Founder: Turnaround Talk
What a difference a few months make. Earlier in the year, national arms manufacturer – Denel – was teetering on the edge of financial ruin. The situation was so desperate that the company faced a number of liquidation bids and had no money to pay its staff.
In an article published in April, I asked whether Denel was a prime candidate for business rescue, or if the company was a poisoned chalice. It seems as if the company was none of the above. Despite being kicked out during the State Capture Hearing, former Denel CEO – Riaz Saloojee – returned to the company as its restructuring officer. An article by News24 points out that Denel’s restructuring programme is paying dividends and that the next step is for the company to prove its worth to Finance Minister, Enoch Godongwana.
Denel acting on instruction
The News24 article points out that Troubled state-owned arms manufacturer Denel has done what Finance Minister Enoch Godongwana has been asking government-owned companies to do: it has helped itself before asking for a bailout.
Denel has been in a severe liquidity crisis for three years, such that it has been unable to pay full salaries to employees since May 2020. On Thursday, board chairperson Gloria Serobe announced that R318 million in outstanding salaries had been fully paid, using a R992-million surplus from the company’s medical benefit trust fund.
The article adds that the company still has another R600 million or so in hand for operational expenditure and has put payment plans in place for SARS and the company pension fund. Serobe said that the plan to access the surplus in the Denel Medical Benefit Trust had been two years in the making and took a long time because it involved securing consent from all parties.
Photo By: Military-Today.com
Denel selling non core assets
The News24 article points out that, as part of a turnaround plan led by former CEO and newly appointed chief restructuring officer Riaz Saloojee, Denel also plans to sell non-core assets, from which it hopes to raise a further R1.2 billion.
But the company, which has been in a Catch-22 situation of being unable to realise existing orders due to its lack of working capital, is still far from climbing out of its hole. To successfully secure new orders, it needs both cash flow and to win back customers’ confidence.
He said:
Denel can be self-sustaining with a R12 billion order book over the next business plan cycle – which is six times its current annual revenues. If the turnaround of the business is successful, there is a potential to grow the order book to R30 billion… But we don’t have the liquidity to execute this. We have been unable to do it because of the credibility issues and inability to pay performance bonds.
Stepping in
The article adds that this is where it is hoped Godongwana will step in. The message from the National Treasury to state-owned enterprises has been “show us what you are doing to fix the business and we can have a new conversation”. So far, bailout money from Treasury for Denel has been restricted to the repayment of debt, with R3 billion flowing in the post-state capture period.
Having proved its bona fides, the company will be hoping for a change of heart from the Treasury, without which it is unlikely to pull off a sustainable recovery. The next Budget announcement is at the end of October at the medium-term budget policy statement. However, Denel will not be the only state-owned enterprise hoping to catch the finance minister’s eye.
SAA is seeking a further R3.5 billion which is necessary to complete its sale to Takatso and Eskom is hopeful of it will finally lose a massive R200 billion to the sovereign balance sheet.
Serobe said the company had made a recapitalisation application through its shareholder representative, the Department of Public Enterprises, to deal with legacy debt and working capital. She would, however, not put a number to the request.
“Denel has a very close relationship with the shareholder, which knows what we are doing. As a board, we have to do what we can. As far as this board is concerned, the shareholder is a last resort. But that doesn’t mean we are not talking to the shareholder. We are not just asking for help, we are helping ourselves. We are able to talk to the shareholder with dignity,” she said.
The News24 article points out that Salojee was CEO of Denel from 2011 to 2015 when he was forced out of the company at the height of state capture. At the time, Denel was a shining example of a profitable state-owned enterprise with several partnerships with top global companies. He has been seconded to Denel from SAA Technical.
Salojee said the turnaround had to happen in the next 12 to 18 months, by which time Denel’s revenue streams would have to be unlocked for the company to survive. He said there was large growth potential in partnerships to secure new technology, markets and funding.
Photo By: Government
Proven success
There is evidence to back the fact that the sale of non-core assets can benefit a company’s turnaround/restructuring strategy.
Turnaround Talk recently published an article which discussed how the company successfully implemented its own restructuring programme and how the sale of non-core assets proved to be a key strategy.
In October 2020, Omnia announced its intention to dispose of Oro Agri to Rovensa, a Europe-headquartered business.
The Engineering News article points out that the sale, which at the time remained subject to approval by Omnia’s shareholders in December 2020, would generate aggregate cash proceeds of about $146.9-million, thereby de-risking the group’s balance sheet.
Commenting on the proposed Oro Agri disposal, Omnia CEO Seelan Gobalsamy said the board undertook a comprehensive review of Oro Agri as part of the group’s broader strategy, and that the board resolved to accept Rovensa’s offer, subject to shareholder approval.
In conversation with Engineering News and Mining Weekly, he refers to the sale of Omnia’s Oro Agri business (bought for $100-million 18 months ago), which puts Omnia in “a very positive space” to capture organic and inorganic opportunities for growth, and allows Omnia to consider resuming its dividend and, potentially, a special dividend or share buy-back post year-end in March 2021.
“We believe that Oro Agri’s risk profile, the attractive price offered by Rovensa and the opportunity to de-risk our capital structure, outweigh Oro Agri’s long-term potential which would require significant investment to realise,” he added in the separate statement on 24 November 2020.
it will be interesting to see how Godongwana responds to this development. Will he reward Denel’s perseverance?
