Debenhams enters most vital week ever: will it be Ashley or administration?
The Debenhams-Sports Direct saga stepped up a couple of gears at the weekend and became even more confusing. There were reports of Mike Ashley offering to underwrite a major rights issue if he’s made CEO; of Debenhams’ resolve to keep him out of the chief executive's chair weakening; but also of a pre-pack administration by Monday evening and thousands of job losses to follow.
So where do we start? First that rights issue. Sports Direct on Monday confirmed that it “continues to seek to constructively engage with the Debenhams board and, as one of a number of potential options under consideration, it has made a proposal to Debenhams under which [it] would underwrite a £150 million pre-emptive equity issuance to existing Debenhams shareholders.” This would be in return for getting the top job at the company and Debenhams' lenders agreeing to write-off £148 million of its debt.
It added that it “continues to give active consideration to its pre-conditional possible offer for Debenhams at 5p in cash per ordinary share announced on 25 March.”
This was in response to Debenhams having called on Ashley to come up with an alternative to the £200 million agreement it had reached with lenders to assure its future. Debenhams had warned that shareholders would lose their entire stakes unless Sports Direct was prepared to come up with its own financing deal in the form of a firm buyout offer, a rights issue or debt funding.
Ashley taking over is a step that the retailer and its creditors have solidly resisted so far, Debenhams citing Ashley’s control of House of Fraser as the main reason because it sees it as a major rival (something Sports Direct denies).
So what has the retailer’s response to the Sports Direct approach been? Sky News said it has learnt that Debenhams wrote back to Sports Direct this weekend to set out four conditions that Ashley would need to meet ahead of a Monday deadline for a refinancing to be agreed. And one of those conditions suggested that its resolve to keep him from being its CEO isn’t as firm as it once was.
Sky also said that unless Ashley agrees to the four-point plan within hours, Debenhams could enter a pre-pack administration as soon as Tuesday. That would mean its lenders (hedge funds led by Silver Point) would become its owners.
So just what are Debenhams’ conditions? First it wants Ashley to withdraw his request for a special meeting at which he would try to eject most of the board; then he’d need to enter a “stabilisation agreement” to stop him making public statements that could damage the company; thirdly he’d have to agree a statement with Debenhams and its lenders to be issued Monday; and lastly provide a legal guarantee that the £150 million would definitely be available if Debenhams agrees to him becoming CEO. That last point is the big surprise, of course, as it's the first time Debenhams has suggested it might agree to letting Ashley in.
So will it happen? Well, this is where reality raises its ugly head. On Sunday afternoon, Sports Direct continued to criticise the Debenhams board, accusing it of bad faith over a non-disclosure agreement and using language that made a deal less likely. It accused the directors of "a sustained programme of falsehoods and denials. The fact that they can so openly lie in their recollection of joint meetings with Sports Direct is beyond the pale.”
That leaves us now with questions over whether there’s still time left for a deal to be struck and whether the lenders (who are in the driving seat) would agree to any deadline extensions. Some reports said it's too late to avert administration.
It has been reported that administrators have already been lined up and that the lenders who would become Debenhams’ owners would then run a formal auction, with a debt-for-equity swap to reduce the chain’s giant debt pile and a CVA to allow it to exit loss-making stores. While Debenhams as a store chain would be likely to survive, it would also mean the likelihood of job losses in the thousands.
But with the situation still being pretty fluid, anything could happen, so watch this space.
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