As Debenhams heads into administration: Hedge funds to seize control of department store

Debenhams is on the brink of administration today after it rejected a last-minute £200million rescue bid by Mike Ashley.

The department store chain has now suspended its shares as it finalises plans to hand the firm over to its lenders later today. 

The move is expected to trigger a wave of store closures and job losses.

The so-called pre-pack administration – where the outcome is agreed before administrators are called in – means investors with shares in Debenhams will be wiped out.

On the brink: Debenhams is set to fall into the hands of its lenders in a move that is expected to trigger a wave of store closures and job losses

On the brink: Debenhams is set to fall into the hands of its lenders in a move that is expected to trigger a wave of store closures and job losses

On the brink: Debenhams is set to fall into the hands of its lenders in a move that is expected to trigger a wave of store closures and job losses

That includes Ashley, 54, who has an almost 30 per cent stake in the company through his firm Sports Direct. At one stage, his stake was worth £150million. 

Debenhams’ shares plunged 10.3 per cent, or 0.21p, to 1.83p last night as lenders, including US hedge fund Silver Point Capital, prepared to seize control.

Mouhammed Choukeir, chief investment officer at Kleinwort Hambros, said: ‘It’s been a rough ride for shareholders.’ 

Earlier this week, Debenhams rejected Sports Direct’s offer of a £150million lifeline in return for Ashley being made the department store’s chief executive. The retail tycoon was still considering the possibility of making a full £61million takeover for Debenhams last night.

But after racking up a £720million debt pile, the store is at the behest of its lenders.

A Sports Direct spokesman said the lack of engagement from Debenhams’ board and lenders is a likely to have a ‘significant and negative impact on shareholders, as well as suppliers and employees’. 

If Ashley wants to be in with a chance of taking over Debenhams following an administration, he will need to make an offer approaching £800million to account for the retailer’s debt and pension deficit.

Analysts said a deal was unlikely to happen, based on strained relations between Ashley and Debenhams’ board which have gradually worsened.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said: ‘In theory, a deal could be struck, but relations seem far from cordial and the Debenhams management look set on giving the lenders control.’

In Ashley’s latest broadside, he accused management of undertaking a ‘sustained programme of falsehoods and denials’.

Mike Ashley (above) demanded that chairman Terry Duddy and non-executive director David Adams take lie detector tests

Mike Ashley (above) demanded that chairman Terry Duddy and non-executive director David Adams take lie detector tests

Mike Ashley (above) demanded that chairman Terry Duddy and non-executive director David Adams take lie detector tests

The Newcastle United owner claimed he had taken a lie detector test to prove he was telling the truth about the details of a disputed meeting with the retailer.

He went on to demand that chairman Terry Duddy and non-executive director David Adams take lie detector tests.

Russ Mould, investment director at AJ Bell, said: ‘Ashley’s no-nonsense approach to business has likely been a significant factor in the creation of his retail empire. But Debenhams might have been a case where a more softly-softly approach would have yielded greater success.’

Shares have collapsed since it returned to the stock market in 2006 in a listing worth £1.7 billion. The company is now worth just over £22million. 

Debenhams wants to shut at least 50 of its 166 stores in a bid to slash costs and make the business more sustainable for the future.

The store closures are likely to put around 4,000 jobs at risk. It is also expected to persuade landlords to give it chunky rent reductions across its stores as it tries to get the company on an equal footing.

Tony Shiret, an independent retail analyst, said: ‘Debenhams is being killed by its rent. Its average rent term is probably 18 or 19 years and they’re paying more than £200m a year of rent plus probably about another £100m of rates, that’s killing them.’

In a statement today, Debenhams said: ‘The Board confirms that it received a revised, highly-conditional, proposal from Sports Direct in the early hours of 9 April, which indicated a willingness of Sports Direct to underwrite an equity issue of £200million. 

‘The company’s lenders have confirmed to the company that the proposal, on the terms set out, was not sufficient to justify an extension to the 8 April deadline.’

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