Retail giant Debenhams went into pre-packed administration on 9th April 2019. They were also taken over by lenders as part of the administration process. Mike Ashley (founder of Sports Direct) called the takeover a “national scandal” asking for the administration process to be reversed. So, are Debenhams stores 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 incorporated in 1905 and was first listed on the London Stock Exchange in 1928. They eventually went on to becoming 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. One of £40 million in December 2018 and a subsequent offer of £150 million in March 2019, with a requirement that Mike Ashley be made chief executive. 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, and other retailers, suffering the consequences and being forced into restructuring deals with their landlords / 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).
It is believed that Debenhams’ current financial issues stem partly from a period at the beginning of the millennium; this was when Debenhams were acquired by a private association (CVC, Merril Lynch and TPG) and were taken off the London Stock Exchange from 2003 until 2006. It is also believed that the private association sold off freehold property and entered into a lease-back deal (which freed capital but locked Debenhams in to a long-term lease with rent-reviews going upwards-only), which added debts and paid 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, it is believed that Debenhams’ lenders might already have an alternative plan 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.
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