Another major company in South Africa enters business rescue

 ·8 Jul 2024

Automotive parts retailer and wholesaler AutoZone has voluntarily entered business rescue as it is in financial distress.

The decision followed a resolution taken by the AutoZone Holdings board of directors on 1 July 2024.

The Companies and Intellectual Property Commission has received AutoZone’s application to be placed in voluntary business rescue.

The group operates close to 200 stations across the country and employs over 1,400 people.

The company said that it is unlikely to pay off its debts when they are due over the next six months.

In a sworn statement of facts, Group CEO Dion De Graaff said that the group underwent a private equity deal in 2014 funded by a responsible level of debt.

That said, the group’s performance did not meet expectations amid the poor performance of the South African economy, which was exacerbated by the Covid-19 pandemic, civil unrest and a period of stagflation.

During this period, the group faced increasingly burdensome debt repayment structures. By late 2021, it became clear that operations were contracting below the break-even point.

To address these problems, the lender, Absa, agreed to provide quarterly debt service holidays, offering the business relief.

A sales process was started to recapitalise AutoZone.

“While liquidity was sufficient to halt the negative leverage, it was not enough to return to positive leverage, effectively keeping the business at break even,” said De Graaff.

“The facilities from Absa are set to mature on 30 June 2024.”

“However, with the sales process aimed at recapitalising the business not concluding in a sale, the bank has declined to give another extension.”

However, as the group has a loyal customer base and valuable intellectual property on certain products, De Graaff believes that the business is attractive to those in the automotive spares industry. He said that three interested third parties have expressed interest in investing in the group.

With the proceedings allowing the business rescue practitioners the time to find investors and/or purchasers looking to restructure the company, the CEO believes that there is reasonable ground for saving the company.

Growing list

AutoZone joins a long list of South African companies that are in distress, including major brands like West Pack, Ellies, Pick n Pay and Multichoice.

According to the latest data from Stats SA, 638 businesses in South Africa were liquidated in the first five months of 2024.

Moreover, two well-known South African companies, Ellies and West Pack, face an uncertain future.

Ellies, for instance, had a tough period. Business rescue practitioners determined that the company could not be saved and recommended liquidation.

The former darling on the JSE has recently misjudged the market, betting big on digital TV migration and investing heavily in satellite dishes and related equipment.

Ellies suffered when digital TV was not implemented according to the government’s timelines, and DStv started to lose its shine.

Although it tried to pivot into alternative energy, poor execution prevented it from taking advantage of the strong demand for these products, especially in 2023, when the nation experienced a solar boom due to heightened load shedding.

Ellies Electronics said it would continue to trade despite the liquidation of its parent company, Ellies Holdings.

West Pack also voluntarily commenced business rescue proceedings in May.

The retail group houses several companies, including West Pack Lifestyle, West Pack Lifestyle Distribution Centre, West Pack Franchise, Petzone, and Petzone Franchise.

The company stated that a core reason for its financial distress was its rapid growth, which led to cash flow problems.

The group opened stores too quickly and needed to stock them with inventory, which utilised its cash reserves and made it challenging to repay debts.

The poor performance of the economy and load shedding also did not help matters.

However, West Pack said there was a reasonable prospect of being saved, with it now implementing initiatives to restructure the business and drive its turnaround.

While nowhere near the business rescue office, major JSE-listed companies like retailer Pick n Pay and multimedia group Multichoice are technically insolvent – meaning their liabilities outweigh their assets.

In May, Pick n Pay released its audited results for the year ending 25 February 2024, showing that its total liabilities exceeded total assets by R183 million.

The retailer’s total assets amount to R46.51 billion, while its total liabilities amount to R46.69 billion.

The largest contributor to the increased liabilities was interest-bearing debt which rose by R5.7 billion from a year ago.

Pick n Pay’s debt interest costs it R2.4 billion a year. The company’s net debt-to-EBITDA increased from 1.1 times to 6.3 times.

Even more striking was that Pick n Pay has breached all its debt covenants, pointing to serious problems at the retailer.

At Multichoice, in June, the group reported a staggering R4.1 billion loss for the year ending 31 March 2024, with the company’s total assets shrinking from R47.6 billion to R43.9 billion, while liabilities rose to around R45 billion.

Read: Five big car brands that kissed South Africa goodbye

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