Sunday, October 25, 2020

Choppies is now out of SA, but will pay millions

Botswana’s leading budget grocer, Choppies Enterprises, which has exited the South African market by selling its subsidiaries for less than one pula but paying several millions to the buyer, has acceded to further concessions for the deal to be concluded. 

On Tuesday, the retailer revealed to its shareholders and the capital markets that over the course of March, it was locked in negotiations with Kind Investments, the purchaser of South African Choppies stores, with the deal concluded on April 22 after the Botswana headquartered retailer agreed to terms that were favourable to the South Africa based buyer.

The freshly concluded deal comes after Choppies announced in December 2019 that it will be retreating from South Africa after a string of operational losses amid piling debts. However, in a shocking twist, the retailer put the price consideration of the stores at R1 or 73 thebe for all issued shares held by Choppies to Kind Investments, which was then just a newly set up company for the purpose of the transaction. 

The embattled budget grocer justified the price consideration of R1 on the basis that the carrying value of the over 70 South African subsidiary stores had a zero carrying value, with net asset value of the operations negative due to liabilities exceeding stock and fixed assets. 

Market observers were critical of the structure of the deal, especially after the South African stores formed part of the legal and forensic investigations instituted by Choppies’ old board of directors which unearthed some dubious accounting processes. The investigations also uncovered that Choppies had initially overpaid for the stores which were overvalued. On the other hand, the media also discovered what appeared to have been an existing relationship between Ramachandran Ottapathu, the retail group’s chief executive officer, and the new buyers. 

The desperation to exit South Africa last year was exacerbated  by agitated creditors and lessors who were prepared go after Choppies’ assets, including the profitable stores in Botswana. Choppies sojourn in South Africa which begun in 2008 had failed to turn profitable, yet the company continued with building its footprint in Africa’s most advanced economy. 

Under the initial exit and sale agreement to Kind investments, the Botswana company will be liable to arising liabilities from the disposed subsidiaries, while the amount payable by Choppies is subject to a maximum of R150 million – termed sellers’ obligation – within fifteen months after the deal commences in April this year. 

Following the March negotiations, the deal was further amended, with retail giant agreeing to pay an amount of R14.9 million to the SA Subsidiaries in addition to the R150 million, in respect of creditor obligations disputed by Kind Investments. In addition, Choppies managed to negotiate to have the liability of potential claims reduced from the initial R125 million to a maximum of R110 million in warranties of future claims. Choppies’s liability to claims or indemnities will expire in September 2021.

“There were certain claims against the SA Subsidiaries for which the Purchaser sought the Company to account, some of which were the subject of dispute with the relevant creditor, and in light of the Purchaser’s unwillingness to assume the dispute, the Company would indemnify the Purchaser and take over control of the dispute, and ultimately, settlement of the claim of the creditor, if any,” said Choppies board in a statement. 

According to the company’s communique, Choppies and Kind Investments agreed to amend the previously agreed payment terms of the R150 million, with two payments of R32.5 million.  The first payable tranche was on April 22, while the second tranche will be paid on May 22. Then the remaining R85 million will be paid in instalments of P10 million per month,  commencing at the end of May.

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