Founder: Turnaround Talk
Fridays are usually reserved for curated articles. However, this issue was important enough to add my two cents.
If one casts their minds back to 2020 and 2021, this period was regarded as a landmark period for the profession because of the South African Airways (SAA) business rescue. It was the first time that a State-Owned Entity (SOE) was placed into business rescue, and it was the first time that the objectives of the Companies Act needed to be balanced with the objectives of the Public Finance Management Act.
The management of the two acts, along with other vital challenges, resulted in a drawn-out business rescue. Many of the business rescue profession’s pre-eminent thought leaders noticed that this would not be the last SOE to be placed in business rescue and pointed out that Government and BRPs need to learn key lessons from the SAA rescue. The key question is: did they?
After many years of financial distress, the North Gauteng High Court in Pretoria granted an application in July to place the struggling South African Post Office into business rescue. What followed was months of hard work by the SAPO BRPs, who had to investigate and peel away layers of distress that the entity faced.
Are we now finally making headway in the matter?
Right sizing
A News24 article points out that SAPO BRPs have proposed “right-sizing” the insolvent state-owned entity by cutting around 420 branches and axing 6 000 staff.
Joint BRPs Anoosh Rooplal and Juanito Damons published their long-awaited business rescue plan on 23 November.
“Our approach in the plan is to rationalise costs which are currently unsustainable and to assist in restructuring the Post Office into an efficient and future-proofed business,” said Rooplal.
The News24 article adds that the Post Office, which has already received R2.4 billion in new funding from Government, needed an additional R3.8 billion bailout as “investment capital” for repair and modernisation, said the BRPs. The R3.8 billion bailout was first teased by Communications Minister Mondli Gungubele back in July (when the SAPO was placed into rescue), who said it may be announced in the medium-term budget policy statement. However, the finance minister’s address failed to mention the bailout for the post office.
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The business rescue plan is not final and will have to be accepted by 75% of creditors at a vote next month in order to be implemented.
Ballooning staff costs have dwarfed its revenues, leading to it losing around R2 billion a year for the past three years. As losses grew and revenues fell, its liabilities continue to grow. By the time its provisional liquidation was transformed into business rescue in July, its debts stood at over R8 billion.
Cost savings
The News24 article points out that Rooplal and Damons said they hoped to save around R1.2 billion in annual costs by retrenching 6 000 of the company’s 11 083 employees. Cabinet has already given its blessing for up to 7 000 employees to be sacked.
They said they also expect to see savings from cutting around 420 operational branches – some of which the Post Office owns and others that it leases. This will leave it with around 600 branches.
The article adds that the BRPs also plan to phase out over-the-counter payment services, which have “continuously failed to produce value”. This means that if the plan is implemented, the Post Office will no longer be used for Sassa grant payments.
Rooplal and Damons said the “right-sized” Post Office would focus on core services such as bulk mail and the processing of Road Traffic infringement notices. It would also look to secure partnerships with the private sector.
The News24 article points out that the BRPs said that, with the current allocation of the R2.4 billion from Government, the plan would grant a dividend award of 12 cents in the rand to all pre-commencement creditors. While this is not much, it’s better than liquidation. Were the state-owned entity to be wound up, Rooplal and Damons said creditors would only get around 4c in the rand.
Lending a hand to the property mogul
Apart from the key services that the SAPO provides south Africans, the beleaguered entity has significant property assets on its books that it needs help to manage.
A News24 article points out that the BRPs have set their sights on bringing in a strategic partner to help manage its R1.8 billion property portfolio and choose what can be sold off. The SAPO owns 427 properties and leases hundreds more.
Rooplal and Damons said years of underinvestment and lack of maintenance meant that many of the Post Office’s buildings were essentially worthless.
But the land the buildings are built on is often located in prime spots in and around the business districts of towns and cities.
“The land could be attractive for property developers, although the businesses themselves could not be of much commercial value,” they say.
The News24 article adds that Rooplal and Damons have not yet said how many of the group’s 427 properties they intend to sell. They have, however, announced they want to cut the total number of operational branches from 1 000 to around 600. Some of these properties are owned outright by the state-owned entity, while others are leased.
Keep or sell?
The News24 article points out that, to decide which properties will be sold off and which will remain, Rooplal and Damons proposed bringing in a strategic partner to provide “development capital and intellectual knowledge”.
The partner will help manage a new property holding company which the BRPs intend to set up to manage the group’s property portfolio, from processing centres and branches to office space.
Image By: Liezl Human
The article adds that many of these properties have not been well-maintained and fall short of occupational health and safety standards. The maintenance backlog is estimated at between R2.5 billion and R3 billion. Selling off properties will not, on its own, be enough to return the Post Office back to solvency.
While the Post Office’s property portfolio is worth R1.8 billion, it owes its creditors R8.7 billion.
Too big to fail?
Once again, we are hearing the narrative from Government that the SAPO is simply too big to fail. This should be a stern warning to the SAPO BRPs that their plan needs to work… no matter the cost.
Have we learned enough lessons from the SAA business rescue to make the second attempt at rescuing an SOE a success? Apart from the lessons pointed out in the article mentioned above, key issues need to be debated:
- Does Government care that many of the pre-eminent thought leaders in the business rescue profession have stated on numerous occasions that some companies cannot be saved, no matter how much time, effort or money is put into the rescue? Is the SAPO one of these companies?
- Many postal services worldwide face a similar uncertain future and have discovered that their business model needs to be increasingly digitised. Can the SAPO afford to make similar investments? Are there funds available? and
- SAA is still looking for a strategic equity partner. This has been a significant stumbling block in the rescue. Will we see similar issues played out in the SAPO rescue?
To me, the primary issue that needs to be addressed is mismanagement. If Government stands by its statement that the SAPO is too important to fail, then it needs to offer whatever support it can to the BRPs to execute the rescue plan and then provide the SAPO with the support it needs to remain profitable. Government gave assurances that it would support the SAa rescue and then played a major role in hindering its execution at various points. Perhaps things will be different with the SAPO rescue, in which case, George Orwell’s ominous quote from Animal Farm will be validated. All animals are equal, but some animals are more equal than others.
