Retail giant Debenhams went into pre-packed administration on 9th April 2019. Lenders then took over Debenhams as part of the administration process. Founder of ‘Sport Direct’ Mike Ashley called the takeover a “national scandal”. So, are Debenhams stores really closing?
What’s happening to Debenhams?
Debenhams’ roots can be traced back to 1778 when William Clark began trading in London, later joined by William Debenham in 1813, becoming Clark & Debenham. Debenhams was then incorporated at the turn of the twentieth century in 1905; and was first listed on the London Stock Exchange in 1928. They eventually went on to become the biggest department store chain in the UK with 166 stores.
Debenhams first announced store closures following its largest loss in its history (£491 million pre-tax). It went through pre-pack administration which allows a company to sell itself as a going concern without affecting the operation of the business.
Sports Direct (Debenhams’ largest shareholder, owning approximately 29% of its issued share capital) put forward a few proposals (including loans and/or a possible takeover bid) and two offers to finance Debenhams.
The first offer of £40 million was in December 2018; with a subsequent offer of £150 million make in March 2019. However, on 09 April 2019 Debenhams rejected financial backing from Sports Direct; control of Debenhams passed to its lenders- i.e. Barclays and US hedge funds (such as Silver Point and Golden Tree) bought Debenhams and provided the group with £200 million in funding.
The pre-pack administration left the equity holders with no value for their investment. This included Mike Ashley who invested approximately £150 million in Debenhams.
Why are Debenhams stores closing?
With the increasing popularity of online retail, the High Street environment has been a tough trade. This has left Debenhams as well as other retailers suffering the consequences; including being forced into restructuring deals with their landlords and creditors. Last year, well-known names such as Maplin, Toys R Us and Poundworld went into administration and have now disappeared altogether.
In addition to online-retail, other factors have contributed to the decline of High Street retailers including higher business rates, and rising labour costs; as well as the lack of ability to adapt to the changes in the retail environment (or a slow reaction).
Debenhams’ financial issues are believed to have begun at the start of the millennium. This was when Debenhams were acquired by a private association (CVC, Merril Lynch and TPG); and were then taken off the London Stock Exchange from 2003 until 2006. It is also believed the private association sold off Debenhams freehold property and entered into lease-back deals. This freed capital but locked Debenhams into long-term leases, with rent-reviews only going upwards; which added debts, all while they continued to pay themselves large dividends.
So, are Debenhams stores closing? What happens next?
Debenhams’ debt is £621 million. Stores will continue trading during the initial phase of the restructuring. It is suggested that store closures (approx. 50 stores out of 166) will begin next year; but no list of which stores will be closed has yet been provided. In the meantime, Debenhams has been re-negotiating rents with landlords to address its funding issues.
Debenhams’ restructuring plans continue. If approved, they would “result in a significant overall reduction in the group’s rent burden and underpin a sustainable future”.
Sports Direct is still keen to acquire Debenhams from its owners and it has formally registered its interest. However, an alternative plan from Debenhams’ lenders may already be in place.
The Corporate Commercial Department here at Fisher Jones Greenwood LLP can certainly assist you with internal restructures, sale of business, acquisitions and/or any other related services; as well as assist you with the preparation of any documentation required and guide you through the transaction.
Should you require any information or assistance do not hesitate to get in touch. Please call 01206 700113 or email [email protected]
Source: BBC news, Financial Times and Wikipedia.
Read more blog articles from Andrea Brindas:
https://www.fjg.co.uk/blog/2019/04/10/partnership-agreements-why-are-they-important