To some it sounds like a death knell, but many retailers can survive an administration - and even benefit from it in the longer term, according to Lee Manning and Rob Harding.
Many retail situations have been well suited to a restructuring through a Company Voluntary Arrangement (CVA). Whilst a CVA is an insolvency process, it is seen as less of a failure than a trading administration. The existing corporate and management structure generally remains intact and it is viewed more as a means of formalising a selective restructuring process, whereas a trading administration would generally result in an open marketing of the business and change of ownership.
The CVA is a very powerful restructuring tool. But in order to secure a successful CVA, there are generally three key ingredients required:
• A viable underlying business;
• Agreement of key stakeholders; and
• Funding to enable the business to trade
So in the absence of one or all of the above ingredients, does a business faced with a trading administration stand a decent chance of survival?
The answer in many cases is yes. The recent cases of hmv and Blockbuster are two examples of a trading administration resulting in a successful operational restructuring. Ultimately, this has been possible because firstly each business had a viable, profitable core, and secondly by virtue of the restructuring flexibility offered by the administration process. This can best be illustrated by the “3P’s” that are at the heart of any retail business:
• People: invariably with a traditional bricks and mortar retailer, both the store portfolio and the back office support functions will require rationalisation. This can be costly for a financially stressed business. Undoubtedly, some difficult decisions need to be made during an administration process, especially when it comes to the future of the employees. In the event that employees are made redundant through an administration process, there is no direct “cost” of the redundancies that would require funding - the employees would have a claim against the company in administration;
• Property: under an administration sale, the purchaser has the opportunity to “test drive” the restructured portfolio prior to formally adopting the long-term lease liabilities (under a CVA or other solvent restructuring, this is not generally possible). Additionally, as we saw on both hmv and Blockbuster, a well-publicised administration sale process provides a “shop window” allowing properties to be sold maximising value for creditors. In the case of Blockbuster, 60 stores were sold to supermarkets for use as convenience stores. Again, this is something not generally seen in a CVA or a solvent restructuring;
• Product: fundamental to any ongoing business is strong supplier support. The position of suppliers will be driven by many factors that differ from case to case. A sale to a new purchaser through administration can often be seen by suppliers as a fresh start. They may be more willing to back new management than the incumbent management. Additionally, a trading administration process will provide a purchaser with a strong opportunity to maximise its commercial leverage with the supplier base.
Ultimately, for stakeholders, the appropriate restructuring option will depend on a number of critical factors - there is no one size fits all solution. Each process has its merits when used in the right circumstances. Perception of a trading administration can be quite negative. However, in a situation whereby you have strong management, a viable core business and a supportive supplier base, such a process can actually be a key fork in the road instead of being the end of it. It allows for a more fundamental restructuring process that effectively reshapes the business for the future.
Lee Manning and Rob Harding are partners in the reorganisation services practice at Deloitte.