The acquisition of House of Fraser by Sports Direct is a typical “pre-pack” administration. In administration one minute, sold the next. The national media promptly welcomed it as the rescue of everyone’s favourite department store, the protection of 17,000 jobs and just what is needed to help save Britain’s High Streets.
Mike Ashley of Sports Direct trumpeted this as a great deal. All the stores and stock were purchased for £90 million when gross assets were £946 million and the company made a profit last year of £14.7 million – more on the financial numbers below. He plans to turn House of Fraser into the “Harrods of the High Street”.
But is it such a great deal? I have written many times in the past about the iniquities of pre-pack administrations. How creditors and shareholders are dumped, and pension schemes likewise. The administrators save themselves the hassle of winding up the business or looking for a buyer of the business as a “going concern” while collecting large fees for little work. I think the insolvency regime should be reformed.
The figure of £946 million of gross assets given by Sports Direct is from the last published accounts of the parent company House of Fraser (UK & Ireland) Ltd for the year ending January 2017, which is the last set of accounts filed at Companies House. The truth is that the company had net assets of £111 million with trade creditors of £365 million and long-term borrowings of £284 million. Debts including short terms borrowings probably grew substantially since then. Although Mr Ashley is paying the administrators £90 million for the assets, it would appear that both the trade creditors and the lenders will be very substantially out of pocket.
That’s not to mention the property companies who are the store landlords who face a default on their leases. Mr Ashley is unlikely to want to keep half the stores, so many of the jobs will be lost and he will no doubt want to renegotiate the leases on other stores downwards. So any property companies you may have invested in may be damaged.
The company will have got shot of its defined pension schemes (approximately 10,000 members) which will be taken on by the Pension Protection Fund. That’s a public body that is funded by a levy on all pension schemes, so basically someone else will be paying if there is any shortfall. Although the pension scheme may be in surplus at this time, in such circumstances pensioners usually face a substantial cut in their future income as there will be no more contributions from the company.
Now House of Fraser might have been a retailing basket case with excessive debt, but surely a more equitable solution was possible? Indeed the Mail on Sunday today called it a “Fix” because there was an alternative offer on the table from retail billionaire Philip Day who allegedly offered £100 million for the company including taking on the pension obligations. The Mail suggested that the bankers and bondholders forced acceptance of the Ashley proposal in their interests. This is not unusual in pre-packs.
Sir Vince Cable suggested an investigation by the BEIS Department is required followed by reform of the pre-pack system. I agree with him. There are better solutions to how to deal with companies that run out of cash or become insolvent due to excessive debt which could better protect the interests of trade creditors, employees and pensioners.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
Roger makes a number of very good points.
Readers my be interested to read the joint the UK Shareholders Association-ShareSoc response to the BEIS consultation on insolvency, that we made in June 2018. https://www.sharesoc.org/sharesoc-news/beis-consultation-on-insolvency-and-corporate-governance/ where we said
Directors are usually much less well informed than the insolvency practitioners, who are to negotiate terms and conditions that guarantee them large fees, often open ended. Such
behaviour is not in the best interests of creditors, employees or other stakeholders. Insolvency practitioners also try to insist on and frequently obtain guarantees and indemnities. They seem to be very unwilling to put their own capital at risk, which we would view as an appropriate quid pro quo for the high fees they are charging. It is wrong to charge very high fees and not put your capital at risk.
Insolvency practitioners too often seem to operating for their own benefit. From an investor point of view, there are not many stories of good insolvency practitioners and perhaps this is evidence of them not operating in the best interests of their clients.
In the US, Chapter 11 seems to work well in some cases and companies continue to trade and emerge after a period back into normal operations. The UK environment seems to favour either a pre-pack, a quick trade sale or an insolvency. All of the UK options are very painful to one or more groups, with the exception of the Insolvency Practitioners.
The Financial Times disclosed more details of the pre-pack administration of House of Fraser this morning.
The FT makes it clear that there was at least one other serious bidder for the company who was willing to purchase the business as a “going concern”. That bidder was Philip Day. How much he was willing to pay is not totally clear, but EY, the administrators are quoted as saying “For the avoidance of doubt, this was the only available offer to save the business, and in comparison to the alternatives represented by far the best recovery for the creditors of House of Fraser”.
The first part of that statement conflicts directly with the other information obtained by the FT. My conclusion is simply that the administrators preferred one bidder rather than another, probably at the behest of the secured lenders (i.e. the banks). There can be a number of reasons for doing so but in essence it’s very typical of what happens with pre-packs where the rush to complete the deal prejudices obtaining the best outcome other than for the secured creditors. So stuff the pensioners, stuff the trade creditors who have supplied goods they won’t now be paid for, stuff the property owners and stuff everyone else so long as the banks get paid.
The administrators can always claim in such circumstances that other offers were not available because very few bidders are likely to make an offer without some information about the business they may be buying and they may need time to put in place the funding required. At least some minimal due diligence is essential. But the administrator can delay or hold back information to thwart other bidders than their favourite candidate. So they can claim that there was only one firm offer on the table when the business was placed into administration.
This is a corruption of the administration process when there should be open marketing and time allowed for reasonable offers to be made so as to obtain the best solution for all stakeholders.
Roger Lawson