Debenhams calls in KPMG as it mulls store closures

25 September 2018

Debenhams has tapped up advisers to consider its options, including possible store closures, as the UK high street fixture struggles to renew falling sales figures. The retailer has engaged auditing firm KPMG to help turn the store chain around, and rescue falling fortunes, just weeks after the administration and sale of House of Fraser.

Founded in the18th century as a single store in London, Debenhams has since grown to 178 locations across the UK, Ireland and Denmark. The British retail stalwart has traditionally operated under a department store format in the United Kingdom and Ireland with franchise stores in other countries, however as the retail sector in the UK in particular endures a torrid 2018, this has seen the shopping institution subjected to a spectacular fall from grace.

In January, Debenhams earmarked £10 million of savings for this financial year, and £20 million extra annually. The last year has seen the company issue a string of three profit warnings, followed by 90 job losses across Debenhams stores as part of further cost-reduction efforts. Chief Executive Officer Sergio Bucher, who is leading the shake-up, then went on to slash 320 store management roles in February. Now, the retailer is said to have identified 30 stores that can be resized – although such a scheme would be subject to landlords agreeing to rent reductions, as the news has broken that the firm engaged KPMG to help explore its options.

Debenhams calls in KPMG as it mulls store closures

The price of Debenhams shares plunged 17% after it emerged that KPMG had been drafted in to help the store consider its options. This seems largely to have been because investors expected a CVA was now a foregone conclusion, with the controversial insolvency procedure having been deployed by a number of struggling firms in 2018, as it allows them to shut under-performing shops. 

Despite speculation, Debenhams Chairman Sir Ian Cheshire insisted that the chain is not heading for insolvency, or indeed that the firm is actively embarking on a company voluntary agreement (CVA). Stating that was "simply not true", Cheshire added Debenhams is looking at "every option in the longer term… If that [a CVA] is the right thing for the company and our broader stakeholders then obviously that's an option, but the implication was we were about to do it and that... trading had somehow collapsed."

KPMG was similarly drafted in to assist House of Fraser, when the UK department store was weighing up its options. The Big Four firm eventually developed a restructuring plan which proposed a CVA and a number of store closures, however the plan was blocked by landlords angry that they would lose money from the scheme. House of Fraser eventually collapsed into administration, before being purchased by Sports Direct. If Debenhams does eventually forge ahead with plans for a CVA, it would join the ranks of a host of retailers who have resorted to the restructuring option, despite anger from landlords who have argued it would leave them out of pocket. At time of writing, this list includes New Look, Carpetright and Mothercare, among others.

Challenging market environment

Debenhams CEO Sergio Bucher said, “The market environment remains challenging and underlying trends deteriorated through the summer months. Nevertheless the product and format improvements we have tested are gaining traction and we are ready to scale up some of our strategic activity ahead of peak. Having put in place a leaner operational structure and strong leadership team, and taken action to strengthen our financial position, we are well equipped to navigate these market conditions and take advantage of any trading opportunities that emerge."

While Debenhams weighs up its future, its plans have been further complicated by becoming the subject of takeover talk. Mike Ashley, owner of Sports Direct, already owns narrowly less than 30% of Debenhams’ stock, and speculation is building that he has designs on merging the brand with the newly acquired House of Fraser. Ashley, whose swoop for House of Fraser came under fire recently for jeopardising the company’s 10,000 member pension pot, has also had to issue a denial that Sports Direct is pushing Debenhams to fail.  

The claims came after tycoon Ashley, who also owns Newcastle United Football Club, has threatened to block Debenhams’ attempt to sell its Danish department store chain Magasin du Nord. The deal could put a sorely needed £200 million cash injection into Debenhams, but without it some have alleged that the brand could be brought closer to collapse, at which point an all-out buyout from Ashley would become significantly cheaper.



8 tips for successfully buying or selling a distressed business

18 April 2019

Embarking on the sale of a business is one of the most challenging experiences a management team can undertake. Even serial dealmakers acknowledge that the transaction process can be gruelling, exposing management to a level of scrutiny and challenge through due diligence that can be distinctly uncomfortable.

So, to embark on a sale process when a business is in distress is twice as challenging. While management is urgently trying to keep the business afloat, they are simultaneously required to prepare it for scrutiny by potential acquirers. Tim Wainwright, an experienced Transactions Partner with Eight Advisory, says that this dual requirement means sellers of distressed businesses must focus on presenting their business in a way that supports buyers in identifying value, whilst simultaneously being open about the causes of distress. 

According to Wainwright, sellers of distressed businesses should focus on eight key aspects to ensure they are as well prepared as possible:

  • Cash: In a distressed situation cash truly is king. Accurate forecasting and day-by-day cash balances are often required to ensure any buyer is confident that scarce cash reserves are under proper control. 
  • Equity story and turnaround plan: Any buyer is going to want to understand the proposed turnaround strategy: how is the business going to enact its recovery and what value can be created that means the distressed business is worth saving? Clear presentation of this strategy is essential.
  • The business model: Clear demonstration of how the business model generates cash is required, with analysis that shows how financial performance will respond to key changes – whether these are positive improvements (e.g., increases in revenue) or emerging risks that further damage the business.  Demonstrating the business is resilient enough to cope with these changes can go a long way to assuring investors there is a viable future.
  • Management team: As outlined above, this is a challenging process. The management team are in it together and need to be consistent in presenting the turnaround. Above all, the team needs to be open about the underlying causes that resulted in the distressed situation arising.  A defensive management team who fail to acknowledge root causes of distress are unlikely to resolve the situation.

8 tips for successfully buying or selling a distressed business

  • Financing: More than in any traditional transaction, distressed businesses need to understand the impact on working capital. The distressed situation frequently results in costs rising as credit insurance becomes more difficult to obtain or as customers and suppliers reduce credit. Understanding how these unwind will be important to the potential investors.
  • Employees: Any restructuring programme can be difficult for employees. Maintaining open communications and respecting the need for consultation is the basic requirement. In successful turnarounds, employees are often deeply engaged in designing and developing solutions. Demonstrating a supportive, flexible employee base can often support the sale process.
  • Structuring: Understanding how to structure the business for the proposed acquisition can add significant value. Where possible, asset sales may be preferred, enabling buyers to move forward with limited liabilities. However, impacts on customers, employees and other stakeholders need to be considered.
  • Off balance sheet assets: In the course of selling a distressed business, additional attention is often given to communicating the value of items that may not be fully valued in the financial statements. Brands, intellectual property and historic tax losses are all examples of items that may be of significant value to a purchaser. Highlighting these aspects can make an acquisition more appealing.

“These eight focus areas can help to sell a distressed business and are important in reaching a successful outcome, but it should be noted that it will remain a challenging process,” Wainwright explains. 

With recent studies indicating that the valuation of distressed business is trending north. With increased appetite from buyers who are accustomed to taking on these situations, it is likely that more distressed deals will be seen in the coming months. “Preparing management teams as best as possible for delivering these will be key to ensuring these businesses can pass on to new owners who can hopefully drive the restructuring required to see these succeed,” Wainwright added.