Hedge funds to seize control of Debenhams

As department store heads into administration...

dEBENHAMS was on the brink of administration last night after it rejected a £150m rescue bid by Mike Ashley.

The department store chain is set to fall into the hands of its lenders today in a move that is expected to trigger a wave of store closures and job losses.

The so-called pre-pack administration – where the outcome is agreed before administrators are called in – means investors with shares in debenhams will be wiped out.

That includes Ashley, 54, who has an almost 30pc stake in the company through his firm Sports direct. At one stage, his stake was worth £150m. debenhams’ shares plunged 10.3pc, or 0.21p, to 1.83p last night as lenders, including US hedge fund Silver Point Capital, prepared to seize control.

Mouhammed Choukeir, chief investment officer at Kleinwort Hambros, said: ‘It’s been a rough ride for shareholders.’

The increasing likelihood of a pre-pack administration came after debenhams rejected Sports direct’s offer of a £150m lifeline in return for Ashley being made the department store’s chief executive. The retail tycoon was still considering the possibility of making a full £61m takeover for debenhams last night.

But after racking up a £720m debt pile, the store is at the behest of its lenders.

A Sports direct spokesman said the lack of engagement from debenhams’ board and lenders is a likely to have a ‘significant and negative impact on shareholders, as well as suppliers and employees’. If Ashley wants to be in with a chance of taking over debenhams following an administration, he will need to make an offer approaching £800m to account for the retailer’s debt and pension deficit.

Analysts said a deal was unlikely to happen, based on strained relations between Ashley and debenhams’ board which have gradually worsened.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said: ‘In theory, a deal could be struck, but relations seem far from cordial and the debenhams management look set on giving the lenders control.’

In Ashley’s latest broadside, he accused management of undertaking a ‘sustained programme of falsehoods and denials’.

The Newcastle United owner claimed he had taken a lie detector test to prove he was telling the truth about the details of a disputed meeting with the retailer.

He went on to demand that chairman Terry duddy and nonexecutive director david Adams take lie detector tests.

Russ Mould, investment director at AJ Bell, said: ‘Ashley’s nononsense approach to business has likely been a significant factor in the creation of his retail empire. But debenhams might have been a case where a more softly-softly approach would have yielded greater success.’

Shares have collapsed since it returned to the stock market in 2006 in a listing worth £1.7bn. The company is now worth just over £22m. debenhams wants to shut at least 50 of its 166 stores in a bid to slash costs and make the business more sustainable for the future.

The store closures are likely to put around 4,000 jobs at risk. It is also expected to persuade landlords to give it chunky rent reductions across its stores as it tries to get the company on an equal footing.

Tony Shiret, an independent retail analyst, said: ‘debenhams is being killed by its rent. Its average rent term is probably 18 or 19 years and they’re paying more than £200m a year of rent plus probably about another £100m of rates, that’s killing them.’

debenhams declined to comment last night.