Multitudes of jobs at Ellerine Furnishers are on the line, partly due to indiscretions of corporate leadership which plunged one of the largest furniture retailing business in the country into a financial crisis alongside African Bank. Ellerine seems like a sacrificial lamb to save African Bank.
Ellerine, a subsidiary of African Bank Limited (Abil), has been pushed into a voluntary business rescue process which might lead into a fire sale of its assets.
In simple terms a voluntary business rescue procession is a stop at halfway station towards liquidation. It is an attempt to halt a downward financial slide of a business to avoid full liquidation. Businesses are put into a voluntary business rescue process when they are struggling to meet their financial obligations. Ellerine must now appoint an independent business administrator who will then lead the development and implementation of a business rescue (restructuring) plan.
The decision to put Ellerine into voluntary business rescue came on Thursday, two days after Abil released a trading statement that sounded like doomsday pronouncement.
Ellerine, the 60 years old business with more than 1000 stores and about 8000 employees houses a number of popular furniture retailing brands. These include Ellerines, Beares, Geen & Richards, Furniture City, Wetherlys, Town Talk, Lubners, Savells/Fairdeal, Glicks, Mattress Factory, Dial a Bed and Early Bird.
The Ellerine statement said “The Directors of the Company believe that there appears to be a reasonable prospect that the business rescue process will increase the likelihood of the Company returning to solvency, and preserve as many jobs as possible.”
Ellerine fell into Abil control in 2008. The micro lending specialist cum bank acquired, Abil, acquired Ellerine for about R9bn. The rationale provided was that Abil would complement Ellerine’s growing credit sales and ambitions to leverage its network towards rudimentary banking services.
The mix of furniture retailing and financial services, mainly credit sales and related services, is a normal affair in South Africa and around the globe. Many other furniture and general retailers, like JD Group, Edgars, Foschini and Woolworths, dabble into rudimentary banking services. All these businesses know that the trick is to maintain a healthy balance between cash and credit sales. Any seasoned retailer will tell you that Cash in is King.
From 2007 onwards, the Abil powered Ellerine aggressively drove credit sales while alarm bells about high debt levels of South African households were going off. Credit sales had reached more than 60% of total merchandise sales. Credit sales are good if the quality of the loan book is as good. If the loan book is poor credit sales are a business killer.
Abil thought it had better skills to navigate the environment. It has been proven wrong. Non-performing loans have risen significantly in the past few years forcing Abil into huge write offs.
Abil resolved to dispose Ellerine in 2013 but no deal has come forth. In the meantime funding pressures at Abil mounted which may have forced authorities to compel Abil to cut out Ellerine fast in order to save the bank.
Abil’s latest announcement, on Ellerine, said “the Retail furniture business continues to trade at a loss which requires working capital funding from Abil and African Bank.”
As a consequence of the financial performance of EF (Ellerine) a decision has been taken that no further funding would be provided by Abil or African Bank to EF or EHL.”
As a result of the above decision, the Board of EF advised Abil that it has commenced with voluntary business rescue proceedings as provided for by Section 129 of the Companies Act, No 71 of 2008, as amended.”
As the Abil crisis unfolds South Africa will be faced with the question: What should be the acceptable costs of saving a bank.
Addition to the original piece
The Company has nominated the following Business Rescue Practitioners whose appointment will become effective within the next few days: Les Matuson from Matuson & Associates and Jay Pema of Matasis Consulting.