House of Fraser: Mike Ashley's rescue deal boosts Debenhams with hopes for a merger

Sports Direct founder already owns almost one-third of Debenhams

Caitlin Morrison@citycait
Monday 13 August 2018 16:40
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House of Fraser to shut 31 stores and put 6,000 jobs at risk

Mike Ashley’s rescue of House of Fraser just hours after it collapsed into administration last week has prompted much speculation over just what the Sports Direct founder plans to do with the chain.

Given that Mr Ashley recently upped his stake in Debenhams to 29.7 per cent, close to the level at which he must make a takeover bid, reports have pointed to a possible tie-up between the two department stores that are now a part of the Sports Direct group.

Malcolm Pinkerton, vice-president of retail and e-commerce at Kantar, said there were signs that a combination could be on the cards “if you look at the state of the high street and if you factor in that Mike Ashley owns 30 per cent of Debenhams”.

However, a merger would be a more long term aim, Mr Pinkerton said, whereas Mr Ashley’s short term focus is likely to be on reforming House of Fraser.

The troubled retailer will benefit from the “retail knowledge and prowess” that Mr Ashley brings to the table, Mr Pinkerton said, and also from the money he can provide.

“It’s not just his capabilities but the investment that will allow House of Fraser management to implement the rescue plan,” he added.

George Salmon, equity analyst at Hargreaves Lansdown, took a dimmer view of a potential tie-up.

While he acknowledged that there are “clear benefits of scale” to be gained by combining the two firms, Mr Salmon said: “One of the concerns I would have is that they both have similar problems and putting two negatives together doesn’t really lead to a positive.

“There’s also the problem of price points. House of Fraser is more upmarket, putting the two together you would have to compromise.”

He pointed out that Mr Ashley has added various businesses to his portfolio without wrapping them into one operator, such as Flannels outlet store. There are also gains to be made by keeping House of Fraser and Debenhams separate, he noted, such as distribution savings.

Meanwhile, Debenhams investors started the week on a cheery note, with shares up more than 8.5 per cent.

Mr Salmon said the move could be down to “a bit of excitement around a possible combination with House of Fraser”, but added that because the company’s stock has fallen significantly over the last year (it is down more than 70 per cent compared to August 2017), price moves can appear to be more significant than they really are.

Kantar’s Mr Pinkerton offered a more positive take on the share movement, and said it could be a reflection of the fact that Debenhams stands to pick up more customers from the House of Fraser closures still set to go ahead, as well as from the planned shutting of dozens of Marks & Spencer branches.

But, he added, it could also be “a reaction to the long term potential of Debenhams becoming a bigger part of Mike Ashley’s retail empire”.

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