Debenhams is on the brink of falling into the hands of its lenders in a pre-pack administration that would wipe out shareholders after the company and its financial backers rejected a rescue offer from Mike Ashley’s Sports Direct.
Sports Direct said it was still considering making a £61m bid for Debenhams by a 5pm Monday deadline after it said the department store had turned down an offer to pump £150m of new cash into the company.
But it is understood that the most likely outcome for the chain, which has 165 stores and employs 25,000 people, is that lenders will take control as Ashley’s offer of assistance were all tied to him being made chief executive – a move they are not prepared to accept.
The board of Debenhams spent Monday in talks with its lenders over whether to accept the Ashley’s weekend offer to underwrite a rescue rights issue or opt for a pre-pack administration. The latter would wipe out shareholders, including Sports Direct, which has a stake of just under 30%. Debenhams also has the option of extending the Monday deadline set last month in order to continue talks with Sports Direct.
In its second statement of the day on Monday afternoon, Sports Direct said it continued to “actively evaluate all possible options to support Debenhams” including a possible 5p-a-share bid which it first flagged last month.
Ashley’s retail group said it was disappointed with Debenhams’ response to its offer to underwrite a £150m rights issue, which would involve existing investors buying newly issued shares.
“Sports Direct believes that, in the continued absence of [engagement] from the board of Debenhams and Debenhams’ lenders, there is a likely significant and negative impact on Debenhams’ current shareholders and other stakeholders, including suppliers and employees. Sports Direct therefore calls upon the board of Debenhams and its lenders to actively engage in negotiations.”
If Debenhams opts for a pre-pack, it could be announced on Tuesday morning and would only affect Debenhams’ holding company, meaning the stores would continue to trade. However, the lenders want Debenhams to close about 50 stores via an insolvency process, known as a company voluntary arrangement, which is likely to follow within weeks.
Sports Direct offered to underwrite a rescue rights issue – but only if Debenhams agreed to make Ashley chief executive before the 8 April deadline set by the department store’s board last month.
A statement issued by Sports Direct has revealed that Ashley also wants Debenhams’ lenders to write off £148m of the group’s debts, which total more than £600m. Lenders are also understood to have been unwilling to accept taking such a hit.
When it set the deadline, Debenhams’ board stipulated that Sports Direct must either launch a fully funded bid, with facility to provide working capital and pay off its existing debts, or agree to underwrite a rights issue on terms agreeable to its lenders.
Debenhams said Ashley must also sign a “stabilisation agreement”, forcing him to avoid issuing any public statements that could harm the retailer, and cancel his call for a shareholder meeting at which he wants to oust the board and install himself as chief executive.
Hopes of a deal were hit on Sunday when Sports Direct issued a scathing statement about Debenhams, accusing it of a “sustained programme of falsehoods and denials” over a non-disclosure agreement (NDA), which had prevented Ashley from buying up Debenhams debt or further shares.
In a highly unusual statement, Ashley said he and his colleagues took a lie detector test to “prove they were telling the truth” and suggested Debenhams’ interim chair, Terry Duddy, and the non-executive director, David Adams, should also take such tests “to clarify their recollection” of a meeting about the NDA.
