It has been another rollercoaster week for Debenhams (DEB) investors as its largest shareholder – Mike Ashley’s Sports Direct (SPD) – continues its campaign to take control of the struggling department store chain. At the time of writing, Sports Direct had detailed a 'potential' takeover offer worth 5p a share, or £61m in total, representing a whopping 127 per cent premium to the closing price of Debenhams’ shares on 26 March 2019.
However, there are several conditions that Sports Direct is seeking before making a firm offer for the company. First, it wants a guarantee that Mike Ashley will be appointed as Debenhams’ new chief executive, that Debenhams will not enter third-party funding arrangements and that it will terminate the noteholder consent solicitation process it announced a week ago. The offer will also be void if the company decides to enter administration or a company voluntary arrangement (CVA).
Given Sports Direct’s near-30 per cent stake in Debenhams, it’s clear why Mr Ashley wants to save the retailer from going bust. But if the chain did enter an insolvency process, Mr Ashley – or other potential bidders – would also have a chance to buy the company free from its current liabilities and debt obligations.
Patrick O’Brien, UK research director at GlobalData, seems to concur: "The proposed 5p-a-share [offer]... would involve the taking on of over £500m of debt and over £4bn in lease liabilities, so hardly a cheap way of supercharging [Mr Ashley’s] plans to create a Harrods of the high street." In Mr O’Brien’s view, Mr Ashley would not make a formal offer "unless he was sure there was a way to avoid being on the hook for all of it", which makes the possible offer "hard to take too seriously". In any regard, Mr O’Brien says Mr Ashley is "hellbent on derailing the debt-for-equity swap, which would destroy his chance to create a 'House of Debenhams'".
