Debenhams calls in the company doctors

The 200-year-old retailer is facing a full-blown crisis
Early this week, the group seemed at death’s door. The prognosis is not quite that bad – but it’s not good news either. Alice Gråhns reports.

“Debenhams has parachuted in a team of top company doctors to draw up emergency turnaround plans as a full-blown crisis threatens to engulf the troubled department store chain,” says Ben Marlow in The Daily Telegraph. Last weekend restructuring specialists from KPMG were called in and speculation mounted that the stricken department-store group was about to resort to a company voluntary arrangement (CVA), a corporate insolvency procedure entailing store closures and discounts on renting properties.
This followed a turbulent few months during which Debenhams’ share price plunged by 66% to 12p after a series of profit warnings. It has also had to renegotiate its banking covenants.
In total, the 200-year-old retailer’s valuation has collapsed by 95% since it listed in 2006, notes Ben Chapman in The Independent. Now “bringing in the advisers appears to be the last throw of the dice”. The board tried to stem the speculation about a CVA with a trading statement on Monday to stop “nosy neighbours”, as Debenhams’ chairman Sir Ian Cheshire put it, gossiping about its future.
Prepare for fresh storms
Yet that statement didn’t come fast enough, says Nils Pratley in The Guardian. Debenhams “was silly to wait until lunchtime, by which time its share price had fallen 17%, to attempt a few reassuring words”. But at least the board addressed some key points eventually – and the upshot is there will be no immediate crisis. Pre-tax profits this year will be about £33m before one-offs, “miserable… but no worse than predicted in June”. Debenhams’ debt pile is also hair-raising. It will be worth £320m this financial year, but at least it hasn’t grown in the past quarter.
Yet “this roundabout way of saying ‘nothing to see, please move on’” did little to placate investors. And no wonder – having KPMG around to consider “longer-term options” is a reminder that “one way or another, some form of restructuring is still the way to bet”.
CEO Sergio Bucher talks about being “well equipped to navigate” choppy markets, but the whole board “has to be prepared for fresh storms”. After all, Debenhams’ profits have collapsed from £139m five years ago. The key now should be to get a decent price for Scandinavian department store Magasin du Nord – the rumoured £150m-plus would buy some time.
Meanwhile, Sports Direct founder and billionaire Mike Ashley is “watching events closely”, says Ben Woods in The Daily Telegraph. He owns 30% of Debenhams and hopes to combine it with House of Fraser, which he bought out of administration last month.
BA shares brace for hard landing
“It’s lucky for airline executives they’re a well-paid bunch, because when things go wrong the job’s a living nightmare,” says Chris Bryant on Bloomberg. British Airways’ CEO Alex Cruz (pictured) knows this well by now. Since taking the helm of the airline in 2016, he’s dealt with an IT failure that left tens of thousands of passengers stranded over a busy holiday weekend.
Now, he’s been forced to reveal a breach of BA’s website that exposed the details of 380,000 customer payments. That would be a nightmare for any company. “But Britain’s flag carrier… already has a problematic public image.” Understandably, the breach “worried investors, as well as customers”, says Lex in the FT. Shares in BA’s owner IAG fell 4% , and the decline seems warranted. “The reputational damage is serious… [and] the airline could also face a swingeing fine if found to be at fault” for the data breach. Under the EU’s new General Data Protection Regulation (GDPR), fines are levied at a maximum of 4% of global revenues. In BA’s case, that could imply a penalty of more than £500m. If the maximum penalty is applied to IAG’s 2017 sales of £23bn instead, BA would forfeit nearly £920m, says Aimee Donnellan in Breakingviews.
BA may get credit for quickly alerting customers and regulators, but the incident highlights the need to beef up its cyber defences. This will involve extra costs for a company already grappling with higher fuel charges and fierce competition. Over time shareholders may have to get used to lower profits.
City talk
• The timing of HNA Group’s $1bn sale of shipping-container lessor Seaco is interesting, says David Fickling on Bloomberg. Seaco, pulled from the bankruptcy of Sea Containers almost a decade ago, was one of the Chinese group’s first major acquisitions. Why sell now? The business is doing well and should fetch a good price. High depreciation and interest charges are part of the story. But there’s also “the trade war to worry about”. Should President Donald Trump achieve the onshoring of supply chains he’s pushing for, those debt-laden lessors “that assumed trade growth would continue roaring ahead will find themselves in a spot”.
• Melrose Industries has owned GKN for 73 days and has already made a £303m half-year loss, says Alistair Osborne in The Times. True, £8bn hostile bids don’t come cheap: there were £126m of “transaction costs”, for example. Luckily Melrose has found no “black holes”, and the turnaround specialist has started investing in the engineer, “a riposte to all the asset-stripping-vulture nonsense from MPs”. But Melrose’s shares have barely budged since its first tilt at GKN. It “still has to prove that GKN was worth the fight”.
• Shares in Sirius Minerals fell 15% last week as it said it needed to raise another $400m-$600m for the 23-mile tunnel that will take its potash plant food from under the Yorkshire moors to the coast, says Kate Burgess in the Financial Times. Now, Sirius has to work out how to raise the extra sum. Moreover, there is still plenty of uncertainty about its plans to sell polyhalite to “a market already awash with potash fertiliser”. Potential investors had better wait until they “see rocks rolling off the conveyor belt”.


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