Debenhams Department Store Is On The Brink Of Administration

Debenhams Department Store Is On The Brink Of Administration

After rejecting Mike Ashley’s Sports Direct £150m cash injection, the department store risks falling into the hands of lenders and losing its shareholders

Debenhams has been struggling lately and issued three profit warnings last year, along with a debt pile of £640m. Debenhams has 165 stores and around 25,000 employees, and towards the end of last year the retailer announced it was increasing its store closure plans from 10 to 50 over a three to five-year period. But now the store is about to enter pre-pack administration, which means the company can sell itself or its assets without affecting the operation of the business, and administrators take over the running of the business to protect creditors while shareholders lose their investments.

But billionaire Mike Ashley, owner of Sports Direct, offered £150m to Debenhams on Monday if the store chain agreed to make him chief executive, and in case there is no deal then the 29% stake that Ashley’s Sports Direct has in the department store will become worthless. Debenhams told the billionaire to agree to four conditions in order to recommend that the store’s creditors extend their end-Monday deadline for a deal. The conditions included withdrawing calls for a shareholder meeting that was meant to oust the majority of the board, as well as agree to a joint press release with Debenhams and its lender this Monday, and to enter into a “stabilization agreement” that would force him to avoid issuing any public statements that could harm Debenhams.

It would be up to creditors which include both banks and hedge funds to decide, so, if creditors move ahead with a pre-pack administration it would mean wiping out shareholders’ stakes, as well as that of Ashley, and once under creditor ownership the company would enter into a company voluntary agreement that could mean the closure of 50 of its 165 store starting 2020.

It was announced that the company’s board and its lenders rejected the offer as it was tied to Ashley being made chief executive. Also, Debenhams’ shares were suspended before Tuesday’s trading at its own request, so now Debenhams is likely to go into pre-pack administration. In the new offer made on Tuesday by Sports Direct, Ashley agreed to underwrite £200m rights issue as long as Debenhams named Ashley as chief executive. The offer also stipulated that Debenhams’ lenders agree to write-off £82m of its debts. Laith Khalaf, senior analyst at Hargreaves Lansdown said that this Tuesday was set to “mark the endgame for control of the department store”:

“It looks like Mike Ashley has one final card to play, and that’s making a firm takeover offer for Debenhams. Even that seems unlikely to shift the retailer from the course it’s currently on, as it sounds like the department store is preparing to enter administration imminently.”