Ellies opts for business rescue

Ellies Holdings has had a good run since the electronics company started in 1979, so it came as a big surprise when the company announced that it would not publish its latest financial statements and instead seek protection from creditors through voluntary business rescue.

The final blow to the once-thriving business was that its bankers declined to assist with financing for the acquisition of Bundu Power, which would have given Ellies a big footprint in the fast-growing industry of getting homeowners off the national grid.

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From the top of the mountain down

Ellies saw its fortunes really improve when, in 1986, it grabbed the opportunity to install satellite dishes when M-Net launched in SA. Maybe management had long meetings and was worried about the risks of backing the new technology back then, but it worked out well, and Ellies joined the big leagues and listed on the JSE in 2007.

The share started trading just below R2, reaching a high above R9 in 2013. Unfortunately, it has been downhill since.

By 2014, the share had nearly halved to less than R5, dropping below 10 cents in 2020.

It crashed by 60% on Wednesday – from five cents to only three cents – when management said it “voluntarily” opted for business rescue.

It looks like Ellies could not muster the courage to grab new opportunities like it did in earlier years. Did Ellies not notice that the writing was on the wall for satellite dishes and that the new games in town were residential power systems and fibre networks?

Too late

Ellies tried to get into the solar and backup electricity systems market by making an offer for Bundu Power in February 2023, but probably waited too long to do so. Ellies was stuck too long in declining markets, and its balance sheet was just not good enough to be able to buy a growing (and valuable) company operating in one of the hottest sectors in SA.

Bundu Power, founded in 2005, specialises in the distribution and rental of generators as well as the distribution and installation of solar and ancillary products, providing alternative energy solutions for residential, commercial, industrial, hospitality, agricultural and recreational users.

The owners of Bundu Power accepted an offer of nearly R207 million for their business, but Ellies could not raise the money.

“Shareholders are referred to the initial announcement released on SENS on 1 February 2023, detailing the proposed acquisition of Magetz Electrical Proprietary Limited and Power on Wheels Proprietary Limited (collectively, Bundu Power), together with the update announcement released on 4 December 2023.

“The proposed acquisition was subject to debt funding by the company’s bankers and the approval of Ellies shareholders in a general meeting by 31 January 2024. Our bankers have advised that they will not fund the proposed transaction, and thus the company advises that the conditions precedent will not be met and therefore the agreement in this regard will lapse and be of no further force or effect,” according to the latest statement.

Ellies planned to raise the purchase price from a rights issue to raise R120 million, debt financing and staggered payments running until February 2025.

Changing market

It said the company was “repositioning itself as a smart infrastructure business which will include comprehensive solutions for alternative energy, water storage and harvesting, connectivity and smart home technology”.

“The acquisition of Bundu Power is the first building block of the new strategy and will expand the Ellies portfolio of alternative energy solutions. Ellies, in turn, provides Bundu Power with an expanded Southern African distribution network and access to a group with a level 1 BBBEE status,” it said when announcing the proposed acquisition in December 2023.

It said Bundu Power had assets of around R77 million and was on track to earn a profit after tax of close to R34 million in the financial year to end February 2024.

On the other hand, Ellies suffered a loss of R85 million in its last financial year to April 2023, with management describing the results as “disappointing”.

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“Revenue decreased by 7.7% on the prior year. Demand for Ellies’ satellite installation and a portion of its retail offering came under pressure due to difficulties facing the consumer, with rising inflation and interest rates.

“The group saw an increase in demand for its products related to power due to the continual load shedding, being UPS backup solutions, generators, solar and surge protection products. Unfortunately, the constrained working capital limited the group’s ability to capitalise on the surge in demand,” it said in the commentary on the results.

A summary of the results for the last five years shows that Ellies suffered operating losses and headline losses in four of the five years.

The profitable year came at a cost – operating cash flow was a negative R7.7 million compared to the previous year’s positive cash flow from operations of R47 million.

Reliance on MultiChoice

More telling was a comment about the group’s continued reliance on satellite dishes as recently as last year: “Ellies’ performance for the financial year has been disappointing and further highlights Ellies’ reliance on MultiChoice.

“Ellies’ satellite business has decreased by 70% from 2018 and, whilst the efforts to replace the revenue with alternative contributions have shown positive results, it is insufficient to stem the ongoing losses. The anticipated move from the traditional satellite business was much slower than anticipated due to a relatively fixed cost base to service this category.

“The FIFA World Cup, held every four years, is the main generator of new DStv connections, and the same was expected in October 2022. Unfortunately for Ellies, the matches were also broadcast on SABC, and new satellite connections failed to materialise.”

Management also said many South Africans have curtailed their discretionary spend, and that “satellite services, such as those offered by DStv, have seen a significant decrease”. 

It seems management was unaware of the move from DStv to streaming services, which has been evident for years.

It will be interesting to see if the process of business rescue will be able to save Ellies. The balance sheet as at end April 2023 showed cash of only R3.6 million compared to R8.9 million a year earlier, while interest-bearing debt and bank overdrafts increased from R64 million in April 2022 to R169 million in 2023.

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Harry Byrne

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