Debenhams falls into administration as lenders take control

The company’s 165 stores will initially continue to trade but 50 have been earmarked for closure within three to five years

Debenhams has gone into administration with control passing to the struggling department-store chain’s lenders.

The company’s 165 stores will initially continue to trade but 50 have been earmarked for closure within three to five years, putting around 4,000 jobs at risk.

Under what’s known as a pre-packaged administration, Debenhams has been sold to a group of its lenders and will now have access to £200m in emergency funding.

In a statement, administrators FTI Consulting said: “The group has been sold for a price which in our opinion is the best price reasonably obtainable at the time of sale.” Under the transaction the company will be “immediately marketed for onward sale”.

The administrators will look for bidders and attempt to recover money to repay Debenhams’ debts and cover its pension liabilities.

Debenhams shares were suspended from trading on Tuesday morning after the struggling chain turned down a £200m rescue proposal from Mike Ashley’s Sports Direct.

The new offer was dismissed by Debenhams as “highly conditional” and was rejected in part because Mr Ashley wanted to take over as chief executive.

Mr Ashley’s attempts to take control of Debenhams had become increasingly desperate, and over the weekend the businessman demanded the board be investigated, two members to undergo lie detector tests and trading in its shares to be suspended.

The pre-pack administration will see Debenhams’ debt reduced and comes ahead of a wider restructuring which will see around 50 stores close. No closures are expected before 2020.

Richard Lim, chief executive at Retail Economics, said: “We should not understate the significance of this collapse given the vast property portfolio, number of jobs impacted and the reverberations felt across many high streets.”

What does it mean for customers?

Eleanor Snow, consumer rights editor at Which? said it was a “worrying” time for Debenhams customers who may find their consumer rights are affected.

“If you have gift vouchers or have bought something you are intending to return do this now as you may not be able to do so if the store ceases trading.” Ms Snow said.

“If you are planning to buy something for more than £100 in Debenhams, make sure you use a credit card so you can make a claim against your credit card company under Section 75 if anything goes wrong.”

What has happened to Debenhams?

Debenhams has been sold through a pre-packaged administration. This allows a business in financial difficulty to sell itself or some of its assets to a buyer before administrators are appointed.

It means that shareholders in the company, including Mike Ashley, will see the value of their holdings wiped out.

Debenhams will now look to get out of trouble partly by reducing its costs, primarily though negotiating rent reductions with its landlords.

The company may come up against resistance from landlords according to David Ereira, partner and head of the insolvency at law firm Paul Hastings.

“The fall of Debenhams has been a long time coming, and as a result they are prepared to push back should the retailer come knocking,” he said.

“Debenhams could develop into watershed in the ongoing power struggle between landlords and retail occupiers, should they want to fight.”

Who has bought Debenhams?

A newly incorporated company controlled by Debenhams’ lenders, including hedge funds thought to include Alcentra, Angelo Gordon and Silver Point Capital.

Why is Debenhams in trouble?

The company has struggled to adapt to rising competition from online competitors and a general decline of high street shopping.

It has also been saddled with high costs from its large number of stores.

According to Mr Lim: “Debenhams has fallen victim to crippling levels of debt, which has paralysed its ability to pivot towards a more digital and experience-led retail model.

“Put simply, the business has been outmanoeuvred by more nimble competitors, failed to embrace change and was left with a tiring proposition. The industry is evolving fast and it paid the ultimate price.”

What happens to Debenhams pension scheme members?

Members can be assured that the schemes are “carrying on as usual”, a spokesperson said.

“The trustees have worked with our specialist advisers throughout the process of the company’s refinancing and restructuring, to ensure that members’ interests are taken into account, and we have consulted closely with The Pensions Regulator and the Pension Protection Fund at every stage.

“We are in the process of writing to all members with further information and we will continue to keep them informed.”

How has Debenhams responded to the latest development?

Chair Terry Duddy said it was “disappointing” to reach a conclusion that will mean shareholders’ value is wiped out.

“However, this transaction will allow Debenhams to continue trading as normal; access the funding we need; and proceed with executing our turnaround plans, whilst deleveraging the group’s balance sheet.

“We remain focused on protecting as many stores and jobs as possible, consistent with establishing a sustainable store portfolio in line with our previous guidance.”