Three top South African companies are technically insolvent
Three top South African companies – Pick n Pay, MultiChoice, and Cell C – are technically insolvent, reflecting the severe consequences of strategic missteps in the country’s tough economy.
A company is considered technically insolvent when its liabilities outweigh its assets. In other words, the company has negative equity.
This means a technically insolvent company cannot settle all its liabilities if all its assets are liquidated.
It is not a death sentence. There are situations in which a company is technically insolvent but still able to meet its financial obligations.
However, technical insolvency creates a situation where bankruptcy becomes a more likely outcome if left unchecked.
Notably, technical insolvency raises red flags for creditors like banks and suppliers. Therefore, they may become less willing to lend money or extend credit to the company because the risk of not being repaid increases.
This can make it difficult for the company to obtain the cash flow it needs to operate.
If these red flags are enough to scare creditors into demanding immediate repayment, companies could also find themselves in a difficult position if they cannot make those payments.
Creditors not getting paid can take legal action to force the company to liquidate its assets. This means selling off equipment, inventory, or even the entire company to pay off debts.
If the company tries to restructure its debt to avoid this, it will need to negotiate better terms with creditors.
However, technical insolvency weakens a company’s bargaining position, meaning creditors are less likely to agree to concessions if they believe the company won’t survive in the long run.
The fact that three top South African companies have found themselves in this challenging position reflects the country’s tough trading conditions and shows how severely strategic missteps are punished.
Below is an overview of what went wrong at each company and what their plans are to fix it.
Pick n Pay
The failed Ekuseni strategy implemented by Pick n Pay’s former CEO Pieter Boone left the company in a dire financial situation that it needs to address urgently.
Last month, Pick n Pay released its results for the year that ended 25 February 2024, which revealed a company in serious financial trouble.
Its net profit was significantly impacted by a R2.4 billion interest expense due to rising debt and an R2.8 billion impairment loss on assets.
These factors contributed to Pick n Pay’s R3.2 billion net loss, the worst in the retailer’s 57-year history.
Apart from its poor operational performance, Pick n Pay also took on more debt than it could handle.
The significant increase in debt caused its total asset value to fall below its total liability value, creating a negative equity value – meaning the retailer is technically insolvent.
However, there is a plan. The retailer has announced a two-pronged approach to raising money to reduce its debt and strengthen its balance sheet.
First, it plans to implement a rights offer that will raise R4 billion from shareholders. Pick n Pay said the offer would “provide short-term liquidity.”
Second, it wants to list Boxer separately on the JSE, with an initial public offering (IPO) set for later in 2024.
The capital raised from the rights offer, Boxer IPO, and asset disposals from store closures could put the group into a healthier financial position.
The retailer’s new CEO, Sean Summers, has also implemented a back-to-basics strategy to turn the company around, which is already showing positive signs.
MultiChoice
Years of financial decline have seen MultiChoice look for growth opportunities wherever it can find them, resulting in an acquisition spree.
This has meant spending billions on projects that may not necessarily deliver a return and potentially leaving the company worse off.
MultiChoice released its latest annual results this month, revealing that the company made a R4.1 billion loss and has become technically insolvent.
The technology giant further 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.
With a dwindling DStv subscriber base and mounting liabilities, MultiChoice has been looking for growth opportunities across the continent.
For example, it is pumping billions into Showmax, hoping to capture a large chunk of the growing African streaming market.
These high expenditure levels have deepened the company’s losses and plunged it into technical insolvency.
However, MultiChoice’s financial problems may not need to be solved internally, as it is currently the subject of an acquisition by French media giant Canal+.
In early June 2024, the two companies confirmed their plan to proceed with a takeover, which will see Canal+ pay around R35 billion for MultiChoice’s outstanding shares.
While there is still a long way to go – and many regulatory hoops to jump through – before this transaction is completed, Canal+ could be the answer to MultiChoice’s financial woes.
Recently, MultiChoice also finalised a R1.2 billion deal to sell 60% of its insurance business, NMS Insurance Services, to Sanlam.
This deal includes a R1.2 billion upfront cash payment and an earn-out agreement of up to R1.5 billion. The earn-out payment is dependent on the financial performance for the year ending 2026.
This transaction will provide MultiChoice with a much-needed cash boost as its Canal+ deal remains uncertain.
Cell C
Cell C has been on a downward trend for years as the mobile operator has struggled with high debt, increased competition and significant network investment challenges.
Blue Label – the largest shareholder in Cell C – released its results for the six months through November 2023 earlier this year.
These results painted a stark picture of Cell C’s deteriorating financial performance and the urgent need for a turnaround.
Cell C reported a loss of R337 million for the six-month period, highlighting the difficulties its new CEO, Jorge Mendes, faces in turning around the company.
Cell C’s total liabilities of R19 billion far exceed its total assets of R15 billion, leaving the company with negative equity of R4 billion.
This means Cell C’s liabilities are far higher than its assets – reversing this situation will be exceedingly difficult.
However, Cell C CEO Jorge Mendes presented his turnaround plan at a media engagement at the end of January.
“We are not in the clear yet. We have been recapitalised twice now. Our balance sheet still looks like a crime scene,” Mendes said.
The latest recapitalisation included a R1.46 billion loan from Blue Label to Cell C, which was used to repay Cell C lenders. The lenders received only 20% of their claimed loans.
The recapitalisation provided temporary relief, but Cell C’s long-term viability remains uncertain, especially considering its poor balance sheet.
Mendes plans to turn this around by solving one of the core issues Cell C has faced since the beginning of its downward spiral – attracting and retaining skilled employees.
“I want to have the best corporate culture in the country. I want staff retention and not staff attrition,” he said.
This means that Cell C’s employee headcount will grow from where it is now at below 1,000 employees.
Mendes explained that key performance indicators and metrics such as revenue, profit, and profit margin will improve due to retaining talent and having a good work environment.
“Profits will come as a result of the underlying culture and philosophy at Cell C,” he said.
Mendes made it clear that Cell C does not aim to be the country’s number one telecoms company, but it certainly does not want to be last.
The initial aim is to reclaim at least its position as South Africa’s third-largest telecoms company from Telkom.
To do this, the company aims to leverage its mobile virtual network operator (MVNO) status to be lighter and more nimble than its competitors.
In effect, Mendes said, the company will be able to replace capex with opex by not having to build and maintain its own network. This will enable the company to retain its value proposition while backing it up with high-quality service.
The company also aims to take market share away from its competitors by launching new products that are not currently offered in the market.
Cell C also recently made a big change to its operating structure by implementing a store franchise model. This plan includes franchising 44 company-owned stores and retaining three stores.
The company said the store franchise model aligns with its strategy of leveraging partnerships to boost revenue and drive growth.
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