Department store group Debenhams has acknowledged the extent to which its capital structure is undermining sentiment and is determined that “leverage is taken off the agenda for Debenhams as soon as possible”.
Alongside straightforward cost savings and efficiencies, the retailer offered a scrip alternative – that is, shares rather than cash – to the interim dividend and is doing the same for the final dividend. The dividend itself has been cut back to just 3p.
About 45 per cent of shareholders including chief executive Rob Templeman took Debs’ paper at the interim stage. The take-up shows that, despite some City unease, existing Debenhams investors see value in the business – so much so that they’re willing to pass on money right now in the expectation that their shares will make them more in future.
Could the focus move from scrip alternatives to full-blown new equity issues as retailers more widely seek to shore up their finances in torrid times?
Other retailers, in far more difficult circumstances than Debenhams, have already begun to raise money that way.
On Monday, troubled sports giant JJB revealed that almost 12 million new shares had been placed with Sports Direct, the rival retailer founded by tycoon Mike Ashley, providing a cash injection of£3.4 million. The money will be used partly to strengthen JJB’s financial position and went down well with investors, prompting a rise in JJB’s share price.
JP Morgan analyst Simon Irwin believes that most retailers can meet their debt obligations until 2011, but thinks that equity issues cannot be ruled out by those store groups where concern remains about their ability to meet covenants. He includes electricals giant DSGi in that category.
It’s hard to gauge investor appetite for potential equity issues. In some cases, such as JJB, shares were not sold on the open market and the buyer’s influence may pose problems for the seller in the longer term. In others, investors may feel obliged to take up new shares because the alternative cannot be contemplated.
But as long as conditions remain so difficult, investors rather than banks may increasingly face cash calls.
George MacDonald is deputy editor of Retail Week