Debenhams says it will consider a takeover bid from Mike Ashley

Mike Ashley moved a step closer to taking over Debenhams when the struggling department store chain said it would consider his takeover bid.

Debenhams said any firm offer from Mr Ashley’s Sports Direct would be given “due consideration” but that this would not address its immediate need for cash.

The company, which traces its history back to 1778, is facing collapse unless it can secure emergency funding.

Debenhams’ share price jumped more than 30 per cent in Tuesday morning trading, reaching as high as 2.2p soon after opening.

Mr Ashley’s attempts to take over the company have resulted in an increasingly bitter public spat which has seen him twice propose ousting Debenhams’ board. Sports Direct has offered to loan Debenhams money and already owns 30 per cent of the retailer.

The latest announcement was a sign that Mr Ashley had failed in his attempts to take control without making an outright purchase, said Laith Khalaf, senior analyst at Hargreaves Lansdown.

“Ashley’s in a race against the clock however, because Debenhams is in the process of refinancing its debt, which will give its creditors even greater control of the company,” Mr Khalaf said.

“If Mike Ashley wants to make this stick, he needs to come out with an offer pretty quickly, along with a plan to meet Debenhams’ immediate funding needs. It would be nice to think a longer term strategy for the business might be forthcoming too.”

“While all this plays out, the share price is behaving like a kangaroo in a trampoline park. 

“Debenhams shares are heavily shorted, and the fact they are no longer in the FTSE All Share means liquidity is much lessened too.”

Earlier this month, Debenhams confirmed it was in “advanced” talks to secure a £150m cash lifeline as part of efforts to stay afloat, days after Mr Ashley sought to oust the retailer’s board and take control.

The chain is struggling under a £500m mountain of debt and has issued four profit warnings in little over a year.

Around £40m of the new funds would go towards refinancing a bridging loan secured in February, Debenhams said. Under the retailer’s turnaround plans, 50 stores will close.

The billionaire retailer said he would step down as chief executive of Sports Direct to take a senior role at Debenhams if the department store chain’s shareholders vote in favour of his plans. 

Debenhams has been trying to cut costs to stem losses, and last year announced plans to close 50 stores, putting thousands of jobs at risk.

What went wrong at Debenhams?

Debenhams is facing many of the same problems as other retailers – but issues at the company run deeper. 

At least part of its current malaise can be traced back to a deal to take the company private in 2003 when private equity houses Texas Pacific Group, CVC and Merrill Lynch Private Equity, led by chief executive Rob Templeman, bought the store.

They invested £600m with the rest of the £1.8bn deal financed by new debt. 

Short-term thinking, a lack of investment and a huge amount of borrowing allowed the financiers to make off with bumper profits while the business was left with £1.2bn of debt. That left it particularly ill-equipped to tackle the huge upheavals faced by retailers in the post-crisis era.

In the face of poor wage growth and seismic shifts in the way people shop, Debenhams has not been able to invest and adapt as it needed to.

At the time of the deal, Debenhams had just opened its largest store, a 19,000 sq m unit at the new Bull Ring shopping centre in Birmingham.

Its private equity buyers slashed costs and sold off freehold property while opening new stores to boost profits (and juice their returns) before floating the company less than three years later.

Spending on refurbishments was cut by 77 per cent to £7 per square foot, less than a tenth of what Marks & Spencer was spending at the time.

The consortium offloaded Debenhams at roughly the same £1.7bn valuation they bought it for, having extracted more than £1.3bn from the company.

Templeman shared a £57m payday with chair John Lovering and finance director Chris Woodhouse by selling a third of their respective stakes.

Templeman, a “buyout specialist”, had repeated a trick that saw him pocket a reported £20m by leading the management team that bought out Homebase in 2002. He also earned millions from a private equity deal for Halfords.

Even before Debenhams floated, the problems were already beginning to show as the company missed sales and profits forecasts.

Bryan Roberts, an analyst at Planet Retail, summed it up neatly and brutally in 2007 after Debenhams issued its third profit warning since floating less than a year earlier: “It was successful compared to its peers when it was on the market the first time round. 

“But when it exited private equity, it was swaddled with debt, its property had been sold and its performance was dismal.“

Another analyst, Richard Ratner, head of equities at Seymour Pierce, said the management team had “squeezed every penny out of Debenhams”.

Since then, the share price has sunk from over £2 to just 2.2p.

Lack of investment in its stores over a number of years has left its oversized estate looking tired, while its range of clothes is seen as functional rather than fashionable.

Sergio Bucher, who was brought in as chief executive from Amazon to try to reverse Debenhams’ fortunes in October 2016, admitted that shopping at the chain was often like “going on a treasure hunt” for customers.

He also conceded that Debenhams’ online experience was not as good as it could be and that its clothing range was not as good as some rivals’.

There are some positives. Debenhams only takes around 15 per cent of its sales through its website, compared to more than 35 per cent for John Lewis, suggesting there is plenty of room for growth.

It has also pushed into more “experiential” retailing, such as providing makeovers and expanding coffee shops in-store. That should help it to provide something online competitors can’t match.

But the list of problems is long – meaning more drastic action may well be needed to turn around this stalwart of the British high street.

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