Pre Pack Administration Successes & Failures
I am a great supporter of the pre pack administration process as a restructuring and recovery tool for failing businesses. However, if you are considering a pre-packing your business by buying it immediately out of administration, or have a buyer lined up that would then it may be wise to first consider the factors that usually make pre-packs either a success or a failure.
Here is my review of some high profile examples of pre-pack successes and failures giving some of the reasons why they worked or failed:-
Without a doubt I think the most high profile pre pack administration success in recent times is the well known bed retailer Dreams, who went into Administration in March 2013 and was immediately bought out in a pre packaged sale by private equity firm Sun Capital Partners. My measure of its success is partly due to the fact that another insolvency process has not followed for the retail giant since its sale but also due to the fact that it was announced that a massive 75p in the pound was paid to creditors. Now some of you may be reading this and think that this is not the greatest of successes due to the fact that 25% of the debt to creditors has remained unpaid. Whereas in a CVA, proposals regularly aim for full repayment to creditors, however statistics show that at least 60% of CVA’s fail and do not go through to full term, resulting in them subsequently being placed into Administration or Liquidation anyway, but in that case, they suffer the additional fees of the CVA Supervisor. I am also quite certain that the CVA’s which do fail are largely made up of the ones which propose full repayment therefore a 75% return is damn good!
I believe that the pre-pack process worked well for Dreams due to the following:-
- The process allowed for all customer deposits and warranties to be honoured.
- The Company had failed previously in part due to experiencing high expansion costs due to its rapid rise in the retail market, therefore the investment was best recouped in a packaged sale which would otherwise be lost in a break up sale.
- The purchaser was sufficiently qualified to run the bed chain given its large portfolio of successful businesses which already included a bed retailer (Sharps).
- The purchaser’s were not burdened with non profitable stores as they chose to take on 171 of its 266 stores rather than being forced to take on all then suffer the costs of redundancies or be forced to spread resources thin whilst attempting to turnaround too much in a short space of time. This did however mean 400 job losses however I believe that this is inevitable in the retail sector at certain times.
It is worth mentioning that there are many other successful pre-packs out there with many of which being the smaller to medium sized businesses that have suffered similar growing problems with expansion or a drop in sales resulting in staff and lease costs crippling the current structure. Therefore do not think that it is only useful for larger businesses or businesses of certain industries (e.g. retail).
La Senza & Jane Norman
Just to prove a point (that pre-packs are not just for the retail sector), my examples of the most high profile pre-pack failures are also in the retail sector being Jane Norman and La Senza. Both of these businesses went into Administration (in late 20011 and early 2012) and were bought out in a pre-pack sale, however both have since been placed into Administration for the second time in June 2014.
At the time, Robert Moran, an Insolvency Practitioner at PWC, who was appointed as one of the Joint Administrator’s of La Senza commented that “Like many other retailers, La Senza has been hit hard by the difficult economic environment and a slowdown in consumer spending.”
Stewart Binnie, Jane Norman’s chairman, blamed “poor trading over the autumn-winter period, inadequate finances and a market that does not allow for weakness” on the failure of the Company.
From my review of the facts, it seems to me that the main errors made by the pre-pack purchasers of these businesses are:-
- Too many of the non profitable stores were taken on (or the purchaser’s were not sufficiently capable to achieving the turnaround plans for these stores).
- The businesses had not changed with the times to compete for the changing market needs of their users (La Senza needing to compete with the trends and on price with supermarkets and Jane Norman’s decreasing target market).
- Inadequate funding and or cash flow for the new purchasing businesses.
Whilst less buyers were probably available the second time round, the administrator’s of both businesses both decided that the second time round, a period of trading and marketing of the businesses were required rather than packaged sales. This approach allows for remaining stocks to be sold off and buyers found for as many stores or assets as possible which in their cases was a fraction of the total stores.
In my view, the new proposals to complete viability reviews on the intended purchaser’s would have been useful when considering the pre-packs originally as it may have been possible to find more suitable buyers or at least a duplication of administrator’s fees with less stores being pre-packed originally to give themselves a better chance of success. Either way I wish the brands all the success in their current form as more retailers on the high street can only be good for consumers.
More reviews of high profile insolvencies such as Phones4U, Mamas and Pappas, Hibu, Barrats, Blockbuster & Jessops have been covered in my blog therefore see below for some of these or go to my full latest news page.
If you would like to discuss whether a pre-pack administration may be suitable for you then please feel free to call me on 01788 544 544 or freephone 0800 612 6197.
Article by Ben Robson MIPA FMAAT MABRP
Would you like to read a summary of how Pre-Pack sales compare to the other insolvency process? – If so click HERE