House of Fraser Pre-Pack – Is It Such a Great Deal?

The acquisition of House of Fraser by Sports Direct is a typical “pre-pack” administration. In administration one minute, sold the next. The national media promptly welcomed it as the rescue of everyone’s favourite department store, the protection of 17,000 jobs and just what is needed to help save Britain’s High Streets.

Mike Ashley of Sports Direct trumpeted this as a great deal. All the stores and stock were purchased for £90 million when gross assets were £946 million and the company made a profit last year of £14.7 million – more on the financial numbers below. He plans to turn House of Fraser into the “Harrods of the High Street”.

But is it such a great deal? I have written many times in the past about the iniquities of pre-pack administrations. How creditors and shareholders are dumped, and pension schemes likewise. The administrators save themselves the hassle of winding up the business or looking for a buyer of the business as a “going concern” while collecting large fees for little work. I think the insolvency regime should be reformed.

The figure of £946 million of gross assets given by Sports Direct is from the last published accounts of the parent company House of Fraser (UK & Ireland) Ltd for the year ending January 2017, which is the last set of accounts filed at Companies House. The truth is that the company had net assets of £111 million with trade creditors of £365 million and long-term borrowings of £284 million. Debts including short terms borrowings probably grew substantially since then. Although Mr Ashley is paying the administrators £90 million for the assets, it would appear that both the trade creditors and the lenders will be very substantially out of pocket.

That’s not to mention the property companies who are the store landlords who face a default on their leases. Mr Ashley is unlikely to want to keep half the stores, so many of the jobs will be lost and he will no doubt want to renegotiate the leases on other stores downwards. So any property companies you may have invested may be damaged.

The company will have got shot of its defined pension schemes (approximately 10,000 members) which will be taken on by the Pension Protection Fund. That’s a public body that is funded by a levy on all pension schemes, so basically someone else will be paying if there is any shortfall. Although the pension scheme may be in surplus at this time, in such circumstances pensioners usually face a substantial cut in their future income as there will be no more contributions from the company.

Now House of Fraser might have been a retailing basket case with excessive debt, but surely a more equitable solution was possible? Indeed the Mail on Sunday today called it a “Fix” because there was an alternative offer on the table from retail billionaire Philip Day who allegedly offered £100 million for the company including taking on the pension obligations. The Mail suggested that the bankers and bondholders forced acceptance of the Ashley proposal in their interests. This is not unusual in pre-packs.

Sir Vince Cable suggested an investigation by the BEIS Department is required followed by reform of the pre-pack system. I agree with him. There are better solutions to how to deal with companies that run out of cash or become insolvent due to excessive debt which could protect the interests of trade creditors, employees and pensioners.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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