Three big South African companies technically insolvent

Three top South African companies – MultiChoice, Cell C, and the South African Post Office – are technically insolvent.

A company is technically insolvent when its liabilities outweigh its assets. In this situation, the company has negative equity.

A technically insolvent company cannot settle all its liabilities if all its assets are liquidated. This means drastic measures are needed to improve the balance sheet.

Although technical insolvency does not mean a company is bankrupt, it creates a situation where bankruptcy becomes more likely if left unchecked.

Pick n Pay is a good example. Its results for the year that ended 25 February 2024 showed it was technically insolvent.

The retailer’s total assets were R46.51 billion, while its total liabilities were R46.69 billion. This means total liabilities exceed total assets by R183 million.

To address the issue and strengthen the balance sheet, Pick n Pay unveiled a two-pronged approach to raise money to reduce its debt.

Pick n Pay launched a successful Rights Offer, raising R4 billion in capital with a high subscription rate.

The retailer’s CEO, Sean Summers, said the proceeds will be used to pay down debt, stabilise the balance sheet, and invest in Pick n Pay’s turnaround strategy.

The next step is to unbundle Boxer and list it separately on the JSE, with an initial public offering (IPO) set for later in 2024. It wants to raise between R6 billion and R8 billion.

Another intervention is that 112 Pick n Pay stores will either be closed or converted to Boxer franchised stores.

The capital raised from the rights offer, Boxer IPO, and asset disposals from store closures could put the group into a healthier financial position.

Summers has also implemented a back-to-basics strategy to turn the company around, which is already showing positive signs.

Pick n Pay’s example illustrates the drastic measures needed to address a weak balance sheet and technical insolvency.

Three big South African companies – MultiChoice, Cell C, and the South African Post Office – are grappling with the same situation as Pick n Pay.

MultiChoice

MultiChoice’s financial statements for the year ended 31 March 2024 showed that it had become technically insolvent.

MultiChoice’s total assets declined from R47.6 billion to R43.9 billion, while liabilities increased to around R45 billion.

This leaves MultiChoice with a negative equity of R1.068 billion, which means it is technically insolvent.

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

Apart from saying it prioritizes cash generation over growth, MultiChoice does not have a comprehensive plan to improve the situation.

MultiChoice is pinning all its hope on French media giant Canal+, who offered R125 per share to buy the company.

If this deal does not go through, MultiChoice will be in deep financial trouble and may have to launch a rights issue to address its dismal balance sheet.

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.

However, the balance sheet improved over the last year. Its negative equity of R3.2 billion was much lower than the R4.0 billion.

That shows that Cell C is progressing in cleaning up its balance sheet and is on a path to becoming solvent.

After the recent recapitalization and with a new management team, there is a renewed focus on turning the struggling operator around.

However, Cell C CEO Jorge Mendes said this is the last chance for the company to survive and carve a niche for itself in the South African mobile market.

He said Cell C was highly distressed when he joined the company in July 2023. “When I looked at the headlines, it looked chaotic, problematic, and financially distressed,” he said.

“The very things I noticed from the outside looking in turned out to be exactly right. The only difference is that it was deeper and wider regarding the magnitude.”

Mendes said over 99% of companies in Cell C’s position close their doors. “A small fraction survives and becomes unbelievable businesses.  I believe that is where we are,” he said.

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 shutting down. The BRP warned 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.

“The consequences of liquidation are fatal for the SAPO. The estate will be placed in the hands of the Master of the High Court, who will appoint a liquidator to wind up the estate.”

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