Mike Ashley cries foul at Debenhams
MAGPIES are among the world’s most intelligent animals. Prone to opportunistic theft from other nests, they enjoy a surprising degree of protection. Foiled Debenhams suitor Mike Ashley won’t miss the irony that while his Newcastle United Football Club is nicknamed after these swooping robbers, it is a marauding band of hedge funds and lenders that has snatched control of the stricken retailer from under his nose, wiping out his near-30% stake and that of all other shareholders.
The situation is far from black and white, it seems. Sports Direct owner Ashley might be ‘Marmite’ and controversial elsewhere in his business empire, but the pre-pack administration of Debenhams, giving lenders and US fund Silver Point Capital control of the trading businesses, raises the important issue of directors’ obligations to shareholders. The wisdom (and freedom) of the directors in appointing administrators is questionable. It is alleged that administrators FTI had been in dialogue with Debenhams since before mid-February and had engaged with the company’s lenders, whom they had previously advised. In such a case, a conflict of interest might be spotted when the administrator would later sell the retailers’ operations to the same lenders in a pre-pack.
Two factors seem to have cemented the board’s determination to keep Ashley’s tanks as far from their lawn as possible. The already uneasy relationship between the board and its significant shareholder-cum-commercial partner is likely to have soured further when Ashley rescued department store rival House of Fraser from administration in August 2018. That is somewhat understandable and firmly set the tone between the parties up to the end. The second factor is harder to fathom, namely the point at which directors’ heads were turned by a supposedly better route to recovery offered by debt funds and lenders.
In December 2018 Sports Direct’s offer of a £40m interest-free loan, in return for security over some of its assets, was rejected for not being in the interests of other stakeholders. In football speak, Ashley said it was like being offered Messi on loan and turning him down. Two months later, the board agreed a loan of equal size from existing lenders, on terms stating that any fresh debt would require the lenders’ consent. Ashley was effectively shut out from that point.
While directors were planning in March to raise £200m from these lenders, Ashley offered £150m interest-free, on condition he became CEO and the new debt plan was dropped. later in the month, he considered a £61m cash offer for Debenhams’ equity - double the market value. Finally, in the 24 hours ahead of the group falling into administration, Ashley offered to underwrite a rescue rights issue for £200m.
The pre-pack deal agreed by directors immediately sold the business to a new entity. Offers were being sought for that company - a process now abandoned - but on tough terms that stopped a buyer contacting landlords or concessionaires for 18 months – a ridiculous restriction, not least since Debenhams is now in a Company Voluntary Arrangement with creditors to reorganise its debt stack. Did this restriction apply to the lenders and current owners? No wonder Sports Direct has complained to the FCA that the sale has not genuine. The Americans have arrived, riding roughshod over UK insolvency law while regulators sit and watch.
Directors would insist they have acted in good faith all along, putting the interests of the company first. That’s all well and good, but the Companies Act 2006 is clear on fiduciary duties to shareholders as a whole, as well as on exercising powers to reduce the influence of dissenting shareholders.Something is up with the Debenhams process, the scale of possible wrongs ranging from simple lack of judgement by directors, to what Ashley has described as a “long planned theft.”
Swooping magpies are a protected species unless they are shown to be a threat to conservation. What Debenhams’ lenders have conserved, as distinct from Ashley’s rescue plan, is debatable. Not his 29.7% stake, that’s for sure, at an estimated loss of £150m. Nor the chance, however long term, for other shareholders to participate in a turnaround. Regulators have their own duty to take a much closer look.