investors, reaching a peak share price in 2013.
However, the company misjudged the market. It bet big on digital TV migration and pumped money into satellite dishes and related equipment.
When digital TV was not implemented according to the government’s timelines, and DStv started to lose its shine, Ellies suffered.
It tried to pivot into alternative energy products, but poor execution prevented it from taking advantage of the strong demand for these products.
After multi-year losses, Ellies enter into voluntary business rescue proceedings on 31 January 2024.
Only a few months later, in April 2024, its business rescue practitioner concluded that there was no reasonable prospect of the company being rescued and decided to place it into liquidation.
The company posted a R106.5 million loss for the six months that ended 31 October 2023, which was 205.2% worse than the R34.9 million loss in the prior period.
Ellies Electronics has clarified that it will continue to trade despite the liquidation of its parent company, Ellies Holdings.
Ellies Electronics is the main operating subsidiary of the Ellies Group and contains all of the group’s cash-generating business units.
“Its only assets are shares in its operating subsidiary companies”, explained John Evans, business rescue practitioner for both Ellies Holdings and Ellies Electronics.
Ellies Electronics CEO Shaun Prithivirajh said he has received offers from third parties who wish to acquire the operating divisions.
“The fact that Ellies Electronics continues to trade is an important factor for all stakeholders to note,” he said.
There is, therefore, still hope for the Ellies brand to live on in South Africa.
West Pack in business rescue
West Pack is the most recent prominent South African company to enter into business rescue proceedings.
The retailer announced that its board of directors adopted a resolution on 9 May 2024 to voluntarily commence business rescue proceedings.
The retail group comprises numerous companies, including West Pack Lifestyle, West Pack Lifestyle Distribution Centre, West Pack Franchise, Petzone, and Petzone Franchise.
The company cited several reasons for its financial distress. Notably, it cited its rapid growth, which led to cash flow problems.
West Pack said it opened stores too quickly and needed to stock them with inventory, which used up its cash reserves and made it difficult to repay debts.
They weren’t buying the right products to meet customer demand, which led to unsold inventory. Cash flow limitations prevented them from correcting this issue.
It also pointed to South Africa’s struggling economy and load-shedding, saying these factors further hurt the business. They caused sales to decline and pushed the company into a loss.
Despite these challenges, West Pack said there was a reasonable prospect of the company being saved. It is now executing initiatives to restructure the business and drive its turnaround.
It is exploring offers to acquire some of West Pack’s assets or the full business, considering a corporate finance transaction, and selling non-core assets.
It is further reducing overhead expenses and is restructuring the business to achieve an ideal retail footprint with market-aligned rental rates.
“By implementing the above initiatives, there will be a reasonable prospect of rescuing the company,” it said.
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