Two top South African companies and one SOE in business rescue
Two well-known South African companies, Ellies and West Pack and the South African Post Office (SAPO), are in or have been in business rescue after suffering multiple strategic missteps. However, they all have a plan to stay afloat.
Over the past few years, South Africa’s weak economy has placed businesses under significant pressure, with hundreds having to close down.
Between January and April of this year, 513 companies have been liquidated. This has brought the total liquidations over the past five years to over 8,000.
This is emblematic of South Africa’s tough operating environment, which has seen thousands of companies head down the route to insolvency and liquidation – processes that often involve business rescue proceedings.
In the past, the impact of the struggling economy has largely been limited to smaller companies that are not strong enough to withstand external shocks on the scale of the past few years.
However, even larger companies have recently started succumbing to these pressures and have seen their businesses rapidly decline.
Interestingly, in the cases of Ellies, West Pack, and the SAPO, not only the external environment but also their own strategic failures have led them to this point.
While the SAPO’s struggles culminate in years of neglect and mismanagement, Ellies and West Pack have seen a far more rapid decline.
Below is an overview of what went wrong at these companies and what their plans are to turn things around.
Ellies
Ellies is arguably the worst of all three organisations. It has already gone through business rescue proceedings, with the practitioners determining that the company cannot be saved and recommending liquidation.
Founded in 1979, Ellies grew rapidly and became a favourite among investors, reaching a peak share price in 2013.
However, a failed government project and the company’s struggle to find new revenue streams resulted in a decline in investor interest and financial health.
This saw 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 when it reported its latest financial results.
However, Ellies Electronics has clarified today 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.
Ellies Electronics clarified that Ellies Holdings Limited is the JSE-listed holding company of the Ellies Group of operating entities.
“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 and is hopeful that the sale of these viable operations will be concluded in the coming weeks.
“This not only ensures the continuation of business relationships but also provides the opportunity for a significant number of employees to be transferred to the potential acquirers,” he said.
“The fact that Ellies Electronics continues to trade is an important factor for all stakeholders to note.”
There is, therefore, still hope for the Ellies brand to live on in South Africa.
West Pack
West Pack is the most recent prominent South African company to enter into business rescue proceedings.
The retailer recently 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 and has 924 employees.
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.
The retailers also explained that 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.
These initiatives include exploring offers to acquire some of West Pack’s assets or the full business.
It is also considering a corporate finance transaction and selling non-core assets to improve its financial position.
Operationally, it is improving procurement procedures to achieve optimal stock levels and a better product mix.
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.
The South African Post Office
The SAPO’s failures have been well-documented. The state-owned entity had been accumulating significant losses for years, reaching a staggering R19 billion by September 2023.
While there are many reasons behind the decline, the rise of digital communication was a major factor, as it chipped away at traditional postal services, a core revenue source for the SAPO.
The state-owned entity struggled for years with operational inefficiencies as it struggled to adapt to the changing landscape and had bloated operational costs.
In the past few years, SAPO became unable to meet its financial obligations, leading to the threat of liquidation.
However, recognising the SAPO’s vital role in maintaining communication infrastructure in South Africa, the government opted for business rescue over closure.
Therefore, a plan was drafted to restructure the SAPO, aiming to stabilise its finances, reduce its reliance on government handouts, and streamline its operations.
This includes closing a significant number of branches across the country and reducing its employee headcount.
The government also plans to turn the Postbank into a fully-fledged commercial bank.
The business rescue process offers a chance for the SAPO to modernize and become financially viable, but whether this plan will successfully revive the Post Office remains to be seen.
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