The embattled Choppies Enterprises has exited the troublesome South African market following a costly expansion strategy that threatened to sink the entire group after accumulating massive debts, forcing the company to make desperate move to save the business by selling the South Africa subsidiaries at a loss.
The Botswana leading grocer, which remains suspended on both the Botswana Stock Exchange and Johannesburg Stock Exchange, this week shocked the markets by announcing the disposal of its South Africa operations for R1 or 73 thebe of all issued shares held by Choppies to Kind Investments, a newly set up South African company for the purpose of the transaction.
The low-price consideration of R1 has been justified by Choppies because the carrying value of the subsidiaries in South Africa had a nil carrying value, with net asset value of the operations negative due to liabilities exceeding stock and fixed assets.
Though it might seem like a loss, for Choppies it was a desperate but necessary move to exit South Africa as debts mounted while the creditors and lessors were prepared go after Choppies’ assets, including the profitable stores in Botswana. Choppies sojourn in South Africa which began in 2008 has failed to turn profitable, yet the company continued with building its footprint in Africa’s most advanced economy.
However, things came to a gridlock last year when the Choppies shares were suspended from trading following revelations of impropriety by management which was picked up by the company’s new auditors, resulting in delay of the audited financial statements. The revelations sparked a contagion that divided the company’s board, with Choppies chairman Festus Mogae blaming the company co-founder Ramachandran Ottapathu of running the company as one man show and blamed the reckless expansion strategy for the company’s dwindling profits.
The Board would later suspend Ottapathu, and during the impasse, decided to put an end to the company’s expansion which was gobbling cash while the operations were registering massive losses. The Botswana stores were the only ones profitable, and the generated profits were used to subsidize losses. The board resolved that the company must clean its image and focus on where it is profitable, resulting in the decision to quit South Africa despite Ottapathu’s objections.
Though Choppies’s charismatic CEO managed to wrestle the company from the board members who were against him and returned to head the company after his suspension was lifted by the new board he helped get elected, Ottapathu failed to stop the planned sale of South African operations.
Under the disposal agreement, the R1 sale is for accounting purposes, while the real cost of the deal has to do with the massive debts South Africa subsidiaries have accumulated. As part of the deal, Choppies will be responsible for collecting about R60 million it is owned by its struggling subsidiaries in Zimbabwe and Zambia.
The purchaser will then be obliged to make an immediate R100 million interest free loan to the South African Choppies stores, with the funds used for capital requirements and stock inventory. The SA companies are further required to use their endeavours to pay off suppliers and re-establish credit lines.
Choppies Group will further remain responsible for any negative equity value in the South African subsidiaries which is yielded by applying a formula agreed by the two parties, and it is subject to R150 million payable over 15 equal monthly payments, which works out to nothing less than R10 million per month over that period.
“The company provided certain warranties and indemnities to the purchaser which are usual in disposals and acquisitions of this nature, in the sale of shares and claims agreement. Indemnities were given in respect of known risks identified by the purchaser, being potential exchange contravention and reportable irregularities identified by the auditors of the SA companies, all of which were disclosed to the relevant authorities without any sanction being imposed at the current time,” said Choppies in a press statement.
Choppies also revealed that their liability under the sale of shares and claims agreement is limited to claims or indemnities will expire in September 2021, and all claims cannot exceed R125 million. Moreover, any claim not exceeding R50 million is payable upon successful resolution of the claim, while the claims exceeding R50 million are payable in ten equal monthly instalments.
Meanwhile Choppies has gone over a year suspended from trading on the two bourses it is listed on for failing to publish audited results. Though the company last month announced it will release results on December 6, the markets closed on Friday with Choppies missing the deadline.