Four big South African companies are technically insolvent

A few of South Africa’s most prominent companies, including the SA Post Office, SABC, MultiChoice, and Cell C, are technically insolvent.

A company is technically insolvent when it has negative equity. This means that its liabilities outweigh its assets.

Negative equity is displayed in a company’s balance sheet, showing that its liabilities are higher than its assets and that its net worth is negative.

The situation typically occurs when a company takes on more debt and borrowings than what it can serve.

When the debt and borrowings rise faster than its assets, and start to outstrip it, the company becomes technically insolvent.

It is important to note that technical insolvency differs from actual insolvency when a company cannot make the required payments to vendors or lenders.

Technical insolvency is not a death sentence. Many companies have been in this position and have turned the situation around.

However, unless a technically insolvent company takes drastic measures to strengthen its balance sheet, it risks bankruptcy.

This means that a company in such a position must implement cost-cutting measures, raise capital, or a combination of both.

An example of this in South Africa is Pick n Pay. The company’s latest financial results revealed that it had become technically insolvent.

To strengthen its balance sheet, Pick n Pay launched a successful rights issue through which it raised R 4 billion.

Pick n Pay CEO Sam Summers explained that the money would be used to pay down debt and strengthen the balance sheet.

The retailer is also unbundling Boxer and will list it separately on the JSE in an initial public offering (IPO), which will raise R6 billion to R8 billion.

In addition to raising capital, Pick n Pay is also cutting costs by closing or converting 112 Pick n Pay stores.

These interventions will ensure that Pick n Pay’s balance sheet looks much healthier and that it is no longer technically insolvent.

The same will need to happen at other technically insolvent South African companies, including the SA Post Office, SABC, MultiChoice, and Cell C.

South African Broadcasting Corporation (SABC)

The South African Broadcasting Corporation’s (SABC’s) 2023/2024 annual report revealed that the state broadcaster is technically insolvent.

“The impact of actuarial valuations on post-employment benefits since FY2020 has given rise to the negative equity reported in the Statement of Financial Position as of 31 March 2024,” it said.

Another name for negative equity is technical insolvency, which the state-owned enterprise must address to become sustainable.

This will be an uphill battle. Its audience is shrinking, and people who migrate to streaming services do not want to pay for TV licences.

This caused license fee compliance to decline to all-time lows. “Compliance cannot be enforced, causing the non-compliance rate to increase to 85.60%,” the SABC said.

These problems filtered down to the bottom line. The SABC’s annual report revealed a loss before interest and tax of R192 million.

The SABC said it ‘remains materially uncertain’ whether it will be able to meet its obligations in the next twelve months.

It will require implementing severe austerity measures, including suspending more than 80% of the long-term capital plan and limiting content investment.

Cell C

Cell C’s annual financial statements for the 2024 financial year revealed that it remained technically insolvent. Its liabilities of R17.3 billion exceeded its assets of R14.1 billion.

Although this is a challenging position, a recapitalisation process and reduced costs have helped Cell C to improve its balance sheet.

Its negative equity of R3.2 billion in the last financial year was much lower than the R4.0 billion the year before.

Cell C CEO Jorge Mendes added that the recapitalisation and new management team means a renewed focus on turning the struggling operator around.

Mendes warned that this is the mobile operator’s last chance to survive, as it cannot continually go to the market for more money.

MultiChoice

MultiChoice’s financial statements for the year ended 31 March 2024 showed that its assets declined while liabilities increased, leaving it with negative equity of R1.068 billion.

One of MultiChoice’s biggest problems is its long-term loans, which increased from R8 billion to R12 billion over the last year.

Unlike some of the other companies which have become technically insolvent, MultiChoice does not have a comprehensive plan to turn the situation around.

Instead, it is pinning its future on French media giant Canal+, which is buying the company. It offered R125 per share to shareholders.

MultiChoice and Canal+ are currently completing the necessary steps to make the deal happen, including obtaining all regulatory approvals.

Should the deal not happen, MultiChoice will be in deep financial trouble and may have to launch a rights issue to address its dismal balance sheet.

South African Post Office

The South African Post Office’s balance sheet deteriorated significantly over the last few years despite receiving billions in bailouts.

Assets plunged from R16.07 billion to R4.5 billion in three years. Liabilities increased in the past five years, reaching R12.4 billion last year.

This resulted in the Post Office becoming technically insolvent and unable to repay its liabilities if it were to liquidate all assets.

Its business rescue practitioners (BRPs), Anoosh Rooplal and Juanito Damons, proposed a plan to significantly cut costs by reducing the Post Office’s headcount and branch network.

Despite the cost-cutting measures, the Post Office is on the brink of closing. The BRP warned that it may have to close its doors without additional funding.

The BRPs said the Post Office is nearing its ‘Day Zero’ and must consider whether the company can still be rescued.

“Based on the aforesaid, with no additional funding, the BRPs will be legally obliged to place the SAPO in liquidation as directed by section 141 of the Companies Act,” the presentation said.

In this scenario, the BRPs said all jobs at the SA Post Office would be lost, and all business operations would cease.

Read: 4 of South Africa’s biggest employers in serious trouble