Close

Not a member yet? Register now and get started.

lock and key

Sign in to your account.

Account Login

Forgot your password?

HCI – THE EYE OF THE NEEDLE

THE RUMOUR Finweek has heard on more than a few occasions is that HCI had its hand forced at Seardel by the unions. In that instance the union — the SA Clothing and Textile Workers’ Union (Sactwu) — happens to be a major shareholder in both HCI and Seardel. Sactwu relinquished its rights in Seardel’s R300m rights offer to”allow” HCI to take up the position as the majority shareholder in the business, effectively making a R200m investment in the process.

However, one source indicates the price HCI paid for admission at Seardel was a lot lower than purportedly proposed earlier by the company’s banks. If indeed HCI did have its hand forced at Seardel, then the company executives are certainly putting on a brave face. HCI’s last annual report didn’t make too detailed a reference to its clothing and textiles investment but directors did refer to “a significant opportunity” to take control of the Seardel Group.

While HCI deemed Seardel a significant opportunity it was around that time that bankers began viewing the loss-making Seardel with some trepidation. To put things bluntly, it looked very much like Seardel’s bankers — which had seen lending limits regularly breached — were ready to pull the plug or force through an onerous recapitalisation exercise.

HCI chairman Johnny Copelyn told shareholders at a recent Seardel AGM the company “came as close to bankruptcy as one would like without going bankrupt”

But by late October last year HCI seemed to have settled matters down at Seardel. So much so that in its interim report to end-June HCI viewed Seardel “as a major turnaround acquisition with the hope that it will be restored to profitability after 12 months’.

Looking at Seardel’s latest annual report, HCI’s assessment of achieving a turnaround in 12 months seems optimistic.

While Seardel took a number of blows on the chin during its 2008 financial year (including restructuring costs and impairments) the operating performance of the core clothing and textiles divisions was ominous. Textiles turned over R1,55bn but yielded an operating loss of R33m, while the clothing cluster showed a hefty R162m loss from turnover of almost R1,7bn.

The scariest part is that Seardel’s business model has been creaking unconvincingly for the past five years. Between year-end June 2002 and year-end June 2007 trading margins have crimped from more than 6% to under 3%, return on total assets has fallen from 9% to 3,8%, return on investments from 3,5% to 1,8% and return on shareholders’ interests from more than 85% to just 3,3%.

Those statistics would suggest that perhaps Seardel is a bridge too far for HCI…

Frater Asset Management’s Matthew Kreeve says with the rand still vulnerable, Seardel has more scope to improve profitability despite being hampered by weak local retail demand.

Imara SP Reid analyst Warwick Lucas says at face value the Seardel deal looks a brave bid by HCI. “It probably isn’t… Seardel is rich in lots of illiquid assets. While HCI may be sympathetic to the employees it will have no qualms about the asset base.’ But Lucas reckons HCI can expect a time-consuming process.

Kreeve is a tad more hopeful about an operational turnaround. “HCI has found in Seardel a large chunk of revenue held by distressed sellers with no access to the two things HCI does have in spades: capital and relationships:’ He argues that by applying capital and relationships HCI should be able to keep a large portion of SA’s clothing industry productive”at a reasonable if not stellar price’.

HCI, says Kreeve, will also gain access to the upside represented by improved border control, a weaker rand and Government contracts (such as the SA National Defence Force). “They can also afford to hold non-core assets until there’s a better environment to sell them.’

But what is – in HCI’s opinion — the most important change that needs to be made to make Seardel viable? Recently appointed executive director Stuart Queen says unlocking the economy of scales inherent in a business of Seardel’s size, right-sizing the business by eliminating low margin and negative margin turnover and consolidating facilities and management structures are key processes in a turnaround strategy.

Queen adds that Seardel will also need to drive production efficiencies, which will not only reduce the total cost of production but also enable it to reduce working capital levels, thereby releasing cash to reduce debt. However, he cautions there are a few things external to Seardel that will have an effect on a turnaround. “First, the instances of imported clothing and textiles entering our market without the necessary duties being paid are great. That includes under-invoicing, both value and volume, transshipping and simply smuggling the goods into the country free of any duties whatsoever:’

Queen alludes to recent press coverage of the raids being conducted by the SA Revenue Service that those items aren’t restricted to the informal sector but also end up in the formal retail sector.

He says Seardel also has to compete with SA suppliers who don’t comply with the terms of the Bargaining Council’s collective agreement. “If those practices can be arrested it will certainly improve the chances for a successful turnaround immeasurably.’

Ultimately much — at least over the short to medium term — will depend on how much cost can be cut out of the Seardel business(es) without giving up critical mass. Queen says it’s not possible to quantify how much can come out of Seardel. “It’s difficult to estimate a number at this point in our process but we believe that cost savings will be significant:’

So far Finweek has noted some key developments, such as the closure of its plush Constantia head office (although modest measured against Seardel’s original HQ at Monterey in Bishops Court) and proposals to close down its not-so- viable Scripto stationery-manufacturing subsidiary.

Those are perhaps developments that should already have taken place under the previous management’s tenure led by founder and major shareholder Aaron Searll. Searll no longer plays an executive role at Seardel, and a number of long-serving directors (such as financial director Arthur Jacobsohn and Russell Upton) have departed the scene.

As far as management changes at Seardel go, the official board restructuring sees Copelyn assuming the role of chairman of the board, with Seardel stalwart Walter Simeoni remaining CEO.

But — significantly — HCI has opted to split the Seardel business into clothing and textiles divisions headed by Anthony Dixon-Seager and Dave Duncan respectively.

Naturally, the major premise around Seardel for the past five years is that many of the group’s factories and plant manufacturing clothing and textiles can be shut down, allowing the surplus industrial properties to be sold off for the benefit of shareholders. Searll resisted such calls for the past three years, backing an operational turnaround rather than a break-up mission to re-build shareholders’ returns.

Will things change on HCI’s watch? Queen says cost-cutting at Seardel will be across the board and not limited to the unprofitable clothing manufacturing side. He stresses: “As opposed to the factories being unviable, what we’re really trying to do is identify areas where factories producing similar items can be consolidated. We’re also focused on consolidating management structures.’

Queen adds it’s not Seardel’s intention to sell off non-core subsidiaries, such as Sharp Electronics or Prima Toys. “Even if it were, the market isn’t conducive to asset sales currently:’

For those counting on an asset strip and unlocking property value, Queen throws a dampener on those hopes. “We actually have very little non-core property. Nearly all of the properties are being utilised by the group.’ But he does concede the consolidation process at Seardel may unlock some surplus property.

Ultimately, Queen believes HCI can pull off a turnaround at Seardel. “I do think that HCI has a good chance of getting a decent return on its investment:’ However, Queen is fully cognisant of the fact this is a difficult time in a difficult industry. “We know the turnaround won’t be easy or quick, so we’ll try and keep a healthy dose of pragmatism in our approach.

“It’s going to take a lot of hard work to get there but I feel Seardel’s management team is committed to the process and the group has very talented people who are relishing the challenge:’

Source: Finweek – Marc Hassenfuss