Collapse of Freemans sale stuns Sears

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Liam Strong's position as chief executive of Sears, the retail group, looked more vulnerable than ever last night after plans to sell its Freemans home shopping business received a serious setback.

In the latest of a series of twists that have afflicted the sale process, N Brown, the Manchester-based mail order group, pulled out of exclusive negotiations to buy Freemans. It said that after its due diligence process it had felt "unable to proceed".

Sears has now resuscitated talks with Littlewoods, the original buyer which itself walked out on Sears earlier this month when it discovered that Sears was holding talks with other parties.

With the Freemans sale fast becoming a fiasco, the City was yesterday questioning whether Mr Strong could survive this latest embarrassment. One analyst said: "This is par for the course with Sears. Whatever route Liam Strong chooses you feel there will be a mishap along the way."

Sears shares fell 1.5p to 74.5p, their lowest point for almost five years. Asked if they were now worth buying, John Richards, retail analyst at NatWest Securities, said: "No they are not. You are better off buying a lottery ticket. You've got more chance of winning."

The collapse of the N Brown deal will further frustrate Sears shareholders who have become alarmed at the Selfridges-to-British Shoe group's failure to take advantage of more benign retail conditions.

It places Sears in a weaker bargaining position with Littlewoods and will make it harder to achieve the original agreed price of pounds 395m.

It will also mean a delay to the deal as it will almost certainly be referred to the Monopolies and Mergers Commission. Mr Strong is under pressure to complete the transaction quickly as he has promised to return pounds 410m to shareholders.

Ironically, the MMC set aside its original investigation into the Littlewoods- Freemans deal only yesterday following formal notification from Littlewoods that the deal was off.

The Office of Fair Trading will now look at the merger afresh before making a decision. If the OFT refers the deal again, it could take up to three months before MMC reports its findings.

N Brown would not reveal what it had discovered in its due diligence process that had scuppered the deal.

However, it is thought that Freemans' short-to-medium-terms earnings stream was not what the company had anticipated. The two sides were then pounds 40m-pounds 50m apart in their valuation.

Mr Strong attempted to put a brave face on the latest embarrassment. "Freemans has a high reputation in agency mail order and enjoys a strong market position," he said.

"While we believe that consolidation in the mail order market would be beneficial, we are only interested in pursuing opportunities that are in the best interests of the company and enhance shareholder value."

Mr Strong's position at Sears has long been under threat and there have been regular reports that headhunters have been appointed to seek a replacement.

But Mr Strong has enjoyed the very public support of the Sears chairman, Sir Bob Reid.

Some institutional shareholders also feel that removing Mr Strong would serve little purpose.

They say the group's disparate collection of businesses, which includes the Selfridges department store, the Wallis and Warehouse fashion chains and a raft of shoe shops such as Dolcis, Shoe Express and Cable & Co, is fundamentally flawed.

Though Selfridges is regarded as a gem, the shoe companies act as a drag on profits.

N Brown's shares returned from suspension yesterday and closed 10p higher at 387.5p.

It is understood that the company did have bank finance in place to fund the Freemans deal.

The group denied yesterday that some of its shareholders had been unhappy about the size of the Freemans deal, which would have transformed its share of the mail order market.