Sports Direct offered Debenhams a new loan worth £150 million in return for a further 5 per cent stake in the share capital. The credit offered was an interest-free loan and would help Mike Ashley, the founder of Sports Direct to take charge of the company. Ashley is a majority stakeholder in Sports Direct and is seeking to take charge of the departmental group. He wants to remove most of the board members and want himself in an executive position and is willing to resign from his position of chief executive at Sports Direct.
Earlier a letter to the directors of Debenhams was written in which the Sports Direct had shown concern about the deteriorating financial position that Debenhams was in and the potential adverse and unfair impact of the company entering an additional secured facility on its unsecured creditors, its shareholders, its employees and pension schemes.
Debenhams is working on changing its capital structure as per most of the observers. The refinancing would comprise a debt for equity swap, a new share issue and possibly a voluntary arrangement to reduce lease obligations.
Sports Direct waited till 11 pm on 26th March to indicate a price to acquire 70 per cent of the Debenhams equity. The company had been patiently trying to gain control for months without paying shareholders anything. They had offered loans and conditional asset purchased to the department store chain, but their offer had been ignored, cast aside in Debenhams’ refinancing plan.
According to Global Data analysts, Sports Direct’s offer of £61 million was not that convincing as it failed to solve Debenhams two main issues which were a plan for £560 million of debt, which would all fall due on a takeover and immediate fund requirement for £200 million. Offer made by the Ashley’s Sports direct was not committed or either assist Debenhams to solve the issue of immediate funding required. The assistance would only come if a retailer with money shortage scrap’s its well-planned refinancing plan.
Sports Direct had three smart reasons for making an offer for Debenhams equity. Firstly, the deal would have prevented Sports Direct’s 30 per cent share & everyone else’s as well. Secondly, Sports Direct could realise a good value for Debenhams, as per broker estimates using £61million equity valuation, net debt of £321million in 2018, 2019 earnings of a £100 million, the enterprise value is only 3.8 times earnings. But in reality, higher debt and lower margins indicated that Debenhams is more expensive than the offered price of £61 million. Moreover, Sports Direct has the capability to cover liabilities and can find better refinancing options. Thirdly, with his vision, Mr Ashley could have turned Debenhams into a profit-making venture.
Sports Direct possible mistake was to leave it all far too late. If this price would have offered a month ago, instead of trying to avoid paying shareholders, there would have been more time for the board and investors to consider the offer. But now only a few hours have been left until a vote on debt refinancing is set to hand creditors more control of Debenhams’ assets.
Instead of trying to get Debenhams at cheap market price, Mr Ashley should have used a more rational approach. He would have made his offer earlier without waiting that long. This would have given time to the shareholder to review the offer made by Mr Ashley’s Sports Direct. The company will have the much-needed restructuring in the interest of all its stakeholders. The Debt refinancing would also help the creditors have a decent control over the Debenhams’ assets.