It's the pension, stupid
Yet again, a dire pension funding situation has got in the way of a safety deal for a long-standing UK enterprise. Older companies are indeed more likely to have a guaranteed (or 'defined benefit') pension scheme with a big queue of current and former workers to pay in retirement. But should the BHS scheme's solvency deficit of £571m have been so wide?
The Pensions Regulator is currently investigating whether it will need to use its 'anti-avoidance' powers regarding BHS. The watchdog has the power to compel employers to provide financial support or restore assets to a scheme. The regulator isn't saying more right now, but the investigation would be expected to focus on money that was removed from the company prior to its collapse.
That could include any money that went to its owner, Retail Acquisitions, since it bought the business for £1 last year from Sir Philip Green, as well as dividends that were paid to the Green family in the years of their ownership. Sir Philip has reportedly already offered £80m towards making up the deficit.
There is precedent for retroactive action. The regulator successfully pursued a Russian company and its subsidiary for contributions years after the sale of manufacturing company Carrington Wire for £1 in 2010, a deal that severed the pension scheme from the group. The facts are different here, but the regulator will be keen to make sure that the sale, and money that left the group before and after it, did not present a deliberate attempt to avoid a pension obligation. Managers and investors, take note.
To be fast and online
Industry commentators agree that BHS has fallen behind in an industry that is increasingly about low-cost, 'fast fashion', and e-commerce. Consultancy Retail Remedy has said BHS dragged its feet in going online, when compared with rivals Debenhams (DEB) and Next (NXT), although it admits the former's customers may not have been so ready for this shift.
Arguably, BHS is two steps behind in the evolution of retail: the first demonstrated by the rise of the likes of Primark, a division of Associated British Foods (ABF): 'Primarni' fashion allowed shoppers to get cheap, throwaway versions of catwalk couture. The second is the march of mobile, click-and-collect and the changing distribution channels that have led general retailers to ditch outlets. That's a wider challenge that leads us onto another major issue for BHS.
Managing the property estate
Of the two 'p's that are currently haunting older UK retailers, the first may well be pension but the second is often property. Critical to BHS's demise was the renegotiation of some crippling leases. That looked to have been possible in March, as the group agreed a deal with its landlords and creditors to reduce its rents and receive loan funding in return for selling off some of its store estate. But the deal soon unwound. With operating leases set to come onto the balance sheet of many companies from 2019, expect much more attention to be paid to these obligations in future.
A knight in white (and black)?
Sports Direct (SPD), founded by Newcastle FC owner Mike Ashley, had been in talks to rescue part or all of the group prior to its collapse. The administrators are keeping the doors open at BHS as they continue to seek a buyer, with a swathe of companies reportedly interested. Subtracted from a crippling pension scheme, and with some accommodative landlords, there could be more than scraps here.
