Ashley Takes on Debenhams Lenders With ‘Project Serpico’

LONDON (Capital Markets in Africa) – Billionaire Mike Ashley’s latest bid to control Debenhams Plc has sharpened battle lines with the troubled U.K. department-store chain’s lenders as it seeks to restructure its debt and avoid insolvency.

Ashley, angling to add Debenhams’s roughly 240 U.K. and overseas stores to his empire that already includes Sports Direct International Plc and House of Fraser, has launched an effort he’s dubbed “Project Serpico” to expose what he says is an insider plot to steer the iconic company into the clutches of foreign hedge funds.

He’s opposed by creditors that are lining up a fallback strategy to gain control of the department-store chain for themselves, according to a person familiar with the matter, who asked not to be identified because the talks are private.

The U.K. shopping-street intrigue is the latest chapter in the saga of British chain stores that are wilting under online competition and the Brexit-hit pound. Owner of a roughly 30 percent stake in Debenhams through Sports Direct, Ashley’s been sidelined as the board and lenders work together on a plan that will likely dilute his stake, reducing his wealth and power. Invoking Serpico, a 1973 film about a New York corruption-fighting cop played by Al Pacino, Ashley is doubling down on claims that Debenhams’s leadership is misleading shareholders about its results and plans, and vowing to reveal them.

“If management and the non-executives want to go ahead with handing the keys of Debenhams to American hedge funds at everyone else’s expense, then good luck,” Ashley said in an emailed statement where he described the project. “We will not rest until we have proven management’s wrongdoing.”

Loan Offered
Sports Direct has offered Debenhams a 150 million-pound ($199 million) interest-free loan that requires installing Ashley as chief executive officer, a move that would increase his stake to about 35 percent. The lenders’ group is in advanced talks to extend the same amount, in a move that would keep Ashley, whose CEO bid they’ve repeatedly rejected, at bay.

While the retailer has said it’s considering Ashley’s proposal, “Debenhams would have to be desperate to take the plan seriously,” independent retail analyst Nick Bubb wrote in a note to clients.

The sides appear to be getting further apart. Last week Ashley called for a shareholder vote to give him an executive role and to oust all Debenhams board members apart from chief financial officer Rachel Osborne. The company has until April 25 at the latest to hold the shareholder meeting, and lenders will seek support for their restructuring plan before that date, the person familiar with the matter said.

If negotiations with Ashley don’t improve, the lenders will seek a court-based process, known as prepack administration, to take control of Debenhams, according to the person. They may take that step before the shareholder vote next month, the person said.

Vitriol Spraying
The lenders may reject Sports Direct’s loan offer but support it injecting equity, the person said. Debenhams’s group of creditors includes hedge funds Alcentra, Angelo Gordon & Co. and Silver Point Capital and banks Barclays Plc, HSBC Holdings Plc and Bank of Ireland Group Plc, the person said.

A spokeswoman for Debenhams and representatives for the lenders declined to comment on the company’s restructuring talks. Debenhams representatives referred to CEO Sergio Bucher’s March 5 statement that its priority is to secure the best outcome for the business and all its stakeholders.

In the meantime, vitriol is spraying. Sports Direct said in a March 4 letter to the retailer’s board that its January earnings report was “at best impossibly optimistic or at worst deliberately misleading.” Debenhams called those comments “unfounded and self-serving.”

The sporting goods chain extended its critique Thursday, saying it will hold Debenhams’s management “personally responsible and liable for any mismanagement, deception, and breach of duties which leads to the shareholders being wiped out.”

“We are giving our word to all Debenhams shareholders that we will leave no stone unturned in pursuing them,” the email said.

The company’s bonds have fallen 50 percent over the past year to 47 pence on the pound, while the shares have slumped 88 percent to about 3 pence. Debenhams will likely convert debt into equity to reduce its 560 million pounds of borrowings, further reducing the value for shareholders. It will also likely seek a so-called company voluntary arrangement with landlords to close stores and negotiate lower rents.

Administration Process
If Sports Direct’s loan isn’t accepted, it would be interested in taking part in an administration process for Debenhams, though it hopes it doesn’t go that far, according to the email. If Ashley plans to purchase the retailer cheaply out of insolvency, as he did with House of Fraser, the lenders’ fallback plan would prevent that.

Prepack administration would give creditors control in a pre-agreed plan that doesn’t require shareholder approval, while allowing Debenhams to continue operating, according to the person familiar with the situation. A trigger is required to initiate the process, such as the company running out of cash or defaulting on a debt obligation.

The same process has been threatened by lenders to U.K. government contractor Interserve Plc. Coltrane Asset Management, owner of about 28 percent of the shares, is resisting a debt plan that will almost wipe out its holding.

Source: Bloomberg Business News