City: Cleaning house

Harrods is a pretty strange place these days. I don't go there often, but I was in the hi-fi department recently when a small brass band blowing at full volume emerged suddenly from the kitchen appliances department, marched through hi-fi and disappeared into books. The procession was dressed in blue, with a couple of girls carrying placards, and it bore a peculiar resemblance to the Salvation Army. They must have been advertising something but it wasn't clear what.

Then there's that shark called 'Tiny' hanging in the food hall, and it is said that some days - if you're lucky - you can spot Harrods' proprietor, Mohamed Fayed, wandering about attired as Tutankhamun. He is not, however, as rich as a pharaoh, which is why he's selling almost everything in his group except the famous department store.

As the state of Harrods suggests, the Fayeds have not been a runaway success as store managers. Since they took over House of Fraser eight years ago, profits have declined both in the group as a whole and in the chain of shops now being floated off. With debts thought to be around pounds 700m, the Fayeds are forced sellers - forced by their bankers. Don't they have the backing of the Sultan of Brunei? Well, no - they bought House of Fraser largely with bank loans. With steadily deteriorating finances and trouble servicing their debt, the flotation is the inevitable consequence of promises made by the Fayeds to the banks during a refinancing earlier this year.

The brothers must now be feeling rather lonely. The point just about everyone involved in the House of Fraser flotation wants to emphasise most is that any future investors will have next to nothing to do with the Egyptian brothers. Brian McGowan, the new Fraser chairman, says he'll resign if the Fayeds so much as talk to a House of Fraser shop assistant before the flotation, and SG Warburg says the same. They are, in short, working for the banks.

This is necessary to instil City confidence in the whole idea of the float - the Fayeds, after all, are known to be somewhat economical with the truth about their backgrounds, and their feud with Tiny Rowland has been weird and murky. (It is hard to quantify what effect this strange saga has had on City opinion, but institutional investors tend to shy away when they see businesses being used as a prop for someone's ego).

McGowan himself is the other tool to attract City confidence. He is known and respected, he understands deals and he was available. His task has to be to explain House of Fraser to potential investors (we don't know what its profits are, although Warburg says the group is 'profitable', which could mean anything from 1p to millions of pounds). He must then put a stranglehold on the group's costs, and come up with a plausible strategy for rejuvenating the stores.

The problem is that the stores have lost their sense of identity. Under the eccentric control of Mahomed Fayed, Harrods has too, but at least it can still trade on its name and on the tourist trade. But shops like the Army & Navy - which can't decide whether it is at the top end of the market or moving towards the discount end - have no such luxury. The stores are unfocused, and seem to have little idea of to whom they are trying to appeal.

And this at a time when department stores are widely regarded as dinosaurs. One problem, for example, is that shoppers do not like climbing stairs or even going up escalators. Even in Oxford Street some department stores find that sales on the mezzanine or first floor are only half those on the ground floor. On the fourth or fifth floors, sales are a fraction of those lower down. Department stores, in short, include a colossal amount of relatively unprofitable space.

Warburg enthuses that House of Fraser will be the only way to invest in a pure department stores group - but that's the problem. It isn't easy to interest investors in such things.

So if Warburg is hoping to find a single trade buyer for House of Fraser, it probably hopes in vain. And if it is hoping to get pounds 550m - the upper end of current estimates - on floating the group, it is certainly fooling itself. The exact price will, of course, depend on how much of the Fayed debt is shoved into House of Fraser (the more debt, the lower the flotation price). It is most unlikely to net much more than the pounds 300m of the management buyout which failed earlier this year.

This may not be enough to get the Fayeds off the hook. They could still be left with fairly hefty debts, and only the profits of Harrods with which to pay them off. Tiny Rowland, if he's still interested and if Dieter Bock lets him, could yet win his war with the brothers.