Answer ALL questions in this paper.

$[100$ MARKS$]$

SECTION A

$[40$ MARKS$]$

Examine the article provided below and answer questions $1$ and $2.$

Pick n Pay in serious trouble

Pick n Pay is technically insolvent and has breached all its debt covenants, which shows the retailer is in serious financial trouble.

On Monday, $27$ May $2024,$ Pick n Pay released its audited results for the year that ended $25$ February $2024.$ They were not pretty.

Pick n Pay reported a $373\%$ decrease in net profit, dropping from a R$1\mathrm{.}17$ billion profit to a R$3\mathrm{.}2$ billion net loss. Basic earnings per share declined from $243\mathrm{.}37$ cents per share in $2023$ to a loss of $661\mathrm{.}67$ cents per share. The poor performance took its toll on the retailer's balance sheet as it had to significantly increase debt to fund operations. For the first time, Pick n Pay has become technically insolvent. Total liabilities exceed total assets by R$183$ million.

The retailer's total assets amount to R$46\mathrm{.}51$ billion, while its total liabilities amount to R$46\mathrm{.}69$ billion.

The largest contributor to the increased liabilities was interest$-$bearing debt which rose by R$5\mathrm{.}7$ billion from a year ago.

Pick n Pay's interest on debt costs it R$2\mathrm{.}4$ billion a year. The company's net debt$-$to$-$EBITDA increased from $1\mathrm{.}1$ times to $6\mathrm{.}3$ times.

Even more striking was that Pick $n$ Pay has breached all its debt covenants, pointing to serious problems at the retailer. Debt covenants are debt thresholds set in loan agreements between lenders and borrowers. They ensure the borrower can meet its debt repayments.

Pick n Pay has a debt$-$to$-$EBITDA covenant threshold is $2\mathrm{.}75$ times. Its current debt$-$to$-$EBITDA sits at $6\mathrm{.}3$ times.

Pick n Pay has also breached its second debt covenant, which states that its EBITDA must be at least $3\mathrm{.}5$ times greater than its net interest expense. Pick n Pay's EBITDA is only $3\mathrm{.}2$ times greater than its interest expense, which shows that it is in a dire financial situation. By breaching its debt covenants, Pick n Pay's lenders relaxed the debt covenants. However, it came at a price.

It was done on condition that Pick $n$ Pay pledge additional security on its debt in the form of $100\%$ of Boxer's shareholding. Simply put, if Pick n Pay cannot repay its debt, lenders can sell Boxer to cover the money they are owed.

Big changes at Pick n Pay

Pick n Pay announced that the Ackerman family would give up control of the company after being at the helm for over $50$ years.

Raymond Ackerman, who passed away on $6$ September $2023,$ bought the first four Pick n Pay stores in Cape Town in $1967.$

The company blossomed and grew to $2,227$ stores across South Africa, Botswana, eSwatini, Lesotho, Namibia, Nigeria, Zambia and Zimbabwe.

However, poor leadership and a misguided strategy caused tremendous harm to the retailer, which used to outperform Shoprite.

Pick n Pay chairman Gareth Ackerman said the past year has been one of challenge, disappointment, and encouraging renewal.

$"$It was distressing to find that operational changes over many years had caused the core business to decline to its position at the end of the $2024$ financial year," he said.

"The work done over the previous decade had not resulted in a sustainable model for our core corporate stores. The profit recovery lulled us into a false sense of security."

In $2022,$ Pick n Pay embarked on its costly Ekuseni strategy and raised capital to support it$.$

Liabilities relating to the core Pick n Pay supermarket business, the Boxer, the Rest of Africa, and the clothing business were converted to long$-$term debt.

$"$It became evident that key elements of the strategy were not working in the core Pick n Pay supermarket business," he said.

Nine months after the launch of Ekuseni, the Pick n Pay board reversed its strategy and brought back former chief executive Sean Summers to fix the mess.

"For Pick $n$ Pay to survive and thrive again, it needs to embark on a fundamental step change, with new ideas and dynamic leadership," Ackerman said.

"Pick $n$ Pay needs a vibrant management team to continue the turnaround in $2027,$ and one of Summer's key KPIs is succession."

As part of the turnaround plan, Pick $n$ Pay will do a R$4$ billion rights issue, followed by an IPO of its Boxer business by the end of $2024.$

"The board believes this is the best approach to reinvest in our company, re$-$capitalise the business, and reduce debt," he said.

Pick n Pay also announced that Ackerman Investment Holdings $($AIH$),$ and, therefore, the Ackerman family, will forego majority shareholder voting control.

Ackerman Investment Holdings will also relinquish the right to nominate the chairman, CEO and CFO immediately.

After $40$ years of service, including $14$ years as chairman, Gareth Ackerman will retire after the FY$25$ results are released.

He has also stepped down from the nominations and treasury comm