When a Billionaire Offers $50 Million, Take It

(Bloomberg Opinion) -- When Mike Ashley offers you a lifeline, it’s worth taking.

That is the message from Debenhams Plc’s profit warning on Tuesday.

The department store chain said it would no longer meet the estimate it published less than two months ago for full-year pre-tax profit of 8 million pounds ($10.5 million). It did not specify a new target.

The shares fell as much as 12 percent before recovering slightly. The market capitalization says everything about its struggles: It’s valued at just 37 million pounds. A year ago, it was worth about 350 million pounds.

When a Billionaire Offers $50 Million, Take It

The chain now faces a balance sheet restructuring, and potentially worse — but things didn’t have to get this disorderly.

In December Ashley, whose Sports Direct International Plc already owned almost 30 percent of Debenhams shares, offered a 40 million-pound loan.

But the department store turned it down — its rationale was that it had to look after the interests of all shareholders, rather than just its biggest. True, accepting the offer would have forced executives to dance to Ashley’s tune. The terms could have given him an extra 10 percent holding and security over some assets. And as a lender, he’d be in pole position to take control of the group in any debt for equity swap.

It’s clear now that investors have not been served well by this decision.

Debenhams last month revealed it had arranged its own 40 million pound loan to see off the billionaire, but the board badly underestimated him — in January he orchestrated the ouster of Chairman Ian Cheshire, and removed Chief Executive Officer Sergio Bucher from the board. The company said on Tuesday the loan had increased its financing costs. Surely it should have anticipated these. Add in disruption from unsuccessful efforts to revive the business — a focus on digital sales has failed to turbocharge growth online — and economic uncertainty, and profit expectations became untenable. 

Accepting Ashley’s loan wouldn’t have changed conditions on the high street. But working together with him could potentially have avoided the chaos of the past few months. The management changes may have been averted, providing much-needed stability at a difficult time. Perhaps the profit warning could also have been avoided — or, at the very least, the company would not have whipsawed shareholders by backtracking on its goals.

When a Billionaire Offers $50 Million, Take It

No one comes out of this debacle looking good.

Investors now face the prospect of a company voluntary arrangement, or being diluted through a debt for equity swap. And if Debenhams fails solve its pressing issues, then in the worst case scenario, they risk being wiped out in an administration.

As for Ashley, the canny dealmaker doesn’t look so clever now. He began building his stake in the department store in January 2014, when the average share price was 79 pence. They are now worth less than 3 pence.

He could still pick up more of the stock — acquiring the remainder of the shares he does not own would cost him about 26 million pounds before any takeover premium. But that looks unlikely given Debenhams’ precarious position.

This saga has always looked as if it would end in a combination with House of Fraser, which Ashley acquired last year. That is still likely to be the case. Debenhams shareholders will lose out however this is achieved. It just didn’t have to be this bad.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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