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AutoZone, which claims to be the largest privately owned automotive parts retailer and wholesaler in southern Africa, is in financial distress and has been placed in voluntary business rescue.
This follows a resolution taken by the AutoZone Holdings board of directors on 1 July 2024, with the Companies and Intellectual Property Commission (CIPC) confirming that it registered an application by AutoZone to be placed in voluntary business rescue on 2 July.
Piers Michael Marsden and Jenna Lee Osborne from Matuson & Associates have been appointed the company’s business rescue practitioners.
The resolution of AutoZone’s board states that after conducting investigations, it recognised that the company is financially distressed as envisaged in the Companies Act, but believes there are reasonable prospects for the rescue of the company.
AutoZone director and CEO Dion de Graaff said in a sworn statement in support of the application that the company is principally involved in the motor spares industry by selling aftermarket automotive parts and accessories. It trades as AutoZone and QSV out of about 190 leased premises scattered around South Africa.
He said the company has about 1 452 employees.
About a quarter are members of the National Union of Metalworkers of South Africa (Numsa), and about 21% are members of the Motor Industry Staff Association (Misa).
De Graaff said the company is reasonably unlikely to pay its debts as and when they fall due for payment over the ensuing six months, with its financial distress arising from the accumulation of a number of things.
Private equity transaction
He said AutoZone underwent a private equity transaction in 2014 funded by a responsible level of debt, but the company’s performance did not meet expectations, primarily due to the increasingly challenging South African economy.
This is a reference to the announcement in January 2015 by private equity firm Ethos that it had invested in AutoZone via its Ethos Fund VI to acquire a controlling interest in the company, with AutoZone’s management and black economic empowerment (BEE) investors holding the balance.
AutoZone previously had CMB Corvest and Zico Capital as private equity shareholders.
De Graaff said efforts to address the lack of performance were further impeded by the Covid-19 pandemic, civil unrest and a period of stagflation.
“Throughout this period AutoZone faced increasingly burdensome debt service obligations, diverting cash from operations to meet these funding needs.
“By late 2021, it became apparent that operations were contracting below break-even levels, initiating a cycle of negative operating leverage,” he said.
“To address these challenges, the lender agreed to provide quarterly debt service holidays, offering much-needed relief. Concurrently, a sales process was initiated to recapitalise AutoZone.”
While liquidity was sufficient to halt the negative leverage, it was not enough to return to positive leverage, which effectively kept the business at break-even.
He said facilities from Absa are set to mature on 30 June. With the sales process aimed at recapitalising the business not concluding in a sale, the bank has declined to give another extension.
“The resultant future cash flows remain challenging and going concern [status] is uncertain,” he said.
Prospect of recovery
Commenting on the prospects for recovery in business rescue, De Graaff said the AutoZone brand and branded products are very strong national brands. It also has a very loyal customer base and valuable intellectual property on certain products.
All this makes the company attractive to those in the automotive spares industry and should “enhance the company’s prospects of being rescued”.
“I say so as I have had three interested third parties that have expressed interest in investing in the company’s business.”
Business rescue will give the company “breathing space” to allow its rescue practitioners to explore all approaches and opportunities.
This is “with a view to restructuring the company to render it solvent, and failing which, to sell its assets or business, which could result in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company”.
De Graaff believes there are reasonable prospects for the rescue and recovery of the company using the rescue processes in the Companies Act.
He said no liquidation proceedings have been initiated by AutoZone or against the company, and the company is not involved in any major litigation.
‘No secret’
The owner of a private automotive spares business who did not want to be named said it is no secret that AutoZone is in financial trouble.
He said its stockholding has been “shockingly low” and its customer service levels have deteriorated.
“At one stage there was speculation that Grandmark International was looking to acquire AutoZone, but then apparently walked away.”
Grandmark International is one of the largest automotive spares wholesalers across southern Africa.
This story first appeared in Moneyweb and is republished with permission.
