Fraser Group Gets 48-Hour Deadline to Make A Binding Commitment for Debenhams

Summary

• Frasers Group has to make a rescue bid of £300 million in next 48 hours for Debenhams
• Throughout the coronavirus crisis, Debenhams has been closing stores and axing jobs
• Many high-street retailers are struggling to pay their rents and are renegotiating their lease agreements for shorter tenures

The coronavirus pandemic has weighed down heavily on the high-street retailers across the UK. The sector has witnessed major job redundancies and is facing an existential crisis and is all is set to witness some major consolidation.

British multinational retailer, Debenhams future remains gloomy as Mike Ashley’s Frasers Group, a prospective buyer has to make a £300 million rescue bid until the middle of this week. According to media reports, the FTSE 250 listed retailer, Frasers Group has to make a binding commitment by Wednesday. Due to the carnage induced by the coronavirus pandemic, Debenhams went into administration again in April 2020. The department store chain had struggled to stay afloat even in the pre-pandemic era.

Mukesh Ambani, business magnate from India reportedly was a potential contender for buying Debenhams, but he seems to have dropped out of the race. Nevertheless, Mike Ashley’s Frasers Group is believed to have made an offer of around £125 million for Debenhams, which employs nearly 12,000 people and has around 124 stores in the UK.

Also read: UK retail sales soar for fifth straight month, exceed expectations

Since April, Debenhams has been announcing store closures. From the peak of unprecedented crisis, Debenhams has made several job redundancies. The 242-year-old department store chain has piled on a debt of more than £600 million. To prevent a fall into liquidation, Debenhams has put itself up for sale.

Let us dive deep into Mike Ashley’s business.

Frasers Group Plc (LON:FRAS)

Frasers Group Plc, earlier known as Sports Direct International Plc, is a Sporting Goods Retailer Company. The Company has businesses spread across sports, fashion, lifestyle and fitness. Frasers Group has delivered strong operational performance during 2020.

Frasers is expecting the underlying EBITDA to grow in the range of 10-30 per cent during the fiscal year 2021. In August 2020, the Company announced the acquisition of certain assets of Dave Whelan Sports Limited for an initial cash consideration of £37 million. It has successfully re-opened the stores after the Covid-19 induced lockdown and delivered a strong online performance with digital transformation.

However, due to the challenging environment and some uncertainties, the Company’s business could be impacted in the short-term. In the long run, the Company has the potential to emerge strongly. The Company has sufficient liquidity to meet its short-term obligations and to tackle the challenging trading environment. The Company is focusing on investing and expansion of the digital infrastructure and is likely to invest more than £100 million in digital elevation strategy.

On a year-on-year basis, the revenue increased by 6.9 per cent during the fiscal year 2020, with UK Sports Retail segment increasing by 0.7 per cent, Premium Lifestyle segment revenue enlarged by 34.9 per cent and European Retail grew by 16.3 per cent The revenue mainly increased due to higher sales volumes and key acquisition of GAME, Jack Willis & Sofa.com.

The underlying EBITDA was up by 5 per cent year-on-year in the fiscal year 2020. The Company witnessed a strong cash generation in the core business, with share buybacks in the period amounted to £44 million and a decrease of £12.5 million in net debt to £366 million.

Also read: Sunak may use new ways to save jobs once the furlough scheme ends

The next wave of coronavirus pandemic followed by another lockdown could again drag down the demand for non-essentials such as apparels and clothing, despite the festive season around the corner. Also, the Frasers Group might witness supply chain disruptions due to corona induced lockdown. Local lockdowns and surge in coronavirus infections might pose a bigger threat to the supply chain of the British multi-retailer. Fluctuations in the foreign currency rates can also impact the factors of production whose burden would eventually be passed on to the consumers in these turbulent times.

FRAS shares were trading at GBX 405, at GMT 12:08 PM +1 on 27 October 2020, up by 3.26 per cent from previous day closing price. The group created a new low of GBX 182.60 during the peak of unprecedented crisis (March). Since then, FRAS shares have delivered a price return of 121.47 per cent. The market capitalisation of Frasers Group stood at £2,036.86 million. Mike Ashley’s company has outperformed the benchmark index (FTSE 250) in the last year.

Also read: Covid-19 Impact-Job Redundancies Continue to Rise in High Street Retail

The plight of the high-street retail can be understood from the fact that these retailers have now reached a point that they are struggling to pay their rents and are renegotiating their lease agreements for shorter tenures. British REITs are struggling to recover rents since the past quarters. Moreover, the consumers have entirely shifted to online platforms for shopping everything i.e. from groceries to cars. These high-street retailers are truly facing an existential crisis in the wake of coronavirus pandemic.