Debenhams’ lenders took control of the department store business today through a pre-pack administration, and a sale is now likely to be pursued.

The pre-pack became inevitable after conditions for further funding were not met, notably with leading shareholder Mike Ashley’s  Sports Direct, which had made alternative proposals to acquire Debenhams or underwrite an emergency equity raise.

For sale sign raised

Debenhams has now been put up for sale by the consortium of lenders – understood to include hedge funds Alcentra and Silver Point as well as banks Barclays and Bank of Ireland – and the process is being led by Lazard.

However, any sale is likely to be complicated by the fact that the lenders want all their money back. Today’s statement on the pre-pack said the sale process “must see full repayment of the group’s debt”.

So, while in theory Ashley could still end up in control of Debenhams if he chooses to bid for it, having already lost £150m on the shares and with Debenhams’ debt totalling £720m, this looks like an unlikely scenario. After all, if he were to make a bid that covered the debt, the sum is close to £1bn without running costs even entering the picture.

Making an exit

That means the lenders are now faced with the prospect of what to do with Debenhams, though for the time being it is business as usual.

First, they will begin restructuring, including closing 50 stores – an initiative already in Debenhams’ plans before it went into administration – in a bid to improve trading and deleverage its balance sheet.

It remains to be seen to what extent lenders will seek to sell assets as quickly as possible, recoup their money by trading Debenhams, or a mixture of both.

“I would imagine the lenders are just trying to maximise their return in the short term,” says Whitman Howard analyst Tony Shiret. “They need an exit and that could be reached by selling assets.

“They presumably have security over some aspects such as the business and trade names and any discrete parts of it. At the end of it all, it’s down to what you paid as a bondholder versus your share of the disposable assets. It could be that Debenhams is slimmed down, protected by receivership arrangements and then sold or IPO-ed back into the market.”

Other observers believe the lenders could stand to benefit from trading Debenhams.

“I think it is possible that the lenders can make a go of it,” says a former Debenhams executive. “I think they could make a lot of money – with different management. There are quite a few things they can do quickly.”

“Debenhams’ issue is still one of relevance. The offer hasn’t been competitive”

John Stevenson, Peel Hunt

Chief among those would be the sale of Magasin du Nord. The Danish department store chain is a healthy part of the Debenhams business and the group mooted a sale price of £250m in September.

However Debenhams’ assets are carved up, the real issue remains the same as it has been for some time: how to get paying customers through the door.

“Debenhams’ issue is still one of relevance,” asserts Peel Hunt analyst John Stevenson. “The offer hasn’t been competitive. It’s a tough gig – it’s all about getting people over the threshold and it comes back to the proposition: it’s stale; the product and merchandise are dated.”

Whether the lenders choose to sell or trade the business, this is all happening against the toughest backdrop in decades. Competitor John Lewis is attempting to shore up its leading position as its profits plunge, while Ashley, furious that he has missed out on buying Debenhams, will no doubt try to trade House of Fraser all the harder.

Catalogue of errors

Many factors have led Debenhams to this point: selling its freeholds and failing to update its proposition are just two failings in an extensive catalogue of mistakes, which also includes failing to adapt fast enough to massive structural shifts.

Perhaps it is best summed up in the words of one observer: “The whole [restructuring] process has been driven by bunch of investors and that is symptomatic of the story of Debenhams for the last 20 years,” he says. 

“It has been tossed around by various financiers and at end of the day there isn’t much left. It’s just a trough with everyone eating out of it.”