Retail giant bows out

Another day, another department store on the brink of bust. Plans have been finalised for Debenhams to be handed over to its lenders. Its history dates back to 1778, when it sold bonnets, gloves and parasols in London’s

West End.

Debenhams’ decline into retail obscurity has been dramatic. It joined the stock market for the third time in 2006, valued at £1.7bn.

The company, now worth just over £22m, has shored up a £720m debt pile. Last week Moody’s Investors Service downgraded Debenhams’ credit rating to Ca, the second-lowest junk grade, reserved for companies

“in or very near default”.

The shares were suspended early on Tuesday.

As with many limping companies, private-equity ownership ultimately hastened Debenhams’ demise. The company was also slow to react to changes in shopping habits and so, like many of its High Street peers, it fell prey to increasing pressure as people began to shop online, visiting stores less and less.

Like many legacy retailers, it is locked into onerous rental contracts signed before the credit crunch hit — Debenhams stores, of which there are 165, have an average lease term of 18 years. Under current arrangements, it has £4.3bn of minimum lease payments over the next 20-plus years.

This week its board rejected an

eleventh-hour £200m rescue bid by Mike Ashley due to an acrimonious relationship with the British billionaire retail entrepreneur. It might have had something to do with him ousting the chair and accusing Debenhams executives of “a sustained programme of falsehoods and denials”, even urging them to take a lie detector test.

He also said Debenhams advisers should be “put in prison”.

Through his Sports Direct empire, Ashley owns an almost 30% stake, which he built over five years.

At one stage, his stake was worth a whopping £150m.

Debenhams has actually spurned a series of offers from the tycoon who, by the way, also owns Newcastle United. His offer to inject cash into the struggling group always came with a caveat: his appointment as CEO.

It’s a pity about the politics, because Debenhams was a natural fit within Sports Direct, whose holdings include House of Fraser, multi-brand luxury retailer Flannels and a stake in French Connection. Apart from better deals from landlords, the cost-saving potential in merging Debenhams’ back office functions with those of House of Fraser (also a department store) is obvious.

In January, Ashley told British MPS that he had already written off more than £100m of investments in Debenhams; it says much that he was still willing to bankroll the ailing group.

History is not on the side of banks and hedge funds that rescue beleaguered retailers. They’re astute at making returns on their investments, not retailing or growing businesses for the long term.

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Retail dinosaur

The so-called prepackaged administration — where the outcome is agreed before administrators are called in — means investors with shares in Debenhams will be wiped out. This includes Ashley’s stake, which is now worthless. Under the proposal, £101m is to be pumped into the company immediately to allow restructuring, which will include the closure of 55 stores and rent reductions.

What Debenhams needed was more cash to keep trading; it has that — for now.