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Debenhams’ £40mln cash injection: Stay of execution or genuine lifeline?

Debenhams was once valued at £1.7bn, but it is now hanging on thanks to the generosity of its lenders, who have agreed to pump in an extra £40mln whilst it gets its affairs in order
debenhams store
More than 10% of Debenhams shares are in the hands of short-sellers

Debenhams PLC (LON:DEB) shares were given some respite today after the ailing department store chain struck a deal with lenders who have agreed to provide it with another £40mln.

News of the financial lifeline sent shares soaring up to 4.2p, valuing the firm at just over £50mln. It was worth ten times that only 18 months ago, while back in 2006 it was valued at almost £2bn.

READ: Debenhams boosts debt headroom with new £40mln facility

So how did it get to this predicament?

Like most bricks-and-mortar retailers, Debenhams, which is one of the most shorted stocks in London, has suffered from the move to online, but it has also been hamstrung by expensive and inflexible leases.

It hasn’t helped itself though, particularly with its choice of products and how it has displayed them, and analysts have been pretty disparaging in their verdicts of the fallen giant.

“The product over the last few years has been pretty shocking, and they haven’t really invested in their stores properly,” said Liberum analyst Adam Tomlinson.

“As a result, they’ve had to continually discount to get people into the stores and once you get people hooked on that discounting mentality, they’re just going to wait for your next sale and it just becomes a bit self-reinforcing.”

Perfect storm has capsized Debenhams

The combination of a dying high street, unattractive stores and weakening consumer confidence culminated in the retailer issuing three profit warnings in 2018.

It has been forced to close some of its worst-performing stores, while persistent concerns over its financial health means it now has to pay for most of its goods upfront, which has only served to hasten the deterioration of its finances.

Mike Ashley, who owns 29% of the company through his Sports Direct International PLC (LON:SPD) business, offered a £40mln interest-free loan towards the end of 2018 to help strengthen the balance sheet.

But then-chairman Sir Ian Cheshire rebuffed this on the grounds that it wasn’t in the interest of all shareholders, with speculation rife that Ashley would use the loan, and his new position as a creditor, to make a full grab for control.

Although his offer was rejected, the billionaire did exercise his power to unseat both Cheshire and chief executive Sergio Bucher a few weeks later.

Former Argos boss Terry Duddy is the new chairman, but Bucher is still in his role, albeit not on the board.

Stay of execution or genuine lifeline?

And that’s where we stand now: a once-stalwart of the high street hanging on, thanks to the generosity of its lenders.

“This debt agreement is a lifeline for Debenhams, but isn’t going to solve its fundamental problems,” said Hargreaves Lansdown senior analyst Laith Khalaf.

“For now, Debenhams has kicked the can down the road, but will have to come back for some tough negotiations with quite a lot of internal dissent amongst its stakeholders.”

It does, though, give management some much-needed breathing space to navigate what looks set to be a tricky few months.

“Debenhams is approaching a crunch point: it’s trying to agree a company voluntary arrangement which will accelerate store closures and re-negotiate rents – both of which will be crucial to the business’s survival,” explains Brewin Dolphin senior investment manager, Alasdair Rudd.

“Whatever happens, significant change is required if Debenhams is to secure its future.”

Mike Ashley ready to pounce?

If that change isn’t brought about, many think Ashley will be waiting in the wings, much like he was for House of Fraser last summer.

A ‘pre-pack’ administration would give him the chance to reset rents and supply agreements, while it would also rid Debenhams of its £300mln of net debt.

Ashley has been on a spending spree of late: already this month he has bought Sofa.com and had a bid for Patisserie Valerie turned down.

He will no doubt be keeping a close eye on how Debenhams fares over these crucial next few months.

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