What's going on?
Months of negotiations with lenders and shareholders failed as British department store Debenhams fell into administration on Tuesday – the UK’s first big retail collapse of the year.
What does this mean?
Years of weak sales and profits hit Debenhams as it bled customers to rivals. The cash-strapped chain therefore asked its lenders to renegotiate the terms of its debt – it was at risk of breaching the conditions agreed when borrowing the money, which could have snowballed into default. But an agreement wasn’t forthcoming and Debenhams edged closer to oblivion…
A recent rescue offer came from acquisitive retail group Sports Direct, which already owned 29% of Debenhams’ stock – but the two couldn’t agree terms. So where US department store Sears was saved by a major investor, Debenhams instead fell into the hands of its lenders – who now plan to shutter several of its 240 stores.
Why should I care?
For markets: Shares freeze – then shatter.
Trading in Debenhams’ shares was suspended on Tuesday. Most Debenhams stores will stay open for now, but the administrators hold the keys and will be looking for a buyer. Debenhams’ debtholders get first dibs on any cash from a sale – loans backed by assets (e.g. its stores) get repaid first, then “unsecured” loans. Shareholders would split whatever value’s left. But Debenhams’ $680 million debt pile dwarfs the $132 million price agreed with administrators for the company – leaving shareholders with precisely zilch.
For you personally: Alarm bell for retail, then it tolls for thee.
US and UK retailers warning of tepid consumer demand this year suggested fierce competition for customers and lower prices to follow – if they survive. Debenhams’ administrators may yet sell it to Sports Direct, boosting the enlarged company’s negotiating power with suppliers and potentially delivering improved profit to its own shareholders. But that could be bad news for consumers: more stores controlled by the same company may spell less competition and therefore higher prices.