Amid acute foreign currency shortages and slow growth, Edgars Stores Limited has reorganised its relationship with Edcon. Shareholders have passed resolutions that will effectively stop Edgars from paying franchise fees to Edcon while increasing Edcon’s shareholding in Edgars Stores Limited. This happened at an Extraordinary General Meeting of shareholders held on 16th January 2019. The transaction now awaits Exchange Control Approval from the Reserve Bank of Zimbabwe as well as approval of the listing of new ordinary shares on the Zimbabwe Stock Exchange.
In a notice released after the Extraordinary General Meeting, Edgars Stores Limited said, “…the Company is hereby authorised to acquire the intellectual property rights to trademarks and brands assigned to Edgars by Edcon for the territory of Zimbabwe from Edcon for a consideration of US $1,500,000 to be settled through the issue of 15,000,000 Edgars shares…” In simple terms, this means that Edgars will no longer be paying franchise fees to Edcon. Edgars Stores Limited will issue 15 million shares to Edcon in order to obtain rights to brands such as Edgars and Jet in Zimbabwe. No money will exchange hands.
According to Edgars Stores Limited, this move is meant to cut operating expenses. Their Chairperson, Thembinkosi Sibanda says, “An opportunity to further lower the company’s operating costs arose when the management team entered into discussions with Edcon regarding acquisition of the Edgars and Jet brands locally. The company currently operates these brands under a franchise agreement paying an annual franchise fee calculated in the first year using a formula based on a percentage of revenue…” At the moment, Edgars owes Edcon about $2,1 million in unpaid franchise fees. It is important to note that many local companies running franchise agreements have experienced challenges in repatriating franchise fees to South Africa and other countries due to foreign currency limitations. Recently, Simbisa Brands advised that it was in desperate need of foreign currency to pay franchise fees and meet other forex obligations for brands like Nandos and Rocomamas. Evidently, Edgars are not alone in this.
Edcon currently owns a 38.07% stake in Edgars Stores Limited and this shareholding is held under Bellfield Limited. At the conclusion of this transaction and with an extra 15 million shares, Edcon will now own a 41.07% stake keeping them as the majority shareholder. These 15 million shares will come from unissued shares which are currently under the directors’ control. It is likely that Edcon may look to sell some of its shares to the public down the line. In any case, Edcon know that they will face difficulties accessing their dividends if current economic conditions persist. If they decide to hold onto the shares, this will be in anticipation of improvements in the operating environment and a massive vote of confidence for Edgars Stores Limited. Unfortunately, Edcon are reportedly not doing well in South Africa. If this is true, getting rid of their shares may prove to be a viable option.
After the transaction sails through, we will be keen to know how things pan out for Edgars and Edcon. The prevailing environment keeps worsening and companies will always position themselves to achieve best possible results at all times.