House of Fraser ‘Rescue’ a Hostile Takeover for Suppliers

Retail tycoon Mike Ashley has been quick to position himself as champion of the high street after buying House of Fraser out of administration. But whether suppliers, pension holders and even landlords will be celebrating the takeover is questionable.

The Sports Direct owner snapped up the struggling department chain for £90m just an hour after entered administration last week, vowing to keep open at least 80% of its UK stores open.

Ashley, known for his hardball approach to financial management, has wasted no time setting out his stall on how he intends to turn around the floundering brand. He has appointed CBRE to immediately start negotiations with landlords of all 59 stores, no doubt looking to secure more favourable leasehold agreements armed with the stick of leaving huge retail spaces vacant if his terms aren’t met.

Ashley’s takeover deal does not include House of Fraser’s 10,000 member pension fund. Passing on liabilities to the Pension Protection Fund (PPF) ‘lifeboat’ will mean lower payouts for members.

And in a letter seen by The Times, Sports Direct has apparently told House of Fraser suppliers that it will not honour payment of deliveries prior to its takeover on Friday 10th August - leaving suppliers an estimated £70 million out of pocket.

Pre-pack problems

This has all once again raised questions over the use of pre-pack insolvency arrangements to sell companies once they have entered administration. Intended to bring administration to a swift resolution rather than risk months of uncertainty and the danger of eventual liquidation, pre-pack sales offer certain incentives to buyers, such as no liability for existing debts and pension funds, plus legal grounds to renegotiate rent deals.

But there are frequent claims that the benefits buyers gain from pre-pack sales versus the detrimental impact on creditors and other stakeholders is completely out of balance. The timing of the Sports Direct buyout - just an hour after House of Fraser entered administration - has rightly raised more than a few eyebrows.

Administrators Ernst & Young have defended the move by claiming there was no better offer on the table. But after just an hour of acting as administrators, how can they reasonably claim that they have sought to secure the best deal for all parties, creditors included? Yes the Ashley takeover may well protect most of the 17,000 jobs at House of Fraser, but does that justify a £70 million hit to suppliers, plus a significant loss to pension holders?

It is hard not be suspicious that the motivations for this deal, as with too many pre-pack arrangements, arise from a cosy relationship between administrators and a large corporate entity, rather than from considering what is best for all stakeholders.

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