Debenhams to strike property deal to generate fresh capital

Debenhams, the department store, has held discussions about unlocking the value in its property portfolio, as it seeks to generate significant funds to further pay down debt and invest in the business.

The retail group has spoken to potential investors about deals on nine of its department stores and is understood to have held talks with the property specialist King Sturge about running the process.

It is understood that Debenhams is considering a sale and leaseback deal over 25 years, but other property options are being assessed. A sale and leaseback typically involves a retailer selling their freehold and leasing the store back from the investor.

The potential property deal on nine stores is the latest move by Debenhams to strengthen its balance sheet and reduce net debt which stood at £927m last year.

The group, which has 165 stores in the UK and Republic of Ireland, completed a £323m rights issue last summer. In April 2010, it said its net debt had been slashed by 45 per cent to £512m.

Debenhams, which declined to comment, said last month it had also completed the refinancing of its debt by signing a £650m credit facility.

While further repayment of debt will be on the cards should Debenhams get a property deal away, it could also use fresh funds to acquire another chain. Last year, Debenhams acquired the Danish department store group Magasin du Nord.

Previously under private equity ownership, Debenhams had stripped back its costs and sold freeholds on many of its stores, which reaped rich rewards for its backers, including Texas Pacific Group and CVC Capital. Debenhams was then floated in May 2006 at 195p.

However, according to its 2009 annual report, Debenhams still has freehold properties with a book value of £51m. For the 42 weeks to 19 June, Debenhams total sales, including Magasin, rose 8.9 per cent. King Sturge did not return calls.