You might presume Hosken Consolidated Investments (HCI) may have underestimated the task to secure an operational turnaround at clothing and textile conglomerate Seardel Investment Corporation. The shock proposals to close certain divisions at textile giant Frame suggest HCI has been forced to forego the “sew-up” turnaround option for a more painful “cut-up” option.

Last year HCI took a 70% stake in Seardel after underwriting the group’s R300m rescue rights issue and — being a union-aligned black empowerment company — the last thing HCI would have wanted to do was shed thousands of jobs in a radical rationalisation.

But let’s be frank: jobs were always going to go at Seardel. But HCJ’s initial tilts at a turnaround were expected to involve tweaking operational processes and closing down non-core divisions (such as the Scripto stationery division, which was closed earlier this year) rather than cutting a huge swathe through operations.

The proposals that Seardel close or dispose of the spinning, weaving and denim divisions of Frame Textiles seem to suggest the already threadbare prospects for the local clothing and textiles have been further frayed by international economic turmoil.

Some of the commentary issued by Seardel about the proposed closures — which will affect 1 400 jobs — were dire. The company argued that cheaper imports — often supplied by companies receiving Government subsidies — as well as structural deficiencies about local incentive schemes made it “all but impossible (for Frame) to compete as a purely commercial enterprise”.

That admission comes after strenuous efforts were made over recent years by Seardel to reduce costs (including workers taking wage cuts) and an investment of R360m in plant and machinery over the past decade.

What worries Finweek is that Seardel’s textile division has in recent years proved more profitable than the group’s clothing manufacturing division. In the half year to end-December 2008 the textile division lost R49m from turnover of R908m while its clothing arm lost R70m off turnover of R887m.

In the year to end-June 2008 the textile division showed a profit of R17m from turnover of R871m, while the clothing manufacturing divisions lost Rl lm from turnover of R931m.

An obvious question is: If HCI is prepared to cut so deeply into the textile operations, then is its loss-making clothing division also set for radical cut-backs and closures?

Seardel CEO designate Stuart Queen says the company has already begun its restructuring process on the clothing side. “We’ve merged the lingerie and swimwear divisions and are moving product ranges to different divisions rather than closing whole divisions.” But Queen won’t be drawn much further on what clearly is a sensitive matter. “Other than that I’d be reluctant to give any forward looking statement.”

At this point, Queen is also reluctant to be drawn on effects of the Frame closures in terms of diminished turnover and (hopefully) improved trading margins. “We’re in a closed period at the moment until our results are out — which should be mid-May. We’ll look to address all the financial implications in due course.”

There can be no doubt HCI — which has the SA Clothing and Textile Workers Union (SACTWU) as a major shareholder — will catch an awful amount of flak for its decision to cull labour-intensive operations.

But let’s be frank: jobs were always going to go at Seardel. That sort of “hard” decision was something the old Seardel — under founder and former CEO Aaron Searll — was reluctant to take, even through trading margins in the clothing and textiles businesses remained under severe competitive pressure over the past few years.

During Searll’s long tenure, many Seardel shareholders had hoped the group would shut down all viable clothing and textiles operations — if only to release the valuable underlying properties.

At end-2008 Seardel carried a net asset value of more than 200c/share — underpinned, for the most part, by R1bn worth of “property, plant and equipment”. With Seardel’s price varying uncertainly between 38c and 44c/share, any efforts to break up Seardel to unlock the underlying value could be lucrative.

Queen says there certainly is industrial property that will be freed by the closure and sale of the Frame businesses. But it seems unlikely that property will be sold. “We haven’t made a decision to sell it and would probably look to lease it.”

Queen maintains HCI still sees value in Seardel as an operational entity rather than a break-up proposition. “Our views haven’t changed in that regard. We’re still cautiously optimistic about the turnaround but retain our pragmatism with regard to the industry and the times we’re living through. Our strategy isn’t to asset strip — we still want to be a local manufacturer.”

Source: Finweek – Marc Hassenfuss