Debenhams is the latest UK high-street retailer to enter into Administration with a pre-packaged Administration deal being agreed this morning (9 April) with its secured lenders. The Business Recovery team at CavanaghKelly take a look at the deal.
What is a pre-packaged sale?
The term “pre-packaged sale” refers to an arrangement under which the sale of all or part of a company’s business or assets is negotiated with a purchaser prior to the appointment of the administrators and the administrators effect the sale immediately on, or shortly after, appointment.
What has effectively happened to Debenhams?
Debenhams plc has concluded that its holding company is insolvent and that losses to creditors would be minimised by facilitating a pre-pack sale to order to protect the rest of the Group’s access to liquidity and therefore protecting the company’s creditors as a whole.
Its lenders are made up of High Street banks and US hedge funds including Barclays and Bank of Ireland.
These secured lenders have essentially purchased 100% of the share capital of various Debenham group trading companies via a new holding company known as Celine UK Newco 1 Limited.
What will happen to on-going trade?
Debenham’s 165 outlets will continue to trade under the deal which only affects its listed holding company (Debenhams plc).
However, various elements of the media are speculating that this restructure will pave the way for around 50 store closures putting thousands of jobs at risk.
This is particularly worrying for Belfast and Derry where Debenhams would be regarded as key tenants at the Castlecourt and Foyleside Shopping Centres.
What has it been sold for?
Debenhams’ lenders paid £102m for the group companies and also took on £520m of debts and its pension obligation, taking the total cost of the deal to c. £620m.
That sum is in line with the total value of Debenhams’ debts at the time it fell into administration.
What will happen to shareholders including Sports Direct?
This sale is likely to effectively wipe out all shareholder value including Mike Ashley’s Sports Direct which owns c. 30% of the shares built up through an investment of c. £150m.
The department store rejected last-ditch rescue offers from Sports Direct, which has been locked in a hostile battle for control. On Monday, it rejected a £150m rescue offer which was increased to £200m in the early hours of Tuesday. The higher offer was rejected because Mr Ashley wanted to be chief executive amongst other conditions.
Interestingly, the transaction includes provisions to ensure that the Group is immediately marketed for onward sale to establish whether there is potential for a return to shareholders. However, in order to secure a return to shareholders, any offers will have to be in excess of all financial debt and secured pension liabilities (which amount to over £600m) and therefore appears highly unlikely to occur.
Why is Debenhams in trouble?
Debenhams has been struggling for a number of years and issued three profit warnings in 2018. It had a debt pile of £622m and had secured emergency funding lines from its bankers in recent months.
Last year, it reported a record pre-tax loss of £491.5m and later reported that its sales had fallen sharply over Christmas.
It had also moved away from owning properties on a freehold basis and had signed up to a significant number of property leases.
A view from CavanaghKelly
In recent years, high-street retailers have faced increasing competition from online businesses as well as specialty operators and supermarket groups.
Unfortunately, the increased competition, alongside economic uncertainty, rising salary costs and increasing business rates has amounted to a perfect storm for many retailers.
With Debenhams carrying a huge debt burden alongside some onerous leases, it’s not a surprise to see it having to restructure.
For businesses at this time it is vital that professional advice is sought as early as possible to avoid scenarios such as this.
If a client is facing the prospect of insolvency, it is vital that the warning signs are spotted so that action is taken to remedy the problem as soon as possible. The earlier advice is sought, the wider the range of options available, increasing the likelihood of a positive resolution for the client.
As Licensed Insolvency Practitioners, CavanaghKelly can advise your Company on the options available should it find itself coming under financial pressure.
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Whilst every effort has been made by CavanaghKelly to ensure the accuracy of the information here, it cannot be guaranteed and neither CavanaghKelly nor any related entity shall have liability to any person who relies on the information herein. Information given here is for guidance only. Detailed professional advice should be taken before acting on any information contained herein. If having read the guidance here, you would like to discuss further; a member of our team would be pleased to help you.