Is Choppies too big to fail?
The question is ringing louder in the ears of lenders, suppliers, affiliated businesses in the market and the numerous households which either have or know someone amongst Choppies’ 7,000 or so workforce.
The country’s single biggest private sector employer recently posted long awaited financial results showing a P444.5 million loss for the year ended June 30, 2018. This was shareholders and ordinary citizen’s first glimpse into the books of the troubled retail giant since April 28, 2018.
An accounting and governance crisis then surfaced at Choppies, wiping nearly P2 billion in value on the Botswana Stock Exchange before its suspension in November 2018 and leading to a very public and bitter boardroom battles.
Choppies CEO, Ramachandran Ottapathu and fellow founder, Farouk Ismail prevailed in the extraordinary general meeting in September, appointing a new handpicked board. Since then, the board has been battling to keep the ship from the rocks, as forensic and legal investigations have rattled shareholders, auditors have quit and lenders have asked tough questions. Analysts who spoke to BusinessWeek this week said the latest financials also carried a number of ominous indicators about a company which has grown into an economically significant entity in the country.
Besides its employment impact, Choppies’ outstanding borrowings of about P709 million are mostly owed to local banks who have previously tried and failed to secure written commitment of solvency from Choppies.
“The LobTrans crisis shook the banking sector with just P300 million and each of the banks which have money outstanding to Choppies will be wary of the numbers they saw in the latest financial statement,” a banking industry insider told BusinessWeek.
LobTrans, a truck haulage business, collapsed spectacularly in 2008, weighing heavily on three local banks. Even today, some residents of Lobatse track the border town’s current struggle to survive back to the events of 2008. Of particular concern is that Choppies’ latest figures show that its Botswana operations, which are its mainstay, were in a state of “balance-sheet insolvency” as the time of the results.
Choppies’ local operations had liabilities of P1.3 billion set against assets of P1.04 billion as at June 30, 2018, which, although it does not mean automatic bankruptcy, suggests a dire state of finances and will spook lenders, suppliers and shareholders alike.
Choppies’ Botswana operations, where it has traditionally posted profits that have helped its expansion into seven other African countries, incurred a P35.6 million loss for the year to June 30, 2018.
Investors, who include
The latest finances show that over several years, going back as far as 2011, major accounting errors were made involving goodwill, depreciation, accounting for acquisitions, recognition of tax deferments and others. The adjustments and restatement of historical numbers run into the hundreds of millions of Pula and will leave many wondering how to account for these on their own investment portfolios.
The latest results also show that Choppies owes its suppliers P1.3 billion, up from P1.02 billion the previous corresponding year. Again a significant number of these suppliers are based in Botswana and include citizen SMEs with deals to supply the grocer’s chain of stores.
To make matters worse, PricewaterhouseCoopers, who previously audited, declined to pronounce an audit opinion on the June 2018 results saying there had simply been insufficient information.
Choppies directors will however be hoping their announcement that the group is exiting South Africa, Kenya, Tanzania and Mozambique will restore stability and the confidence of lenders, suppliers and shareholders.
For the year to June 30, 2018, Choppies incurred a P274 million loss in South Africa and another P148 million in the rest of its African footprint. Outside of Botswana, only Zimbabwe recorded profits of P13 million for the year.
Directors will also be quick to point out that besides historical accounting errors, climbing debt and obligations to suppliers, the losses for the year to June 30, 2018 are due to difficult trading conditions.
“In addition, Choppies has not yet announced its results for the half year to December 2018 or full year to June 2019, which may wipe out whatever issues are currently stressing the market.
“Remember that the counter has been suspended since November 2018 with no trades possible. The better picture for investors will come when the full year 2019 results are out which will give an accurate picture for future decision making,” an analyst told BusinessWeek.
Choppies directors did not respond to BusinessWeek’s questions on the group this week, which sought, amongst others, to establish the level of confidence the grocer is enjoying amongst its key stakeholders.
Analysts are however agreed that 2020 will mark a pivotal year for the group, one in which it may even decide to place a buyback offer before shareholders and go back into private hands by delisting.