DAVID BUCHLER IN CITYAM: THE DEBENHAMS ADMINISTRATION PROCESS HAS GONE HORRIBLY WRONG

MAGPIES are among the world’s most intelligent animals. Prone to cunning theft from other nests, they enjoy a surprising degree of protection. Foiled Debenhams suitor Mike Ashley won’t miss the irony that while his Newcastle United Football Club is nicknamed after these swooping robbers, it is a marauding band of debtholders that led a planned effort to steal the stricken retailer from under his nose, wiping out his near-30% stake and those of other shareholders.

 The situation is far from black and white, it seems. Controversial Sports Direct owner Ashley might be ‘Marmite’, but the pre-pack administration of Debenhams, giving lenders and US fund Silver Point Capital control of the trading businesses, raises important questions of directors’ obligations to shareholders.

 No cheers for the non-executive directors here. Former chairman Sir Ian Cheshire was off the board comfortably before the pre-pack, ousted by Ashley and another major shareholder at January’s AGM. Debenhams had lost 90% of its market value on his watch over less than three years. The wisdom (and freedom) of remaining directors in appointing administrators is questionable. 

 It is believed that administrators FTI had been in dialogue with Debenhams and the lenders, whom they had previously advised, from at least early January. In such a case, a conflict of interest might be spotted when the administrator would later sell the retailers’ operations to the same lenders in a pre-pack.

 Ashley’s long-running battle with Cheshire about underperformance is well documented. During this period Sports Direct, with retail concessions in a number of Debenhams stores, grew its shareholding to just below the mandatory takeover level. But two factors seem to have cemented the board’s determination to keep Ashley’s tanks as far from their lawn as possible, whatever the cost.

 The already uneasy relationship between the board and its significant shareholder-cum-commercial partner is likely to have soured further when Ashley rescued department store rival House of Fraser from administration in August 2018. That is somewhat understandable and firmly set the tone between the two parties up to the end. 

 The second factor is harder to fathom, namely the point at which directors’ heads were turned by a supposedly better route to recovery offered by lenders and US debt funders. 

 In December 2018 Sports Direct’s offer of a £40m interest-free loan, in return for security over some of its assets, was rejected as against the interests of other stakeholders. The only condition was that Ashley should join the board, but the move was seen off by directors in a manner that suggested they were preserving their own positions, as opposed to those of the company and its shareholders.

 In football speak, Ashley said it was like being offered Messi on loan and turning him down.  Two months later, the board agreed a loan of £40m from existing lenders, on stringent terms, notably that any fresh debt would require the lenders’ consent. The directors effectively shut Ashley out from that point. 

 While directors were planning in March to raise £200m from these lenders, Ashley offered £150m interest-free, on condition he became CEO and the new debt plan was dropped.  Later in the month, he considered a £61m cash offer for Debenhams’ equity - double the market value. Finally, in the 24 hours ahead of the group falling into administration, Ashley offered to underwrite a rescue rights issue for £200m.

The company had effectively been working against a timetable imposed by an Emergency General Meeting process, requested by Ashley in early March in an attempt to fire the board. Debenhams had to respond within 21 days and hold the meeting within a further 28 days, meaning a late-April deadline.

 The pre-pack deal agreed by directors immediately sold the shares in the trading entity to a new vehicle controlled by US debt investors.Offers are now being sought for the operations, but on tough terms that stop a buyer contacting landlords or concessionaires for 18 months – a ridiculous restriction, not least since Debenhams is now in a Company Voluntary Arrangement with creditors to reorganise its debt stack.  

 Does this restriction apply to the lenders and current owners?  No wonder Sports Direct has complained to the FCA that this potential sale is not genuine.  The Americans have ridden roughshod over UK insolvency law while regulators sit and watch.

 Directors would insist they have acted in good faith all along, putting the interests of the company - and therefore its shareholders - first. That’s all well and good, but the Companies Act 2006 is clear on fiduciary duties to shareholders as a whole, as well as on exercising powers to reduce the influence of dissenting ones.

 Something is up with the Debenhams process, with the scale of possible wrongs ranging from simple lack of judgement by directors, to what Ashley has described as a “long planned theft.”

 Swooping magpies are a protected species unless they are shown to be a threat to conservation. What Debenhams’ directors have conserved is debatable, as distinct from the potential of Ashley’s rescue plan. Certainly not his 29.7% stake, at an estimated loss of £150m. Nor the chance, through Ashley’s rights issue, for other shareholders to participate in a turnaround. Regulators have a duty to take a much closer look at what appears to be an appalling use of the pre-pack process.