Mergers And Acquisitions » Is Sports Direct biting off more than it can chew?

Sports Direct has an established strategy of buying up companies that are struggling. It started with outdated sports brands, such as Lilywhites and Lonsdale in 2002, Slazenger and Dunlop in 2004 and, amongst others, LA Gear in 2005.   More recently the company has evolved its strategy with a key focus on the purchase of struggling high street brands.

The company seems to be linked to every ailing high street brand, for good reason – it bought House of Fraser out of administration in 2018, Evans Cycles in October 2018, Sofa.com in February 2019 and has invested heavily in Debenhams. Its most recent acquisition, Jack Wills, was a “pre-pack” in administration, which was the same process used in its purchase of House of Fraser and Evans Cycles. This article explains what a “pre-pack” in administration is, discusses the differences between administration and insolvency and looks at the possible future for Jack Wills.

What is a “pre pack”?

The term “pre-pack” is used to describe the process through which a company arranges the sale of its business or assets (or both) immediately before an administrator is appointed. The administrator completes the sale and any assets or business remaining in the company will either be sold separately or the company may be put into liquidation.

Usually the business or assets are sold as a going concern, meaning that there is a relatively smooth and quick transfer of the business to a new owner, without the erosion of price or confidence that may occur if the sales process was conducted by the administrator(s) once the company was in administration.

A “pre pack” may be the only available choice for a company. If there is no funding available an administrator would not be able to continue to trade this business and the alternative would be to liquidate the company, resulting in the immediate end to the company’s business.

“Pre-pack” vs Liquidation

Both processes are used to deal with insolvent companies – that is, a company with insufficient assets to pay its debts and liabilities. The processes do overlap and involve the appointment of a third party to the management of the company to act in the interests of the company’s creditors. Administration is designed to be a relatively temporary solution for a company in financial distress and would typically only be used for a viable business, or where a better outcome for creditors is likely than if the company was placed in liquidation.

Once an administrator is appointed they usually have only 12 months to develop a strategy to save the company. If the company is able to (i.e. it has sufficient funding) it can continue to trade whilst it is in administration. An administrator will spend the time identifying whether the business of the company is viable, taking steps to reduce the debt of the company and then determining the best way for the company to exit the administration – this may be by returning control to the directors to continue running the (now solvent) company, selling parts of the business and/or assets of the company to realise capital needed to pay off the company’s debts or, if the business cannot be returned to solvency, placing the company into liquidation.

Liquidation is a terminal process that puts an end to a company – an insolvency practitioner is appointed and the company stops trading, resulting in immediate job losses. The company’s assets are sold, with any return distributed to the company’s creditors in a particular order of preference. The company is then dissolved permanently and creditors, where there are insufficient funds realised from the asset sale, are left without any further recourse, unless it can show wrongdoing on the part of a director of the company.

The future of Jack Wills?

Sports Direct’s chief executive and largest shareholder Mike Ashley has already sacked the CEO of Jack Wills and closed eight stores in Marlborough, Derby, Reigate, Rock, Tunbridge Wells, Durham, Kingston and St Albans.  He will now look to cut costs further, and may shut more stores if he cannot reach agreement with landlords on lower rents.

A familiar pattern is emerging as with Sport Direct’s other distressed acquisitions.  Despite Ashley’s promises to turn House of Fraser into “the Harrods of the High Street”, what seems to have happened with the remaining stores is that he is selling clothing from brands within his empire at discount prices.

Will Jack Wills clothing end up simply being sold from concessions within House of Fraser rather than from stand-alone stores?  Sports Direct’s aspirations to expand the brand’s wholesale business are perhaps an indication that it doesn’t see a medium-long term future in the brand trading independently.

The question is whether Sports Direct can deliver on its ambitious plans in relation to its ever-increasing portfolio of distressed retail business.