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Department Stores

Debenhams enters pre-pack administration

Debenhams has entered pre-pack administration and gone into the control of its lenders following the department store’s rejection of Sports Direct’s offer to underwrite £150m equity issuance.

The pre-pack administration will see all of the company’s shareholders – including Sports Direct which has a 30% stake – wiped out and lose their investments.

Chad Griffin, Simon Kirkhope and Andrew Johnson of FTI Consulting LLP were appointed as joint administrators while Debenhams’ shares were sold to Celine UK Newco I Limited, an entity owned by the company’s secured lenders.

Although Debenhams previously announced plans to close 50 of its stores, its 166 outlets will continue trading as normal. The company employs around 25,000 people.

The pre-pack administration will allow the company to sell itself without affecting the running of the business. It also allows additional funding of up to £99m to be provided.

Early this morning (9 April) Sports Direct revised its offer to underwrite an equity issue of £200m with the same conditions of making Mike Ashley CEO and Debenhams’ lenders agreeing to write-off (in aggregate) £82m of its £720m total debt facilities. However, the company said the offer “was not sufficient” to justify an extension to the 8 April deadline to allow it more time to seek funding.

The embattled department store also requested to suspend its shares this morning.

Debenhams chairman Terry Duddy said: “We remain focused on protecting as many stores and jobs as possible, consistent with establishing a sustainable store portfolio in line with our previous guidance. In the meantime, our customers, colleagues, pension holders, suppliers and landlords can be reassured that Debenhams will now be able to move forward on a stable footing.”

What happened?

The department store has had a challenging period; in April 2018, its pre-tax profits dropped by 84% as it was forced to temporarily close 100 stores due to adverse weather conditions caused by the ‘Beast from the East’.

This appeared to signify what was to come for the company, as at the time, its CEO Sergio Bucher also attributed its poor performance to “challenging market conditions”.

Then in May, the company announced an employee reshuffle to help improve its finances, putting 320 jobs at risk. It hoped this would produce £10m in cost savings.

However, shortly after, Debenhams issued a profit warning as it said its full-year earnings could fall to £55m following a “disappointing” Christmas trading period. This was significantly lower than its £83m expectation, against its 2016 pre-tax profits of around £95m. During this period, the department store’s overall group sales were down 1.8%

It then issued its third profit warning of 2018, saying it expected its profits to reach £35-40m. Although the company insisted it wasn’t facing cash problems, it created enough uncertainty for its credit insurers Euler Hermes, Coface and Atradius to reduce cover for its suppliers.

Speculation of a CVA ensued as it was reported that the company had appointed KPMG to explore restructuring plans; this led to insurer Atradius to completely withdraw cover.

In its full year results to 1 September 2018, Debenhams’ troubles appeared to worsen as the company reported a record annual loss of £491.5m prompting it to announce the closure of 50 stores over a three to five year period, affecting some 4,000 jobs. During this period, its like-for-like sales declined 2.3%.

2019 didn’t prove to be much better for the department store as it struggled over the Christmas period with a 3.4% drop in group like-for-like sales for the six weeks to 5 January.

It was around this time that Mike Ashley began his attempts to take control of the company by forcing chairman Sir Ian Cheshire to resign with immediate effect after he was voted off the board. Bucher was also removed from the board but remained in his position as CEO.

It then looked as if things might be back on track for the department store as it secured a £40m cash injection from its lenders, allowing it to extend its £520m borrowing facilities with banks for another 12 months. Unfortunately, just a month later Debenhams issued another profit warning as its group’s like-for-like sales fell by 5.3% in the 26 weeks to 2 March 2019.

At this time, Ashley ramped up his efforts to step in with an announcement that he planned to remove the entire board of directors except for Rachel Osborne and make himself CEO. This preceded a series of offers made by Sports Direct to Debenhams including a £150m loan, a £100m offer for its Danish brand Magasin Du Nord and a £61.4m bid to take control of the company.

The department store, while saying it was considering these offers, appeared to try to stave Ashley off when it entered discussions with its lenders to secure a £150m loan before bondholders agreed to back a £200m restructuring loan.

Ashley criticised the company for this decision, saying its advisers should be “put in prison” and shortly before Sports Direct’s most recent £150m offer, he accused the company and its advisers of a “sustained programme of falsehoods and denials” and suggested its advisers take a lie detector test.

Despite Sports Direct revising its offer to £200m this morning (9 April), Debenhams said it would not be enough to justify extending its deadline in an effort to seek more funding.

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