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Debenhams on verge of administration after rejecting last-minute Sports Direct bid (DEB)

Department store chain Debenhams (LSE:DEB) inched ever-closer to administration on Tuesday after dismissing an eleventh-hour offer from Sports Direct owner Mike Ashley.

The firm requested that its shares be suspended with immediate effect after revealing that it had spurned Sports Direct’s offer to underwrite a £200m rights issue, made in the early hours of the morning. This came after the 240-year-old chain rejected a £150m offer from Ashley’s company on Monday.

The latest offer was conditional on lenders agreeing to write off £82m of Debenham’s £720m debt mountain – a smaller amount than before – and Ashley becoming chief executive. But Debenham’s lenders said the deal was not sufficient enough to justify an extension to their Monday refinancing deadline.

Debenhams added that ‘milestones relating to a potential transaction’ with Sports Direct had not been met. As such, the tranche of financing it needs to stay afloat will only become available if Debenhams transfers into the owner of a lender-approved entity – a process known as pre-pack administration.

‘This outcome would ensure the stability and continuing trading of the group’s operating subsidiaries, with no disruption to the group’s business, customers, employees, pension holders, suppliers or operations,’ the company added.

This situation would, however, wipe out all the firm’s equity value for current shareholders. This is something Ashley is keen to avoid given that Sports Direct currently owns 30pc of Debenhams. According to BBC News, this has cost about £150m to build up.

Tensions between Sports Direct and Debenhams have been rising over recent weeks. According to Sky News, Ashley’s firm said members of Debenhams’ board should take lie detector tests over a disputed meeting on the weekend, accusing them of ‘a sustained programme of falsehood and denials’

Like many retail stores, Debenhams has been struggling for time, issuing three profit warnings in 2018 alone. Towards the end of last year, it announced that it was increasing its store closure plans from 10 to 50 over a three to five-year period. The company has 165 stores and employs around 25,000 people.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said Tuesday’s update ‘suggests that Debenhams simply isn’t interested in what Sports Direct has to offer’. He added:

‘It looks like Mike Ashley has one final card to play, and that’s making a firm takeover offer for Debenhams. Even that seems unlikely to shift the retailer from the course it’s currently on, as it sounds like the department store is preparing to enter administration imminently.’

Debenhams is just the latest in a growing line of UK high street disasters. According to figures from the British Retail Consortium released in January, UK retail sales fell 0.7% year-on-year in December. The statistics echo a set of highly mixed festive results for British retailers, with supermarkets such as Aldi and Lidl thriving as stalwarts like Halfords, Debenhams, and Mothercare watched sales fall.

The Christmas period was so bad for Marks & Spencer that it has decided to close another wave of stores, putting 1,000 jobs at risk. Meanwhile, John Lewis is looking to pull bonus payments in light of recent weakness. December topped off an already dreadful 2018 for retailers. The first half of the year saw the number of UK shops, pubs, and restaurants lying dormant soar by more than 4,400, according to the Local Data Company.

Meanwhile, the second half of the year was just as turbulent, with renowned British chains like House of Fraser, HMV, and Maplin all entering administration. Ashley went so far as to call November ‘the worst in living memory’ for high street stores. Ironically, the same month saw online sales as a proportion of all retail sales exceed 20% for the first time.

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  • Daniel Flynn does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the piece.
  • Daniel Flynn has not been paid to produce this piece by the company or companies mentioned above.
  • Dynamic Investor Relations Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.

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