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British Megachains Eye Bankrupt Victoria’s Secret UK as Intu Collapses Under $5.8B Debt

U.K.-based department store Marks & Spencer (M&S) and apparel retailer Next are two of three parties that have reportedly shown interest in acquiring the British arm of Victoria’s Secret out of bankruptcy, according to Sky News.

On June 5, the lingerie retailer’s parent company L Brands placed the U.K. arm into administration, the equivalent of a bankruptcy in the U.S., putting over 800 jobs and 25 stores at risk. The administration came after Victoria’s Secret announced it would permanently close 250 stores in North America over the next few months, equating to about one-quarter of its store estate in that market.

The U.K. arm is going through a “light touch” administration process overseen by Deloitte, which will allow it to keep trading while putting off its debts. On June 26, Victoria’s Secret reopened around one-third of its 25 U.K. stores, which had been closed since the COVID-19 pandemic broke out across the nation. The group’s online store is not owned or operated by the company and has not been affected by the administration.

Neither Next nor Marks & Spencer have commented on the reports.

But the move would make sense for both: M&S is already a leading seller of underwear and intimate clothing in the U.K., currently holding a 27 percent share of the lingerie market and 36 percent of the market for bras, Sky News reported.

M&S’ interest in the lingerie retailer comes after it said in its most recent full-year trading update it would begin working with third-party brands in an attempt to broaden its appeal. And Next is looking to augment its broader business by linking up with brands in multiple categories, while also opening standalone shops in expanding categories, such as beauty. Next already sells products from a range of major brands including Abercrombie & Fitch, Hugo Boss and Under Armour.

The speculation over the interest in Victoria’s Secret U.K. comes as more potential administration processes continue to shake out across the U.K.’s struggling apparel sector.

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While New Look, which operates 500 stores in the U.K. and Ireland, initially started negotiations with landlords in early June to switch to revenue-based rents across its brick-and-mortar portfolio, the fashion retailer has since hired consultancy CBRE in an effort to move its store estate to the new rent model, which increases the possibility of its falling into pre-pack administration should those discussions not be successful.

Revenue-based rents, or “turnover-based rents” as they’re referred to in the U.K., have become increasingly popular since the COVID-19 pandemic began as more retailers sought to push back rent payments while the contagion closed their stores.

Should New Look enter pre-pack administration, it would mark the chain’s second financial restructuring in less than two years, following a debt-for-equity swap with stakeholders in January 2019. The company is seeking administration as a last resort.

And T.M. Lewin, the men’s wear retailer that already was likely to shutter the majority of its 66 stores across the U.K. if it couldn’t secure rent cuts, has reportedly hired restructuring firm ReSolve ahead of a potential pre-pack administration, according to The Sunday Times. The report came a week after T.M. Lewin CEO Sven Gaede resigned following the recent sale of the business to SCP Private Equity.

Issues regarding restructuring and landlord negotiations have become a common theme among struggling U.K. apparel brands since the start of the pandemic.

Debenham’sLaura Ashley, Cath Kidston, DVF Studio, Monsoon, Accessorize, Quiz and Go Outdoors are among apparel and fashion retailers that have filed for administration, with most of these businesses demanding deeper rent cuts as they seek out some form of restructuring.

On the landlord side of the equation, Intu Properties, one of the U.K.’s largest shopping center operators, has fallen into administration on June 26 after weeks of speculation. The real estate investment trust, which operates 17 shopping centers in the U.K. and three in Spain, failed to come to the financial agreement with its lenders that it needed to prevent the administration filing.

Intu’s creditors have agreed to pay up the £12 million ($15.1 million) to KPMG required to keep the company’s malls open as the administration process plays out. It told investors earlier this month that it expected 2020’s rent collection to drop to £310 million ($380.4 million) from £492 million ($603.8 million) a year earlier.

KPMG said it had appointed administrators to the British firm, which was last year struggling with net debt of nearly £4.69 billion ($5.8 billion), before the COVID-19 lockdown hit rent payments, piling pressure on its finances. According to its annual report published in March, its debts were worth 68 percent of its assets, a jump from 53 percent a year earlier.

During the pandemic, the company had about 60 percent of shopping center staff and approximately 20 percent of head office employees on furlough.

Intu began talks with creditors in May but could not reach an agreement on the duration of a debt standstill, and how much creditors would share in any future recovery and funding.