Friday, April 3, 2020

Choppies gets R1 in SA but might end up paying R150 million

Botswana’s leading budget grocer, Choppies Enterprises, has concluded the deal to exit the South African market, retreating in a deal that has been slammed as unfair, with assets disposed for less than a pula, while the company is left to pay millions in future liabilities.

On Friday, the beleaguered retailer announced to shareholders that the last outstanding condition precedent to the disposal of Choppies stores in south Africa has been fulfilled. According to the statement released late Friday, the Competition Commission of South Africa has issued a merger clearance certificate in which it approved the acquisition by Kind Investment of all the shares held by Choppies Enterprises in and loan accounts advanced by the retailer to each of its South African subsidiaries. 

In the recently concluded deal, Choppies which has sold its entire shareholding in SA operations for R1 or 0.73 thebe, will be liable to arising liabilities from the disposed subsidiaries, with the amount payable by the Choppies, subject to a maximum of R150 million within fifteen months after the deal commences in April this year.

The new deal comes after Choppies announced that it will be exiting the South African market last year December, putting the price consideration at 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 in 2018 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.

Meanwhile Choppies is nearing two years of its suspension on the Botswana and Johannesburg stock exchanges for failure to publish audited results within stipulated times. Choppies’s June 2018 results were over a year late, and were released in December 2019. 

The retailer is playing catch up to release the outstanding June 2019 financials, which the company said it will release in June 2020, a year overdue. Earlier this month, Choppies appointed Mazars as external auditor after the retailer was dropped by PriceWaterhouseCoopers (PwC) last year September. PwC had only served a one year term before separating with Choppies, labelling the retailer a risky client and refused to sign of the June 2018 financials. 

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