House of Fraser Saved From Administration

A lot will be written in the coming days and weeks about Sports Direct’s purchase of House of Fraser out of Administration. But leaving aside whether £90million is a fair price to pay, what do Sports Direct get out of the deal, and more importantly, what do the creditors get?

From the Sports Direct perspective, they get the chance to turn around a business which generates turnover of over £1billion per year, without the burden of the legacy debt owed by the business. New management can often have a very powerful positive effect on a business mired in the problems of the past. Further, Sports Direct and a debt-free trading business would likely be a more viable option than the old debt-laden business for funders looking to invest.

Sports Direct will now have the chance to negotiate fresh deals with landlords. The landlords will have to bear in mind that, even though some of them opposed the previous Company Voluntary Arrangement proposed by the company, if they refuse to re-negotiate the rents then events will likely just proceed in the same way as would have occurred before the Administration – some form of insolvency process, leading to store closures and landlords facing up to holding some very large, but now vacant, premises.

For the creditors, therefore, while at first blush it might look like they have been left behind (because Sports Direct buying the business out of Administration means that the creditors are forced to queue for payment of their existing debts), they may end up better off than if the company had gone into liquidation.

The main creditors are likely to be the company’s landlords and their suppliers. Landlords will look to negotiate terms for the continued occupation of their premises by the new owners, which will also help to secure the jobs of the company’s employees. Their legacy debts stand a better chance of being paid (or, more likely, partly paid) if the company continues to trade from their stores.

As for suppliers, House of Fraser is likely to have stock, now owned by Sports Direct, which it has already paid for. The benefit of the sale of that stock will go to Sports Direct. However, each of the stores will also contain stock which had been supplied to the company on retention of title terms, meaning that the company does not own it until it is sold and paid for. The suppliers, therefore, could either call their stock back from the stores, in order to minimise their losses, or more likely they could negotiate with Sports Direct for new terms on which they would continue to supply the business.

Neither the landlords, nor the creditors, will be left entirely hanging for their debts, therefore. Meanwhile, the company’s employees stand a chance of keeping their jobs because they will likely transfer to the new operators of the business under the Transfer of Undertakings Regulations.

While it’s therefore tempting to see the “failure” of legacy House of Fraser as a bad thing, it may end up being what saves the business, its creditors and its employees from suffering a much worse fate.