From object of desire to fashion victim in less than two years: how Allders' quick turnaround went belly up

Abigail Townsend tells the story of the department stores that couldn't carry the burden of leveraged finance

At the time, it must have seemed like a great idea. Retail was one of the hottest tickets in town, and a flurry of buyers were eyeing up deals. The property group Minerva wanted a slice of the action - and settled on department-store chain Allders.

At the time, it must have seemed like a great idea. Retail was one of the hottest tickets in town, and a flurry of buyers were eyeing up deals. The property group Minerva wanted a slice of the action - and settled on department-store chain Allders.

It spent 2002 building a 25 per cent stake (ousting Allders' chief executive, Harvey Lipsith, in the process after a profit warning) and tussling for control with the Scottish entrepreneur Tom Hunter before finally taking the company private in 2003.

The acquisition vehicle, Scarlett Retail, was 60 per cent owned by Minerva, with the US bank Lehman Brothers owning a further 20 per cent. Debenhams' former boss Terry Green was brought in, with Phil Cox as his right-hand man, to turn Allders around, and the two took the remaining 20 per cent stake. The plan was simple. Shed the fusty image, improve the offering and boost sales and profits.

Yet as Allders collapsed into administration last week, a little less than two years after the original £162m purchase, it demonstrated just how wrong things can go. The company's debts total around £150m, including £50m senior debt to Barclays and £10m secured debt to Minerva. Then there are potential pension liabilities, which could be as high as £75m if the fund is wound up, leaving hundreds of pensioners in the lurch - not to mention monies owed to concession operators. Alexon, the owner of the Dolcis shoe chain, last week confirmed it was due £1.5m.

Lehmans, meanwhile, sold its £100m debt in Allders to US turnaround specialist Hilco earlier this month (for a reported £26m). Scarlett had already put the struggling chain up for sale, but when Lehmans offloaded the distressed debt, it was taken as a sign that it had run out of patience with the sale process.

It would not take a financier to work out that such high levels of debt, when the company was underperforming, hardly looked wise. At the time of the acquisition, a trading statement revealed a fall in sales and an unexpectedly weak start to the crucial festive season. A year down the line, the group unveiled an operating loss of £55.8m after writing off old stock.

But not everyone believes that Scarlett was wrong to let debt levels build up so high. "It's been hideously expensive," says Nick Hood, a senior partner at corporate recovery and insolvency firm Begbies Traynor. "But just think about when [the deal] was done, about how different the retail market was then. We were seven to eight years into a period of spectacular increases in the level of activity. The retail sector had come to believe anything was possible if it had the right strategy. Unfortunately, [this] Christmas was Armageddon for those without the right offering."

The problem was that, for all the high-profile reputation of Mr Green, his strategy just did not work. "You cannot make a silk purse out of a sow's ear," says Richard Hyman, chairman of retail consultancy Verdict. "It had an ageing customer profile and that needed to be addressed. But Terry Green alienated Allders' traditional customers and didn't replace them.

"I'm not sure he knew enough about Allders' customers, or the new customers he was trying to attract. Allders was always going to be difficult. Its performance was not very exciting, it had sales per square foot of less than £200, and it was losing market share."

Retailers also take a notoriously long time to turn around. However, in the rush to snap up Allders, it seems few were thinking that far ahead. "I cannot say why they bought it - clearly they thought they could turn it around," Mr Hyman continues. "But department store retailing is very tough. In many ways, Tesco and Asda have become the new department stores. Terry himself has intimated that he didn't do his homework because he found lots of stock that he didn't know anything about."

That stock was believed to be worth around £20m, with Mr Green claiming some of it was up to five years old. But it was not the only problem.

Nick Bubb, analyst at broker Evolution Securities, explains: "The other thing he did wrong was to get into this discounting game. He just completely destroyed its pricing power." In the run-up to Christmas, Allders' flash sales seemed an almost permanent feature.

Kroll has so far received 30 expressions of interest and expects more, but the priority is for a quick sale. Says administrator Alastair Beveridge: "Because the company was already for sale, some parties are up to speed and they want to move quickly. We would like it to be shorter than six weeks because it's better for the business."

Some approaches have been for the whole chain but few expect Allders to survive. House of Fraser, for example, is thought to be interested in the Bromley outlet, John Lewis in Croydon (the one property owned by Minerva), and Primark in Oxford Street. Other names include Mr Lipsith, Debenhams, Sun Capital Partners and Jon Moulton's Alchemy. Even Mr Green has not ruled himself out.

Then there are the pension liabilities, which could be a particular headache for Minerva. Shareholders who deliberately make transactions that deprive schemes can be forced to compensate them under the Pensions Act, which comes into effect on 6 April. Minerva bought the Croydon store for £49m last April but the property group said it had been "advised it has no liability for the pension fund deficit and that any action which may be taken against it by the new pension regulator is unlikely to succeed".

At present, Allders' future is up in the air. But what is known is this: at the time of its acquisition, it was one of a host of retailers to be taken private by investors looking for lucrative deals. Now, in the wake of the recent collapse of the furniture group Courts and fashion chain Pilot, it is one of a number of retailers forced into administration as reality kicks in.