Struggling department store chain Debenhams (DEB) has fallen into the hands of its lenders following months of financial distress, board in-fighting and a highly public spat with its largest shareholder – Mike Ashley’s Sports Direct (SPD). Although the pre-pack administration allows the company to keep trading in the immediate term, remaining shareholders are set to be entirely wiped out by the deal.
It is fair to say the final sequence of events was rapid. Having secured a £200m refinancing on 29 March 2019, the availability of that facility was subject to certain conditions, including a possible equity or debt financing backed by Sports Direct. Over the weekend of 6 April, Sports Direct offered to underwrite a possible £150m rights issue, although Debenhams quickly rejected this plan. A second offer to secure a £200m rights issue was also batted away by Debenhams' bosses early on the morning of 9 April, before the shares were suspended at 8am and administrators appointed shortly before noon. Sports Direct had, prior to the administration, been mulling over a possible takeover offer for the company although – like all of its offers – this depended on Mike Ashley’s immediate appointment as Debenhams’ chief executive.
A Debenhams spokesperson said reluctance to appoint Mike Ashley as the group’s new leader stemmed from a material adverse information clause, which would have allowed Mr Ashley to walk away from the business, its employees and shareholders commitment-free if the situation was deemed worse than first thought. At this point, the group would have entered a 'disorderly insolvency'. Instead, as part of a pre-pack administration, Debenhams’ lenders – which include banking group Barclays (BARC) and US hedge fund Silver Point – have agreed to take control, and subsequently sell the business, leaving all underlying group operating companies trading as normal. All commercial relationships with suppliers, employees, pension holders and customers are within the operating companies, so none have been adversely impacted by the deal either.
The pre-pack administration may have been in the "best interests of the group's creditors, employees, customers, pension holders and suppliers", but will undoubtedly cause anger among shareholders who have lost out. The shares were due to be cancelled at 10am on 10 April, while the repayment of debt and store closures are still the top priority. As such, the group does "not expect that there will be a distribution to… shareholders" as part of the sale process.
The remainder of the £200m refinancing facilities secured at the end of March should also be made available in due course, although this still depends on the success of a wider restructuring, including "a significant overall reduction in the group's rent burden". Around 50 of Debenhams’ 166 stores were already earmarked for closure, while negotiations with landlords continue. A possible company voluntary arrangement (CVA) – a form of insolvency that helps companies cut rent bills and close stores – could help to expedite this process.
Debenhams chairman Terry Duddy said it was "disappointing to reach a conclusion that will result in no value for equity holders" but that "customers, colleagues, pension holders, suppliers and landlords can be reassured that Debenhams will now be able to move forward on a stable footing". Mr Duddy said the board also remained focused on "protecting as many stores and jobs as possible" and "establishing a sustainable store portfolio".
But Sofie Willmott, senior retail analyst at GlobalData, thinks that the cash injection from the new owners "will not be enough to turn around the failing department store’s fortunes". Furthermore, store closures will "not bode well for the struggling Arcadia group" as many of its brands are present in Debenhams branches, while Next (NXT) and Primark are "best positioned to benefit from Debenhams shutting locations", particularly if Marks and Spencer’s (MKS) clothing ranges "remain unappealing".
