Our local business landscape is always full of topical issues to discuss. Recently, much attention has been on Tawanda Nyambirai, a lawyer and entrepreneur, who regained control of Steward Bank, now holding 53,2% of the bank’s holding company, formerly Ecocash Holdings with 25% subject to approval from the Reserve Bank of Zimbabwe (RBZ).
This move has sparked mixed reactions, similar to the lack of excitement around Econet’s acquisition of Ecocash’s non banking assets, showing how public sentiment shapes perceptions.
Last year, OK Zimbabwe’s management faced criticism from the permanent secretary in the Ministry of Finance and Economic Development and Investment Promotion after the company raised concerns about unfair competition from the informal sector. These informal businesses continued to thrive by transacting strictly in United States dollars, shielding themselves from currency and exchange rate volatility while attracting suppliers away from formal retailers. The result has been empty shelves in large retail chains.
More recently, the Ministry of Finance introduced a series of measures to formalise the informal sector. This raises a critical question. If they previously dismissed concerns about unfair competition, why the sudden push for a level playing field? Perhaps reality has finally set in: The informal sector is too significant to be ignored.
In 2024, several major companies, including Truworths, Bindura Nickel Corporation, Beta Holdings, Metro Peech, and Khayah Cement, went into corporate rescue. Early this year, N. Richards closed two key branches, while OK Zimbabwe shut down five.
Over the past decade, Truworths lost 100% of its value on the Zimbabwe Stock Exchange, followed by OK Zimbabwe (-92%), Edgars (-70%), and TM Pick n Pay with a decline of approximately 18%. This widespread value erosion highlights the severe impact of Zimbabwe’s challenging economic environment on businesses, not to mention the exits of major players such as Choppies and Nampak from our market.
Anyway, let’s dive into today’s topic: Truworths’ corporate rescue plan. Shall we?
Truworths was placed under corporate rescue due to severe financial distress and an unsustainable business model. The company was technically insolvent, with net liabilities of nearly US$1 million before due diligence and US$2 million after. Total creditors were valued at US$2,5 million before due diligence and US$3,3 million afterwards.
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Compensating creditors
Creditors will receive US12 cents in a dollar. However, this payout depends on the Zimbabwe Revenue Authority (Zimra) verifying the company’s tax losses. If Zimra’s assessment changes the value of the company's deferred tax asset by more than 5%, the amount available for creditors could be adjusted up or down accordingly.
Employees (NEC workers) and corporate rescue expenses will be paid between months seven and 12 after the corporate rescue plan is approved. Other creditors (people and companies the business owes money to) will be paid in three equal parts over months 12, 18, and 24 (one third at each stage).
Creditors will be issued debentures at an interest rate of 8% per annum. The total amount of money being converted into debentures (debt that will be repaid over time) is US$1 067 172. This includes old debts, new debts, rescue costs, capital raising fees, and post-restructuring expenses.
Truworths prior business model
Truworths’ revenue was primarily derived from two key sources: Retail merchandise sales and factory sales to third parties, contributing 83,8% and 1,5% of total revenue, respectively. The remaining 14,7% came from service fees and commissions on debtors.
Retail merchandise sales, which include clothing, footwear, and accessories sold through the company’s retail stores and online platforms, form the bulk of the revenue. Its heavy reliance on credit sales (85% of total sales) created liquidity challenges, leading to cash flow constraints and payroll payment failures for 16 months.
The cost structure was largely driven by employment and occupancy costs, which accounted for 39,1% and 21,7% of total expenses, respectively.
Economic volatility, unfavourable policies, and hyperinflation eroded its financial position, including losses from policy induced currency devaluations and high interest rates that halted lending.
Additionally, second hand clothes in the informal sector intensified competition. With a shrinking local supplier base, the company had to import materials, requiring upfront US dollar payments, which further strained its finances and led to understocking and branch closures.
The existing shareholders of Truworths Zimbabwe Limited will lose their ownership stakes, as their shares will be effectively liquidated (cancelled) for a nominal value of just US$1 in total. Shareholders will forfeit their ownership rights in the company. Essentially, this move wipes out the value of current shares, signalling that the company is in such financial distress that shareholder equity is considered worthless in the restructuring process.
Proposed capital summary
A total of US$5,07 million will be injected into Truworths through a combination of new capital (US$4 million) and debentures (US$1,07 million) to support business recovery. Here is the breakdown of capital injection:
- US$2 million from First Mutual Microfinance (FMM) to fund the debtors book.
- US$2 million from the Valfin-led consortium for:
- Buying merchandise;
- Renovating all retail stores;
- Implementing a new retail management system; and
- Covering operational costs.
- Debt management (debentures — US$1,07 million).
Key business changes
New investors will take over management of Truworths. Employees will need to sign new contracts with agreed terms. No past employee liabilities will carry over, as they are already accounted for in the balance sheet. Supervisory employees, that is managerial and executive staff, will be compensated by taking over the Bravette business, as the investors already have a manufacturing unit.
In conclusion, Valfin Investments seeks to revitalise Truworths’ business model, turning it from a loss-making entity into a profitable venture over time. They also plan to streamline management and staffing to enhance efficiency and lower costs. While the retail sector faces challenges from informal competitors and the impact of business formalisation still needs to be assessed, the future outlook is not entirely bleak. It will be intriguing to see how this strategy unfolds.
- Taimo is an investment analyst with a talent for writing about equities and addressing topical issues in local capital markets. He is an active member of the Investment Professionals of Zimbabwe community, pursuing the Chartered Financial Analyst charter designation.
