What’s Next for Debenhams and Arcadia as U.K. Retail Reopens
U.K. Retail Emerges From Lockdown as a Much Diminished Industry
(Bloomberg) -- Most of England’s retailers are emerging from lockdown, with just over three weeks left until Christmas and the outlook for the industry looking far worse than before they closed their doors a month ago.
While the shutdown may have helped contain the spread of Covid-19, it dealt a hammer blow to stores during their most lucrative period of the year. Debenhams and Philip Green’s Arcadia Group, two of the biggest retail brands, collapsed this week, putting 25,000 jobs at risk in an industry that was already on track to cut more than 200,000 positions this year.
On Wednesday, Bonmarche Ltd., the fashion retailer that caters to women over 50, became the latest retailer to file for insolvency placing 1,500 jobs and more than 225 shops at risk.
As hundreds of stores nationwide continue to close weekly -- felled by both the long-term shift to e-commerce and the impact of Covid-19 -- there is growing alarm about the future of Britain’s shopping streets.
What’s next for Debenhams?
The end is almost in sight for this department-store chain that traces its history back more than 200 years. Debenhams has struggled for years, burdened by a large and costly store portfolio as shoppers shifted online. Now controlled by its lenders, Debenhams has tried and failed since April to find someone willing to take the business on. Its last hope faded on Tuesday when the sportswear retailer JD Sports Fashion Plc ended negotiations.
While Debenhams is still looking for a buyer, Hilco Capital Ltd., a restructuring company, has been asked to assess the assets and come up with a liquidation strategy that maximizes returns for creditors. The chain entered administration with 720 million pounds ($961 million) of secured debt and about 200 million pounds owed to trade creditors. The chain said that all contractual obligations made with suppliers during the administration will be met.
On Wednesday, as shops in England reopened, consumers looking for a bargain deluged Debenhams’ website as it launched a 70% off stock clearance sale. Such was the demand from shoppers that the chain had to implement a queuing system online with shoppers given 30 minutes to complete their purchases.
What about Arcadia?
Prospects may be slightly brighter for Arcadia, but only just. By going into administration, the owner of the Topshop brand has bought itself time to seek a buyer or fresh financing, and it has protection from any creditors that may want to bring claims. Its stores will remain open for the crucial Christmas period, and management will stay in place under the supervision of Deloitte, which now has full control of the business. Deloitte has eight weeks to assess Arcadia’s assets and creditors, and produce some initial proposals to try to save the business.
Who could buy all or parts of these companies?
With a sale of Debenhams seeming less likely, the main focus will be on Arcadia. Mike Ashley’s Frasers Group has already expressed interest in the business, or at least part of it, despite saying a year ago that he wouldn’t buy it for even one pound. Online rivals, including Asos and Boohoo, might eye some of Arcadia’s brands, particularly the jewel in the crown, Topshop, although even that star has faded in recent years. Arcadia’s share of Britain’s clothing market has roughly halved since the start of 2016, dropping to 2.2% from 4%, according to data from Kantar.
What if no buyer can be found?
If no buyer steps forward and there’s no agreement with creditors, then Arcadia may be placed into liquidation, where the company is broken up and the assets sold off piece by piece. This would include any properties Arcadia owns, such as the 100,000 square-foot Topshop flagship on Oxford Street. Proceeds will go to creditors including suppliers, landlords and pension funds.
Which creditors stand to lose?
As in any administration, there is the usual cast of creditors, including banks, landlords, suppliers, employees, company pension systems and tax collectors. Secured creditors would receive payouts first in the event of a sale or liquidation, followed by preferential and then unsecured ones. The timing of Arcadia’s administration is key, given that British tax authorities would have been considered a preferential creditor as of Dec. 1 following a rule change by the government. However, as it filed on Nov. 30, the revenue service will still rank among the unsecured creditors.
Administrators are obliged to provide a full list of creditors, what they are owed and how much they can expect to be repaid.
What about the pensions?
Arcadia agreed to provide security for the pension plans last year to the value of 210 million pounds ($282 million). Still, the Unite union has warned that employees may face reduced pensions as a result of the administration. The Pension Protection Fund will now assess whether the plans can be rescued.
“If the funding level in the scheme is below PPF compensation levels, the PPF is able to absorb the scheme and compensate members, subject to statutory limits,” said Glen Flannery, a restructuring partner at law firm CMS.
Green himself is coming under pressure to protect his employees’ pensions, much like in 2016 when his BHS department store chain collapsed and the tycoon eventually agreed to inject 363 million pounds into the pension plans. He has no legal obligation to do so.
Politics is getting involved too, with U.K. Chancellor Rishi Sunak telling lawmakers on Tuesday: “Rest assured that we keep an eye on the situation.”
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