Debenhams’ meagre share price nudged up last week amid speculation that acquisitive Sports Direct boss Mike Ashley could launch a takeover of the struggling chain as he builds a department store empire.
However a leading shareholder has poured cold water on the idea, claiming that he will not hand over his shares to Ashley at their current price – around the 13p mark.
Martin Walker, UK equities fund manager at Invesco Perpetual, the fifth largest shareholder in Debenhams, told This is Money that Ashley would have to cough up a lot more for the business than it is currently trading for as he believes its heavily shorted shares could soon be on the up.
Debenhams’ share price stands at just 13p, compared with highs of nearly 50p last September
‘I haven’t heard what Mike Ashley’s strategy is, but I wouldn’t sell the shares at this point. If he wants it, he can have it, but he’s going to have to get his chequebook out and pay up.
‘He may own nearly 30 per cent, but Debenhams has an independent board and Sir Ian Cheshire, the chairman, is no one’s lap dog,’ he said.
Speculation of Ashley making a swoop for Debenhams surfaced in March when the billionaire mogul upped his stake to 29.7 per cent – close to the threshold at which he must launch an official bid.
The theory gained more momentum this month when his Sports Direct snapped up its biggest rival House of Fraser in a pre-pack deal for £90million.
Mike Ashley’s Sports Direct has vowed to keep 80 per cent of House of Fraser stores open
Neil Wilson, chief market analyst at online broker Markets, said: ‘The rally in Debenhams’s shares is a clear indication the market believes Sport Direct could be ready to pounce. A move to effectively consolidate the two troubled department store chains into a single offering looks to be the only viable solution to their problems.’
However Walker, who holds a 5 per cent stake, sees potential in the stock market minnow and is adamant that Debenhams, which has issued a number of profit warnings this year, has the potential to turn its fortunes around.
He said: ‘It is without doubt a highly risky stock situation, but the reason I’m doing it is because I believe the risk reward is in my favour. If things go right, the leverage for the upside is huge.
‘This is not me saying that Debenhams is the future of retail in the UK, but the business has done a better of job at defending market share than the popular narrative would have you believe.’
Ashley (pictured) has stakes in a large number of High Street chains
Walker argues that Debenhams could be close to turning a corner, explaining that because of how the business geared, it would take just a slight improvement in like-for-like sales to give its bottom line a boost and ‘provide significant upside to the share price’.
Walker thinks minor like-for-like growth could be possible as wage growth accelerates and inflation falls.
He argues that Debenhams has been hit by a series of ‘exogenous events’, such as the Beast from the East, which unfortunately coincided with its end-of-season Sale, and its ‘loose cannon competitor on the High Street’
High levels of discounting by House of Fraser, and therefore also at John Lewis which is honour bound by its ‘never knowingly undersold’ moto to match its low prices, has hurt Debenhams’ gross margin.
‘Should that competitive pressure ease, it could lead to some margin recovery for some department store retailers,’ Walker said.
He also backs the management team: ‘I am no expert in fashion retail, however, when I meet the management of Debenhams, it strikes me that the changes they are making are sensible.’
He emphasised, however, that it was essential for Debenhams to ‘hunker down’ and shift its debt.
Debenhams’ last reported net debt position was £248m – a far cry from the near £1billion that eventually sealed House of Fraser’s fate, but still a heavy burden for a retail firm to shoulder.
‘It shouldn’t be carrying any debt. Every pound of the debt repaid is a step away from the cliff edge,’ Walker said.
‘If we assume no significant step down from current forecast levels, then the business should be able to generate significant organic cash flow in 2019.
‘This combined with the possible sale of Danish subsidiary Magasin du Nord, which could raise somewhere between £100million and £200million, could make a significant dent in paying off the outstanding debt of the business, thereby adding further value to the shares.’