Why did Mike Ashley let House of Fraser go bust first? The secret behind pre-pack administrations


Ailing department store House of Fraser went into administration on Friday – but it was not to suffer the same fate as fallen High Street counterparts Toys R Us, Maplin or Poundworld.

The 59-store chain will not, like its wounded neighbours, set about shutting up shop and disappearing from the High Street, because its short-lived administration was part of a so-called ‘pre-pack’ deal.

Billionaire tycoon Mike Ashley, founder and boss of cut-price sportswear retailer Sports Direct, was waiting in the wings and ready to pounce on House of Fraser once accountancy giant EY was appointed as administrator.

Mike Ashley's Sports Direct came out on top following a bidding war with retail rival Philip Day

Mike Ashley's Sports Direct came out on top following a bidding war with retail rival Philip Day

Mike Ashley’s Sports Direct came out on top following a bidding war with retail rival Philip Day

Although the 169-year-old chain held discussions with multiple interested parties prior to EY’s appointment, including turnaround specialists Hilco and Alteri and Edinburgh Woollen Mill-owner Philip Day who reportedly tabled a £100 million offer, a solvent deal was not reached and Ashley’s £90 million pre-pack bid prevailed.

EY claims that, at the time it was drafted in, Ashley’s bid was the ‘only offer’ on the table that would keep House of Fraser afloat.

What does a pre-pack entail?

The key difference between a traditional administration and pre-pack administration is that the sale of the business is negotiated prior to the appointment of administrators, explains Clare Kennedy, a director at insolvency firm AlixPartners.

The sale completes either immediately upon, or shortly following, the appointment. 

In the case of House of Fraser, the £90 million deal with Sports Direct had been pre-arranged and was announced just hours later, with Ashley reversing the department store’s plans to close 31 branches and promising a future for the embattled chain and its 17,000 employees. 

In a standard administration, such as that taken by Maplin earlier this year for example, the appointed insolvency practitioners market the collapsed firm and sell off what assets it can, before winding down what’s left. 

More House of Fraser stores may now stay open as Sports Direct has reversed its CVA plans

More House of Fraser stores may now stay open as Sports Direct has reversed its CVA plans

More House of Fraser stores may now stay open as Sports Direct has reversed its CVA plans

The winners and losers

For House of Fraser, its employees and the High Street, securing a sale of the stores, stock and brand can be seen as good news. 

The business will continue to operate under its new ownership, and some of the stores previously earmarked for closure may now stay open. 

Ashley wants to turn the chain into the ‘Harrods of the High Street’ and negotiations with landlords are already underway.  

Pre-packs – The pros and cons

Pre-pack deals limit the impact on the business as operations can continue as normal, and completing a sale immediately can prevent losses.

The brand is unlikely to be compromised by adverse publicity, leading to the increased likelihood of jobs being saved and suppliers being paid under new ownership.

However, new owners are not obliged to shoulder the debt of unsecured creditors, including the pension fund, landlords and suppliers. 

While landlords may transfer leases over to new owners, the buyer is free to cherry-pick the best stores and assets and may still opt to close some branches and make job cuts.

The system is controversial when it involves the sale of a business to connected parties, as it can used to create ‘phoenix’ businesses – enabling owners to cut debts and pension schemes while continuing to trade. 

However, pre-pack deals attract a lot of criticism too, because, like with all insolvency procedures, they come with a cost.

A pre-pack follows the same rules as a traditional administration, so the new owner buys just the business and its assets – without any of its liabilities or unsecured debt. 

While House of Fraser’s secured creditors, such as banks and bondholders, are likely to get their money back, its unsecured creditors, including the pension fund, landlords and suppliers, may be left out of pocket. 

As Sports Direct has not taken on the retailer’s pension liabilities, action is already underway to prevent the fund from falling into the hands of the pensions lifeboat – the Pension Protection Fund (PPF), whereby members may receive smaller payouts. 

Pensions expert John Ralfe told the Mail on Sunday that, if the pension fund does end up with the PPF, those not yet retired will have pensions cut by up to 10 per cent.

Suppliers and concessionaires may be out of pocket too to the tune of a collective £70 million as Sports Direct is only obliged to pay them for goods sold from the point of the acquisition on Friday.  

The deal also raised eyebrows, because Ashley had an existing connection to House of Fraser, in which he held an 11 per cent stake.

Pre-packs typically come under more scrutiny when a business is sold to a connected party. 

Liberal Democrat leader Sir Vince Cable has called for an inquiry. Cable, who ordered an investigation into pre-packs while he was Business Secretary, said once again that the rules should be looked into.

He said: ‘There needs to be an investigation by the Department for Business leading to a change in the law. Until the pre-pack process is reformed, there are open goals for people to exploit.’

‘Something has to change,’ agrees Andrew Teacher, founder of Blackstock Consulting.

‘House of Fraser’s sale for £90m to Mike Ashley implies there’s a huge amount of value to be extracted across the company’s asset base of over £400m. Much of this will come out in the wash, but what’s clear is that many creditors will have lost out through the administration process.

‘If House of Fraser, or any of the other big retailers that have collapsed, were car plants, the government would have taken action years ago,’ he says. 

Previous High Street pre-packs

Pre-packs relatively rare. In 2017 there were 356 pre-packs ,accounting for 2 per cent of all corporate insolvencies, and 28 per cent of 1,289 administrations, according to Pre-Pack-Pool. But there have been some notable pre-pack dealings on the High Street.

  • Footwear chain Jones the Bootmaker was snapped up in March 2017 by private equity firm Endless for £11m in a pre-pack deal. Less than a year later, 42 of its 47 stores were passed to Pavers through yet another pre-pack arrangement – a move that safeguarded 389 jobs.   
  • Pre-packs can often give retailer’s a chance to turn their fortunes around, as was the case with beds retailer Dreams, which was bought in a pre-pack deal in 2013 by private equity firm Sun European for £35 million. Since then, the firm has gone from losing £5 million a year to reporting full-year profits of £29.2 million in 2017.
  • And Mike Ashley was involved in another deal last year that was likened to, if not formally called, a pre-pack. Lingerie chain Agent Provocateur was sold to a fashion agency part-owned by Sports Direct – Four Holdings. The process was handled by AlixPartners. 
Four Holdings, part owned by Sports Direct, snapped up Agent Provocateur last year

Four Holdings, part owned by Sports Direct, snapped up Agent Provocateur last year

Four Holdings, part owned by Sports Direct, snapped up Agent Provocateur last year

While pre-packs in general have a chequered reputation, they can be an effective business and job rescue tool. 

As Kennedy argues, the process can be justified as long as multiple parties have been approached and the administrator has run a robust and fair process.

‘The concept of pre-pack has been around for a long time, and the process is subject to a high degree of regulatory scrutiny,’ she says. 

‘There is detailed criteria that the insolvency practitioners have to follow, such as running a robust marketing process and agreeing a value that is a true reflection of the value of the business and its assets.’ 


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