Billionaire lashes out as US fund invade UK retail crisis

The billionaire

LOndon: UK retail billionaire Mike Ashley is lashing out after losing a fight with US hedge funds over department store chain Debenhams Plc.

The retail magnate, who made British headlines for power drinking and substandard working conditions at his sporting goods chain, has been blasting Debenhams management and making legal threats since lenders took control on April 9, wiping out his roughly 30% stake.

The loss by Debenhams’ largest shareholder and king of UK retail, who has led a crusade to protect Britain’s forlorn shopping districts from online competition, signals the extent of the sector’s debt crisis and the businessman’s bluster. Ashley was outmaneuvered by lenders as he fought the company at every turn.

“Ashley played this badly wrong,” said Stephen Lienert, a credit analyst at Jefferies in London.

“He could have bought Debenhams’ debt or sided with the lenders. He could have played it several other ways. Instead he went his own route and that was a massive mistake.”

Officials at Debenhams and Ashley’s Sports Direct International Plc declined to comment.

The problems at Debenhams, once one of Britain’s most-loved department stores, go back to a 2003 leveraged buyout led by private-equity firms CVC Capital Partners Ltd. and Texas Pacific Group. The buyers saddled Debenhams with debt and sold stores to pay themselves dividends.

The company has struggled to develop its online business as consumers shift purchases to Inc. and other e-commerce providers. That’s claimed household names from department-store owner BHS to the British arm of Toys “R” Us Inc.

Debenhams’s lenders Alcentra, GoldenTree Asset Management and Silver Point Capital will now seek to cut rents, close stores and convert some debt to equity to prevent the 241-year-old company from going under. The private owners aren’t expecting to report first-half earnings next week as previously planned.

The lenders are likely to seek a type of restructuring known as a company voluntary arrangement in coming weeks to loosen expensive leases and are poised to appoint a turnaround specialist as chief restructuring officer.

Administrators have put Debenhams up for sale in the hope that a buyer will fully repay its £720mil (US$944mil) of debt. That means Ashley could get back in, but he hasn’t made any public statements suggesting plans, and it would cost more than three times his highest previous offer.

“Ashley could walk away entirely and forget it, or buy it down the road if he believes the business will struggle, or write a big check today for it,” said Lienert at Jefferies. “But paying up has never been his style.”

The 54 year-old retail heavyweight has an empire that encompasses Debenhams’s rival department store chain House of Fraser, along with Sports Direct, Evans Cycles, underwear brand Agent Provocateur and Newcastle United soccer club.

He spent about £150mil acquiring his stake in Debenhams, but was on the back foot with lenders since the funds and European banks extended a £40mil lifeline in February. That secured funding gave them priority in debt talks ahead of unsecured lenders and shareholders.

The company rejected Ashley’s own 40 million-pound loan offer late last year because it came with strings attached.

Instead of buying Debenhams’ existing debt and playing hedge funds at their own game, Ashley followed a contradictory strategy of making offers to control the company while sparring with the board.

He made at least six approaches to Debenhams, culminating in an offer to underwrite a £200mil rights issue. Each was rebuffed -- mostly because they fell short of lenders’ requirements and demanded Ashley be installed as chief executive officer.

He sought to remove most of the directors after leading an ouster of Debenhams’s chairman and CEO from the board in January, then vowed to expose an insider plot to steer the company into the hands of hedge funds, which he dubbed Project Serpico after a 1970s movie about a corruption-fighting cop.

In the days approaching the prepack administration, the acerbic tycoon called for the board to take lie-detector tests and for advisers to be put in prison.

On the day he lost control, Ashley accused politicians and regulators of being “as effective as a chocolate teapot,” dubbed the administration a “national scandal” and called on authorities to reverse it.

He used an April 11 stock buyback at Sports Direct as another opportunity to twist the knife, telling shareholders that his actions contrast with those of Debenhams’ board.

“Mike Ashley has made so many mistakes in his doomed pursuit of the embattled Debenhams that his credibility as a businessman and a gambler has been seriously damaged,” independent retail analyst Nick Bubb wrote in a note to clients. — Bloomberg

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