As the business world awaits Arcadia Group’s imminent restructuring, Drapers spoke to industry experts to find out who is calling the shots in the negotiations.
The group, owned by fashion retail mogul Sir Philip Green, was expected to announce plans for a CVA last week. However, proceedings have slowed as Arcadia continues to lobby for the requisite approval from 75% of creditors.
Arcadia has 571 stores and 388 concessions in its UK portfolio. Its current plans would involve closing more than 50 stores and significant rent cuts across much of its remaining store estate.
“The CVA, if proposed, will only be effective if they cut deep to reduce their footprint and rent liabilities,” warned Clare Kennedy director at restructuring adviser AlixPartners.
“There is always a risk of not achieving that when you have a number of stakeholders to manage. Here they are balancing the needs of the pension fund, the landlords and Philip Green himself.”
An Arcadia CVA will be much more complex to approve than other high street retailers’ because of its group structure. Each of its brands – Topshop, Topman, Dorothy Perkins, Miss Selfridge, Evans, Wallis and Burton – will have to face its own creditor vote.
Additionally, it is reliant on two large creditor groups – landlords and the pension fund – to give the green light to the restructuring.
To woo creditors, Green has pledged to invest £100m to revamp stores. The investment is to be broken up into two £50m loans. The first has already been paid down and the second will be issued on approval of the CVA.
But landlords are calling for a more substantial investment from the retail tycoon, who, when announcing Arcadia’s annual results in October 2005 famously revealed he would receive a £1.2bn dividend – the biggest payout to an individual in British corporate history and four times the group’s pre-tax profits for the same period of £235m.
Green has offered landlords 10% of equity from any future sale of the business, but one property source told Drapers this “hasn’t been taken up by many, and certainly not enough to make it a tangible part of the CVA”.
He added: “Many landlords have voiced that they would only agree to a CVA if Green was to sell the business afterwards.”
Landlords are resistant to investment in the form of a loan, as “Green’s loan ranks ahead of all other creditors, and makes him the first debtor in the system”, another property expert said.
Retail analyst Richard Hyman agreed that by offering a loan Green shows a lack of faith in the viability of the group: “He doesn’t seem to have the confidence in his businesses that he’s asking landlords to have, and maybe more pertinently, customers.”
In the hopes of negotiating better terms, a group of landlords including British Land and Hammerson have joined forces.
“Unlike a lot of other CVAs, where the landlords as a block always get outvoted by other creditors, with Arcadia they are in a much stronger negotiating position,” said one property source. “To get this to work, Arcadia is going to have to win over landlords.”
However, the deal is also highly reliant on the approval of the pension fund – a major creditor on whom Arcadia is awaiting approval before it proceeds.
Green has threatened to slash payments into the staff pension fund to £25m a year, and the scheme already has a deficit of more than £500m. A sweetener of the freehold of Topshop’s flagship Oxford Street store has been offered, however, has been heavily mortgaged, reducing its value.
Like the landlords, the pension fund is reticent to accept equity in a company with such a complicated structure, one property source told Drapers: “Pension funds do not want to have shares in an offshore non-transparent company. It’s not one company – it is seven different ones with a holding company and an off-shore company. The market’s reaction to this would be very damning.”
As negotiations continue, multiple sources still question the need for such a dramatic restructuring.
One source told Drapers: “Arcadia has 150 stores where leases expire in the next two years, instead of going the way of a CVA Green could easily resolve this himself.
“He has negotiated short leases and low rents over recent years, so why does he need to do a CVA?” another asked. “This isn’t about the store portfolio. He needs to invest in the brands and make them a strong proposition – property is second to that.”
Arcadia Group declined to comment.
Arcadia restructuring: who holds the power?