House of Fraser administrators defend Sports Direct deal

21 August 2018 Authored by Consultancy.uk

House of Fraser administrator EY has come under pressure to justify accepting Sports Direct’s offer to buy the department store. The deal, which was reportedly favoured over one which offered to take on pension liabilities, has since jeopardised the troubled retailer’s 10,000 member pension fund.

The retailer had been on the ropes for months, but House of Frasers final laboured collapse into administration seems to have only prolonged the on-going saga of its demise. Following a ruinous £155 million take-over in 2014, House of Fraser had seen sales slump consistently, but hoped a company voluntary arrangement (CVA) – which was set to see 31 stores out of 59 close early next year – could help cut costs and maintain the business. The company’s plans to vacate a number of presences and reduce rents on others infuriated landlords, however, who repeatedly pledged to veto the scheme.

As House of Fraser finally filed for administration on August 10th, Big Four firm EY was installed to oversee the process, and completed the sale of the business quickly. While that might have been the end of the matter in many other recent administrations, however, the buyer is the latest cause of controversy for the beleaguered high street institution. Fresh from settling an embarrassing dispute regarding player bonuses at Newcastle United, Sports Direct owner Mike Ashley sealed an agreement to buy the stores, stock and brand names of House of Fraser last Friday, less than two hours after the 169-year-old store chain had been placed into administration.

House of Fraser administrators defend Sports Direct deal

While the agreement to hand the keys of the brand to Ashley and company removes an immediate threat to 17,000 jobs and is expected to result in fewer of House of Fraser’s 59 stores closing, the arrangement allows Ashley to abandon the group’s Pension fund, jeopardising the 10,000 member pot. Now it looks increasingly likely that the pension scheme will fall into the Pension Pension Protection (PPF) lifeboat, to avoid it being totally lost, which would see workers facing cuts to their hard-earned pensions of up to 10% through no fault of their own. Trustees are understood to be preparing to open discussions with leading insurance companies to try and prevent this, and the scheme is understood to have been well run with long-term investments that would be attractive to insurers helping to create a £20 million surplus, although the cost of a buyout would likely be about £170 million.

Critics argue that the fund has been exposed to an unnecessary risk by administrators who were too keen to quickly seal a deal. A prior offer from retail entrepreneur Philip Day to acquire House of Fraser as a going concern – including the pension liabilities – was spurned in favour of the “pre-pack” administration sale. According to sources close to the story, the difference seems to have been that Day’s offer was £40 million lighter than Ashley’s £90 million fee. However, people close to Day also told the UK’s Financial Times said he was prepared to bid £100 million for the company in administration.

Any other options?

EY meanwhile maintains that Sports Direct’s offer to buy the department store chain was the “only available offer” to keep the business afloat. The professional services firm, which acted as advisers to the bank creditors and handled the administration, further asserted that they had entered into discussions “with various parties” after the decision to go into administration was taken, but before it was implemented.

A spokesperson explained, “During the course of Thursday August 9, those parties reduced to one. EY were appointed as administrators on Friday August 10 at approximately 8am and subsequently sold the business and its assets to the Sports Direct at approximately 9am… For the avoidance of doubt this was the only available offer to save the business, and in comparison to the alternatives represented by far the best recovery for the creditors of House of Fraser.”

Elsewhere, real estate consultancy CBRE confirmed it had been appointed to “advise Sports Direct on all property-related matters in relation to its recent acquisition of House of Fraser.” CBRE added that having briefly entered administration, House of Fraser must now renegotiate leases with individual landlords, which is unlikely to be welcomed by the same group who previously fought to scupper House of Fraser’s CVA. Although Ashley has pledged to keep as many stores as possible open, experts anticipate a number of unprofitable locations will close, and CBRE added, “Contact will be made to all landlords over the following days.”

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