https://www.engineeringnews.co.za

Two out of three are bad

1st April 2016

By: Riaan de Lange

  

Font size: - +

Cast your mind back to November 1, 1997. This was when Shoprite Holdings acquired OK Bazaars Group from South African Breweries (SAB), now SABMiller.

Shoprite acquired OK Bazaars for what, at the time, was described as the ‘nominal’ sum of R1. (Back then, the exchange rate was R8.17 to the British pound – as I am writing, it is R22.11 to the pound.)

At the time of the OK Bazaars acquisition, SAB had injected an estimated R1-billion since delisting OK Bazaars in March 1994. According to media reports at the time, the deal included a guarantee of R540-million in assets and loan accounts on the acquisition day. (In 1997, Meyer Kahn was the CEO of OK Bazaars Group and from 1981, he served as group MD of SAB and as its executive chairperson from 1990 to 2012.)

Chances are that you are familiar with the success story that OK Bazaars’ incorporation into Shoprite Holdings became. According to the Deloitte Global Powers of Retailing survey for 2015, Shoprite Holdings was named the number one retailer in Africa and the Middle East last year. The Financial Mail’s Top Companies 2015 ranked Shoprite Holdings as the Top Retail Company in 2015 and the company was ranked fourteenth on the 2015 SA Giants list.

But the other retail business in which SAB sold its interest turned out to be less of a success story; in fact, it is currently fighting for its survival – well, at the very least, in its present form. On July 6, 2004, SAB announced the impending sale of its entire stake (21%) in Edgars Consolidated Stores (Edson), South Africa’s largest nonfood retailer. Like OK Bazaars, Edgars was founded in 1929. As to what the future holds for Edcon, well, it is going to remain extremely tough. According to its results for the three months ended December 26, 2015: “As at December 26, 2015, the Edcon group reported net debt of R22.621-million, a decrease of R4.478-million, from R27.099-million as at September 26, 2015, driven mainly by the conclusion of the exchange offer on November 27, 2015.”

Let us consider another company that was also established in the 1920s – on March 1, 1923, to be exact. The day saw the establishment of the Elektrisiteitsvoorsieningskommissie (EVKOM) by the government of South Africa; the company was also known as the Electricity Supply Commission (Escom). In 1986, these two acronyms were merged (combined), and the company simply became known as Eskom.

This made me wonder, and for a brief moment consider this to be a possibility: what if government was to decide to put Eskom up for sale? Assume that it is offered for sale at the exact same price and under the same SAB conditions – for R1 and taking on all its debt and liabilities. Do you expect there to be a willing buyer for Eskom? One would expect that anyone willing to acquire Eskom would be interested in its future economic viability – revenue generation capability. Would it at least be able to service its debt and would there be the possibility – in restructure – to reduce its other liabilities?

If there would be no willing buyers, let us consider Eskom’s many suppliers. Would any of them not have an interest, or would they only be willing to supply Eskom? Is it a safer bet, or does it make more financial sense to be a supplier, in which case you would be guaranteed payment for your goods or services? Just in case you are wondering, it is not unknown internationally for private companies to generate electricity and to supply it to various levels of government. Just in case you have forgotten, Eskom generates about 95% of the electricity used in South Africa and also exports electricity to neighbouring countries. Yes, it exports electricity, and also imports electricity. It is understood that this is the result of contractual obligations.

So, if there are no potential buyers, is one to deduct that the real money is to be made in supplying Eskom rather than in running Eskom as a bona fide business?

As things stand, Eskom, which, according to Public Enterprises Minister Lynne Browne, had debt of R333-billion at the end of 2015, which is expected to exceed R350-billion over the next five years, is to continue being a drain on the South African government’s financial resources, with yearly National Energy Regulator of South Africa (Nersa) tariff increases set to become a standard feature. On March 1, Nersa approved a 9.4% electricity increase for 2016/17, which comes into effect today, April 1. This follows a press briefing held by Finance Minister Pravin Gordhan ahead of the 2016 Budget speech, where he said that “[electricity] tariff increases should only be approved if they are necessary, and not just to make things more comfortable”.

As a consequence of the electricity tariff increases, South African manufacturers’ competitiveness will continue to be impeded and the country’s attractiveness as a foreign direct investment destination will become excessively difficult. As a result, the manufacture of goods will tend to migrate from the country.

Is this not already the case for many a product available to South African consumers? Why are overseas companies willing to export to South Africa, but not willing to invest in its economy? Is this not equitable to a South African company having a preference of only being a supplier, rather than having an interest in owning the company that it supplies? A case of tomato (təˈmeɪtəʊ) and tomato (təˈmɑːtəʊ) or potato (pəˈteɪtəʊ) and potato (pəˈtɑːtəʊ)?

I have no doubt that much will continue to be written about Eskom for many years to come, particularly in respect of the costs that it has imposed, and continue to impose, on the South African economy. Surely, its role in the decline of South Africa’s economic fortunes – its manufacturing fortunes, in particular – cannot be denied, deflected or underestimated.

Considering the fortunes of the three major South African companies established in the 1920s, you have to be sad that two out of three are bad. With sincere apologies to Meat Loaf – Two out of Three Ain’t Bad, from the 1977 ‘Bat Out of Hell’ album.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

Comments

Showroom

Booyco Electronics
Booyco Electronics

Booyco Electronics, South African pioneer of Proximity Detection Systems, offers safety solutions for underground and surface mining, quarrying,...

VISIT SHOWROOM 
Aqs image
AQS Liquid Transfer

AxFlow AQS Liquid Transfer (Pty) Ltd is an Importer and Distributor of Pumps in Southern Africa

VISIT SHOWROOM 

Latest Multimedia

sponsored by

Option 1 (equivalent of R125 a month):

Receive a weekly copy of Creamer Media's Engineering News & Mining Weekly magazine
(print copy for those in South Africa and e-magazine for those outside of South Africa)
Receive daily email newsletters
Access to full search results
Access archive of magazine back copies
Access to Projects in Progress
Access to ONE Research Report of your choice in PDF format

Option 2 (equivalent of R375 a month):

All benefits from Option 1
PLUS
Access to Creamer Media's Research Channel Africa for ALL Research Reports, in PDF format, on various industrial and mining sectors including Electricity; Water; Energy Transition; Hydrogen; Roads, Rail and Ports; Coal; Gold; Platinum; Battery Metals; etc.

Already a subscriber?

Forgotten your password?

MAGAZINE & ONLINE

SUBSCRIBE

RESEARCH CHANNEL AFRICA

SUBSCRIBE

CORPORATE PACKAGES

CLICK FOR A QUOTATION







sq:0.082 0.14s - 144pq - 2rq
Subscribe Now