PPF warns against A&M's involvement in Toys R Us administration

23 February 2018 Consultancy.uk 5 min. read
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Alvarez & Marsal should not be appointed as administrators for Toys R Us – should the retailer fail to secure its future in the coming days – according to the Pension Protection Fund. It is understood that the organisation, which is Toys R Us’ biggest unsecured creditor, would prefer to see such a project handed to Big Four firm PwC instead.

The Board of the Pension Protection Fund (PPF) is a statutory fund in the United Kingdom, intended to protect members if their pension fund becomes insolvent. The organisation is also a major creditor of assorted UK businesses, and the largest unsecured creditor of troubled UK children’s retailer, Toys R Us.

Thanks to weak sales growth, increased debt, and digital disruption – something that its competitors like Build-a-bear have been quicker to adapt to – Toys R Us' businesses have been struggling to stay afloat for some time. The embattled group are presently attempting to sell both their UK and European divisitions through separate processes run by Lazard and Alvarez & Marsal (A&M). Consulting firm A&M had previously secured approval for a deal to safeguard Toys R Us UK’s future just two months ago – obtaining the support of the PPF for that deal at the last minute.

Toys R Us UK only survived the Christmas period after the PPF agreed to vote in favour of a Company Voluntary Arrangement (CVA), which aimed to trigger the closure of a quarter of its 105 shops, just months after PwC research revealed closures of UK retail stores had reached their lowest level in seven years. The CVA was also expected to involve the injection of £9.8 million into the Toys R Us' pension scheme, while shortening its deficit recovery period to 10 years – but a sudden £15 million VAT demand from the UK Tax Office due before the end of February looks to have scuppered such a deal.

PPF warns against Alvarez & Marsal's involvement in Toys R Us administration

The company is now racing to secure new investors within the next few days, with more than 3,000 jobs and the fate of one of the UK's best-known retail brands on the line. However, while a number of parties are said to still be interested in buying parts of the business, The Entertainer, a privately owned chain, has now withdrawn from talks, in what could be an ominous sign of things to come. With time rapidly running out, the prospect of Toys R Us UK avoiding insolvency proceedings looks increasingly bleak.

In order to ensure impartiality, and avoid a conflict of interest, the UK’s pensions lifeboat is demanding that directors of Toys R Us UK line up an 'independent' administrator, if talks about a rescue of the chain break down in the coming days. According to reports in the UK media, PPF has written to the directors of Britain's biggest toy retailer to argue against appointing their existing adviser on its restructuring to oversee any insolvency proceedings.

Commenting after the news of the letter broke, a spokesperson for A&M said in a statement, "We understand that the PPF has written to the directors of Toys R Us UK. We are aware of our professional responsibilities."

Toys R Us and A&M could ignore the advice, as it is only advisory. The powers of the PPF to influence the choice of administrator is limited, as only secured creditors and the company's directors have the right to choose which firm is appointed, although City sources also suggested it could be "dangerous" to ignore the PPF's wishes.

Sources told British broadcaster Sky News that the PPF was "uncomfortable" about A&M handling the chain's administration because of its role orchestrating a Company Voluntary Arrangement (CVA) approved three days before Christmas. On top of this, it was reported that PwC, which has been advising Toys R Us UK's pension trustees for months, was likely to be the PPF's preferred choice as administrator.

PwC and Carillion

Elsewhere, PwC is also presently administrating collapsed outsourcer Carillion. Auditors from EY had been reported to have been placed on stand-by as it emerged that the ailing construction group would not receive a bailout from the Government. However, it was their Big Four rivals who were eventually appointed for the high-profile liquidation.

The professional services giant has come under continuous scrutiny since this appointment. PwC’s role in the liquidation of Carillion was first criticised after it emerged that the auditor already has two separate, and apparently conflicting roles, including one advising the defunct company’s pension trustees.

More recently, the firm provoked further ire for its alleged failure to supply axed Carillion workers with information that they require in order to receive redundancy payments from the Insolvency Service. Nearly 1,000 people have lost their jobs at the Wolverhampton-based construction and services giant since it went into administration in January, and while 6,600 jobs have been secured, the future of more than 10,000 UK Carillion workers still hangs in the balance.

One former Carillion manager told the British press, "On the afternoon of February 2nd I was telephoned, and told I was being made redundant in three-hours-time. My mobile phone and internet was cut off and I was told I wouldn't be paid after 5pm that day. We [later] had a letter from PwC telling us we would be provided with a code to be able to claim statutory redundancy. I'm still waiting. I've tried calling and was told by someone from PwC that he couldn't deal with it and I'd have to email. I'm still waiting for a response to my email.”